Chapter 15 – Performance Evaluation
15-1
d. Suppose Murdoch changes its performance assessment measure from ROI to residual
income (RI). Murdoch’s desired rate of return is 14%. Under these circumstances,
should Hydride’s manager accept or reject the opportunity to invest the additional
$4,000,000 in machinery as described in requirement c?
Demonstration Problem 15-1 Solution
a. b.
Organization Chart
Level
1
CEO—Company Headquarters
Investment Center
2
VP-Operations
Profit Center
Administrative
Manager
Cost Center
3
Clerical
Services
Division
Profit Center
Computer
Services
Division
Profit Center
Advertising
Manager
Cost Center
4
Employee
Search
Dept.
Cost Center
Client
Services
Dept.
Cost Center
Employee
Search
Dept.
Cost Center
Client
Services
Dept.
Cost Center
c. No. Because LiPari exhibits a decentralized organization
structure, the CEO should not be involved in such detailed
Chapter 15 – Performance Evaluation
15-2
experience.Demonstration Problem 15-2 Solution
Item
Budget
Actual
Variance
F or UF
Selling and Admin. Exp.
$ 29,000
$ 27,000
$ 2,000
F
Sales Revenue
$310,000
$325,000
$15,000
F
Materials Price
$2.00 per lb.
$2.10 per lb.
$.10 per lb.
UF
Cost of Goods Sold
$125,000
$100,000
$25,000
F
Materials Purchases
$250,000
$265,000
$15,000
UF
Materials Usage
6,000 lbs.
5,800 lbs.
200 lbs.
F
Sales Price
$550 each
$500 each
$50 each
UF
Labor Rate
$8.10 per hr.
$7.95 per hr.
$.15 per hr.
F
Production Volume
950 units
900 units
50 units
UF
Labor Usage
$ 96,000
$ 97,000
$ 1,000
UF
Research and Dev. Exp.
$ 22,000
$ 25,000
$ 3,000
UF
Demonstration Problem 15-3 Solution
a. b.
Western Chair Company
Static Budget, Flexible Budget, Volume Variances
Static
Budget
Flexible
Budget
Volume
Variances
F or
UF
Number of Units
43,000
44,000
1,000
F
Sales Revenue
$2,666,000
$2,728,000
$62,000
F
Variable Costs
Direct Material
688,000
704,000
16,000
UF
Direct Labor
516,000
528,000
12,000
UF
Overhead
602,000
616,000
14,000
UF
G,S,&A
344,000
352,000
8,000
UF
Contribution Margin
516,000
528,000
12,000
F
Fixed Costs
Manufacturing
120,400
120,400
0
G,S,&A
67,000
67,000
0
Net Income
$ 328,600
$ 340,600
$12,000
F
Chapter 15 – Performance Evaluation
15-3
Demonstration Problem 15-3 Solution continued
b. The 1,000-unit favorable volume variance is usually
to higher than expected sales revenue.
The production manager is responsible for many of the
manufacturing cost variances. The purchasing manager and
human resources manager also share some of the responsibility
necessarily caused increased production costs.
The G,S,&A variance is a composite for which many managers
from that information. Demonstration Problem 15-3
Solution continued
c.
Western Chair Company
Flexible Budget, Actual Results, Flexible Budget Variances
Flexible
Budget
Actual
Results
Flex. Bud.
Variances
F or
UF
Number of Units
44,000
44,000
0
Sales Revenue
$2,728,000
$2,640,000
$88,000
UF
Variable Costs
Direct Material
704,000
718,960
14,960
UF
Direct Labor
528,000
480,480
47,520
F
Overhead
616,000
624,800
8,800
UF
G,S,&A
352,000
308,000
44,000
F
Contribution Margin
528,000
507,760
20,240
UF
Fixed Costs
Manufacturing
120,400
114,000
6,400
F
G,S,&A
67,000
69,000
2,000
UF
Chapter 15 – Performance Evaluation
15-4
Net Income
$ 340,600
$324,760
$15,840
UF
The marketing manager is responsible for the sales revenue
variance. In this instance, it appears sales volume increased as
from that information.
Demonstration Problem 15-4 Solution
a.
Sweeney Company
Responsibility Report
For 2014
Budget
Actual
Variance
F or U
Variable Costs:
Materials
$1,980,000
$1,962,000
$18,000
F
Customer Delivery
171,000
175,500
4,500
U
Inspection
108,000
104,400
3,600
F
Sales Commissions
360,000
378,000
18,000
U
Fixed Costs:
Manufacturing
720,000
708,000
12,000
F
Advertising
107,000
120,000
13,000
U
F. S. Software
15,600
18,000
2,400
U
Product Liability
45,400
17,900
27,500
F
b. The purchasing and production managers should be able to
explain the materials variance. The production manager may
Chapter 15 – Performance Evaluation
15-5
information services or accounting departments can probably
explain the variance related to financial statement software.
Demonstration Problem 15-5 Solution
a.
ROI for Hydride Division
Operating income
=
$720,000
=
18%
Operating assets
$4,000,000
b.
Margin
Operating income
=
$720,000
=
6%
Sales
$12,000,000
Turnover
Sales
=
$12,000,000
=
3
Operating assets
$4,000,000
Margin
x
Turnover
=
ROI
6%
x
3
=
18%
Management can increase ROI by increasing sales, reducing
c.
Hydride Division ROI with Additional Investment
Operating income
=
$720,000 + $600,000*
=
16.5%
Operating assets
$4,000,000 + $4,000,000
*Operating income from additional investment:
Chapter 15 – Performance Evaluation
15-6
If Hydride’s manager buys the additional machinery, Hydride’s
However, because the ROI on the additional machinery (15%) is
Demonstration Problem 15-5 Solution continued
higher than the company-wide ROI (14%), the company’s overall
ROI would increase with the investment. Using ROI to evaluate
d.
Residual Income without Additional Investment
Operating income
–
(Operating assets x Desired ROI)
=
RI
$720,000
–
($4,000,000 x .14)
=
$720,000
–
$560,000
=
$160,000
Residual Income with Additional Investment
Operating income
–
(Operating assets x Desired ROI)
=
RI
$720,000 + $600,000
–
($8,000,000 x .14)
=
$1,320,000
–
$1,120,000
=
$200,000
If Hydride’s manager buys the additional machinery, Hydride’s
residual income will increase by $40,000. Using residual income
Demonstration Problem 15-1 Work Papers
a. b.
Organization Chart
Level
Chapter 15 – Performance Evaluation
15-7
1
2
3
4
c.
Demonstration Problem 15-2 Work Paper
Item
Budget
Actual
Variance
F or UF
Selling and Admin. Exp.
$ 29,000
$ 27,000
Sales Revenue
$310,000
$325,000
Materials Price
$2.00 per lb.
$2.10 per lb.
Cost of Goods Sold
$125,000
$100,000
Chapter 15 – Performance Evaluation
15-8
Materials Purchases
$250,000
$265,000
Materials Usage
6,000 lbs.
5,800 lbs.
Sales Price
$550 each
$500 each
Labor Rate
$8.10 per hr.
$7.95 per hr.
Production Volume
950 units
900 units
Labor Usage
$ 96,000
$ 97,000
Research and Dev. Exp.
$ 22,000
$ 25,000
Demonstration Problem 15-3 Work Papers
a. b.
Western Chair Company
Static Budget, Flexible Budget, Volume Variances
Static
Budget
Flexible
Budget
Volume
Variances
F or
UF
Number of Units
Sales Revenue
Variable Costs
Direct Material
Direct Labor
Overhead
G,S,&A
Contribution Margin
Fixed Costs
Manufacturing
G,S,&A
Net Income
Demonstration Problem 15-3 Work Papers continued
b.
Chapter 15 – Performance Evaluation
15-9
c.
Western Chair Company
Flexible Budget, Actual Results, Flexible Budget Variances
Flexible
Budget
Actual
Results
Flex. Bud.
Variances
F or
UF
Number of Units
Sales Revenue
Variable Costs
Direct Material
Direct Labor
Overhead
G,S,&A
Contribution Margin
Fixed Costs
Manufacturing
G,S,&A
Net Income
Demonstration Problem 15-3 Work Papers continued
c.
Demonstration Problem 15-4 Work Papers
Chapter 15 – Performance Evaluation
15–10
a.
Sweeney Company
Responsibility Report
For 2014
Budget
Actual
Variance
F or U
Variable Costs:
Materials
Customer Delivery
Inspection
Sales Commissions
Fixed Costs:
Manufacturing
Advertising
F. S. Software
Product Liability
b.
Demonstration Problem 15-5 Work Papers
a.
ROI for Hydride Division
=
=
Chapter 15 – Performance Evaluation
15–11
b.
Margin
=
=
Turnover
=
=
Margin
x
Turnover
=
ROI
x
=
c.
Hydride Division ROI with Additional Investment
Operating income
=
=
Operating assets
*Operating income from additional investment:
Demonstration Problem 15-5 Work Papers continued
c.