Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-45 (continued -1)
PART THREE
Reconciling Difference in Operating Income between Full and Variable Costing
2015 2016
Change in Inventory in Units 1,000 (1,000)
Multiply times Fixed Overhead Rate $ 8.00 $ 8.00
=Difference in Operating Income $ 8,000 $ (8,000)
An increase in inventory units means full costing operating income is higher
than variable costing operating income.
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-46 Profit Centers: Comparison of Variable and Full Costing
(Underapplied Overhead) (30 min)
1., 2.
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-46 (continued -1)
2. (continued)
PART THREE
Reconciling Difference in Net Income between Absoprtion and Variable
Costing
2015 2016
Change in Inventory in Units 600 (500)
Multiply times Fixed Overhead Rate $ 175 $ 175
= Difference in Net Income $ 105,000 $ (87,500)
An increase in inventory units means full costing operating income is higher
than variable costing operating income.
A decrease in inventory units means variable costing operating income is
higher than full costing operating income.
In 2015, inventory units increased, so operating income for full costing is
higher than variable costing in that year.
In 2016, inventory units decreased, so in that year operating income for
variable costing is higher than full costing.
Additional Note on the Production Volume Variance: A recent CFO
magazine item notes how the use of full cost accounting in the auto
industry has biased profit reporting in that industry. See, Marielle Segarra,
“Accounting: Lots of Trouble,” CFO, March 2012, pp. 29-30.
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Education.
Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
3.
Memo
TO: Mr. Mark Hancock
FROM:
DATE:
The difference in operating income between variable costing
and full costing is due to the fact that the level of units in finished
goods inventory increased by 600 units (from 800 to 1,400) in 2015
and decreased by 500 units (from 1,400 to 900) in 2016. The
variable cost income statements do not include fixed manufacturing
costs in inventory, but treat these costs instead as a cost of the
current period. Thus, variable costing income statements are not
affected by changes in inventory levels.
You may use the variable cost income statements as a more
reliable measure of operating income when fixed manufacturing costs
are high and inventory changes significantly, as in this case. The
variable cost statements.
Note that the production volume variance does not affect the
difference between variable and full costing income. The difference in
income is fully explained by the change in inventory multiplied times
the fixed overhead rate, as illustrated in the end of part 2 above.
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Education.
Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-47 Balanced Scorecard (15 min)
Solution for problem 2-35
1. Medical University’s strategy should encompass a focus on the
quality of its clinical care, education, and research. The relative size
of the healthcare system is important as a way to attract third party
payers, providers, and patients. A large hospital system tends to offer
a greater breadth of services, which often increases the clinician’s
level of expertise. A physician at a larger institution will most likely
2. Yes. The balanced scorecard goes beyond simply monitoring
financial performance. Because the four areas: financial
performance, customer satisfaction, internal processes, and learning
factors.
3.
Financial: operating margin, cost per discharge, days in
accounts receivable
Customer: patient satisfaction, employee satisfaction, referring
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-47 (continued -1)
4. One of the hardest challenges is convincing employees that the
balanced scorecard is not simply a management tool. The reluctance
of employees to implement the balanced scorecard may prevent the
organization from achieving its strategic goals. In order to increase
buy-in from employees, management needs to educate them on the
relevance of the balanced scorecard. A hospital in the Southeast
realized that they needed to educate employees not only on how the
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Education.
Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-48 Balanced Scorecard (15 min)
Solution for problem 2-39; Balanced Scorecard for Fowler’s Farm
There are a number of possibilities for determining both the number
and types of perspectives for the balanced scorecard, and for
determining the critical success factors which belong under each
perspective. The answer below is representative of a balanced
scorecard that would be a good fit for the Fowler farm. This
Operations
crop rotation; number of fields in rotation
inventory of supplies and parts, by type of equipment, cost and
date purchased
weather forecast, days missed, important weather changes
irrigation schedule; % days on schedule
prices received for each major product
interest cost
Employees
turnover (number and percent)
accidents (number )
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-48 (continued -1)
Regulatory Compliance and Environmental
compliance with local, state and federal laws on tobacco
farming
compliance with FDA regulations regarding handling raw milk
usage of restricted chemicals known to have negative
environmental effects (amount, percent)
Customer
orders shipped on time (number and percent)
quality complaints (number, percent)
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Education.
Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18-49 Balanced Scorecard (15 min)
Solution for problem 2-43, The Tartan Corporation.
An example of a balanced scorecard for Tartan Corp follows:
Financial Internal Customer Employee
Sales, sales
growth, by
product and
region
Cycle time Lead time Training hours
Earnings, as
above
Waste of
materials
Retention Retention
ABC-based
Rework Satisfaction, in
Satisfaction
product line
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Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
PROBLEMS
18-50 Profit Center Limitations (25 min)
This question is intended primarily for class discussion. The objective
of the question is to have the class understand and discuss some of the
key limitations of the profit center approach for strategic performance
measurement, and to understand some of the methods for addressing
these limitations. The question will work best if the class has some prior
experience in either intermediate accounting, financial statement
analysis, or both. The Merchant and Sandino article is one of many that
have addressed the limitations of profit centers over the years, and it is
one of my favorites. Instructors may have their own favorite in this
regard, and could add their own favorite reading assignment on the topic
as part of the class assignment for this question,
1. Merchant and Sandino (especially in the full article) present a solid
case for moving away from the pure profit center evaluation, and
incorporating one or more of their four suggested approaches for
addressing the problem. Students who have had a solid financial
accounting background including for example, the financial
intermediate course or the financial statement analysis course, will be
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