Chapter 15 Performance Evaluation
15-1
Answers to questions
1. People, not budgets, control costs. Ms. Kelly needs to use the budget system to build
maintain the desired control.
2. A responsibility center is the point in an organization where the control over
revenue or expense items is located.
3. The three types of responsibility centers are:
(1) cost centers,
Cost centers exist where a business segment incurs costs but does not generate
4. A static budget is based on the expected or planned volume of activity. An example
of a static budget would be the master budget prepared for planning purposes.
Flexible budgets differ from static budgets in that they show the estimated amount
they have control and would be reasonable measures of performance.
5. Mr. Smith is assessing his performance based on a comparison between a static
budget and actual results. Since a static budget is based on the planned level of
6. Sales variances are favorable when actual sales are greater than planned sales and
are unfavorable when actual sales are less than planned sales. Cost variances are
Chapter 15 Performance Evaluation
15-2
7. Many circumstances at the production level could affect Joan’s sales. Low quality
control in the production process could lead to lower quality goods that are difficult
variances can substantiate who is responsible for poor sales performance.
8. To determine volume variances a static budget based on planned volume is
compared to a flexible budget based on actual volume. When actual volume is
greater, variable costs are planned to be greater under the flexible budget. Variable
concern.
9. Sales revenues could increase because of either an increase in sales volume or an
increase in the sales price. The increase in sales volume could have resulted from
the actions of the marketing manager or could have resulted from circumstances or
10. The amount of fixed costs will remain the same under planned or actual volume.
Based on this cost behavior when actual volume is greater than planned, there will
11. Flexible budget variances are determined by taking the difference between flexible
budget amounts (based on standard per unit costs and actual volume) and actual
Chapter 15 Performance Evaluation
15-3
12. To determine if the marketing department’s variances are favorable or unfavorable
overall, the combination of variances requires analysis. The magnitude of the price
variance versus the magnitude of the volume variance would have to be compared. If the
13. Variance reports show variances from standard or expected amounts. Managers
14. It is possible for a manager with a lower return on investment (ROI) to be
outperforming a manager with a higher ROI. Many factors such as work stoppage,
15. The factors that affect the computation of return on investment are: (1) Margin;
Net income/Sales and (2) Turnover; Sales/Investment.
16. The return on investment can be increased by:
(1) increasing sales,
17. A manager is rewarded for an investment that returns an amount in excess of the
company’s desired rate of return under the residual income method. Accordingly,
18. The manager with the highest residual income is not always the best performer.
Managers with larger investments will naturally have higher residual incomes.
Exercise 15-1
Chapter 15 Performance Evaluation
15-4
a. Individual stores of Besant Toys Corporation are profit centers because their
responsibility is mainly to sell products provided by the headquarters for the
b. A balanced scorecard includes both financial and nonfinancial measures. While
return on sales is a good measure for the performance evaluation of individual
light on this particular aspect of store performance.
Employee turnover measures whether store staff members are happy and willing to
continue working for the company. If turnover is high, the store cannot provide
good customer service because employees do not plan to stay with the store for the
performances.
Exercise 15-2
Price/Cost
per Unit
a.
Master
Budget
2,000 Units
b.
Flexible
Budget
2,200 Units
Sales
$10.00
$20,000
$22,000
Variable manufacturing
$6.00
(12,000)
(13,200)
Contribution margin
8,000
8,800
Fixed manufacturing
(3,000)
(3,000)
Fixed selling and admin.
(1,000)
(1,000)
Net income
$ 4,000
$ 4,800
Exercise 15-3
Flexible
Budget
40,000 Hours
Flexible
Budget
45,000 Hours
Flexible
Budget
50,000 Hours
$6,400,000
$7,200,000
$8,000,000
(2,400,000)
(2,700,000)
(3,000,000)
4,000,000
4,500,000
5,000,000
Chapter 15 Performance Evaluation
15-5
1,800,000
1,800,000
1,800,000
$2,200,000
$2,700,000
$3,200,000
Exercise 15-4
Item to Classify
Standard
Actual
Type of
Variance
Sales volume
40,000 units
42,000 units
Favorable
Sales price
$3.60 per unit
$3.63 per unit
Favorable
Materials cost
$2.90 per pound
$3.00 per pound
Unfavorable
Materials usage
91,000 pounds
90,000 pounds
Favorable
Labor cost
$10.00 per hour
$9.60 per hour
Favorable
Labor usage
61,000 hours
61,800 hours
Unfavorable
Fixed cost spending
$400,000
$390,000
Favorable
Fixed cost per unit (volume)
$3.20 per unit
$3.16 per unit
Favorable
Exercise 15-5
Item
Budget
Actual
Variance
F or U
Sales price
$800
$780
$20
U
Sales revenue
$720,000
$780,000
$60,000
F
Cost of goods sold
$385,000
$360,000
$25,000
F
Material purchases at 5,000 pounds
$275,000
$280,000
$ 5,000
U
Materials usage
$180,000
$178,000
$2,000
F
Production volume
950 units
900 units
50 units
U
Wages at 4,000 hours
$60,000
$58,700
$1,300
F
Labor usage at $16 per hour
$96,000
$97,000
$1,000
U
Research and development expense
$22,000
$25,000
$3,000
U
Selling and administrative expenses
$49,000
$40,000
$9,000
F
Exercise 15-6
a. & b.
Titov Company
Internal Income Statement for 2014
Budget
Actual
Variance
Sales
$800,000
$793,600
$6,400
Unfavorable
Variable expenses:
Product costs
(326,000)
(320,800)
5,200
Favorable
Selling expenses
(80,000)
(82,500)
2,500
Unfavorable
Other expenses
(6,000)
(7,200)
1,200
Unfavorable
Contribution margin
388,000
383,100
4,900
Unfavorable
Fixed expenses:
Chapter 15 Performance Evaluation
15-6
Product costs
(21,000)
(20,780)
220
Favorable
Selling expenses
(40,000)
(39,610)
390
Favorable
Other expenses
(3,200)
(3,350)
150
Unfavorable
Operating income
323,800
319,360
4,440
Unfavorable
Interest expense
(1,300)
(1,200)
100
Favorable
Operating Income
$322,500
$318,160
$4,340
Unfavorable
Exercise 15-7
a. & b.
Master
Budget
2,000 Units
Flexible
Budget
2,200 Units
a. & b.
Volume
Variances
Sales
$20,000
$22,000
$2,000 F
Variable manufacturing
(12,000)
(13,200)
1,200 U
c. Since the sales price and cost per unit are the same for both the master and flexible
budgets, the cause of the variances is attributable solely to the fact that the sales
volume was 200 units more than planned. The favorable $2,000 sales volume variance
suggests that it is beneficial to increase sales. However, more information is needed to
d. The amount of fixed cost appearing in the flexible budget is $3,000 for manufacturing
e.
Master
Budget
Flexible
Budget
Fixed manufacturing
$3,000
$3,000
Fixed selling and admin.
1,000
1,000
Total fixed cost (a)
$4,000
$4,000
Units (b)
2,000
2,200
Cost per unit (a b)
$2.00
$1.82
Exercise 15-7 (continued)
Chapter 15 Performance Evaluation
15-7
The increase in sales volume acts to reduce the fixed cost per unit, thereby increasing
profitability. The effect on net income will be magnified as a result of operating
Exercise 15-8
Flexible
Budget
2,200 Units
Actual
Price/Cost at
2,200 Units
a. & b.
Flexible
Budget
Variances
Sales
$22,000
$21,5601
$440 U
Variable manufacturing
(13,200)
(12,650)2
550 F
Contribution margin
8,800
8,910
110 F
Fixed manufacturing
(3,000)
(2,500)
500 F
Fixed selling and admin.
(1,000)
(1,025)
25 U
Net income
$ 4,800
$ 5,385
$585 F
1Actual sales: $9.80 x 2,200 units = $21,560
c. The fixed cost flexible budget variances are frequently called spending variances.
Exercise 15-8 (continued)
d. The unfavorable flexible budget sales variance results from the fact that products
were actually sold at a price below what was planned. To properly interpret this
result, you must also consider the sales volume variance. As previously shown in
Exercise 15-2A, the sales volume variance was $2,000 favorable. A rational
explanation for the two variances is that management sought to increase sales volume
Exercise 15-9
Chapter 15 Performance Evaluation
15-8
b. The marketing department could lack the leadership necessary to motivate the sales
staff to accomplish otherwise attainable objectives.
company’s ability to lower its sales price.
Exercise 15-10
a. & b.
Static Budget
Per Unit Cost
Production in units
60,000 Kits
Direct materials
$420,000
$7.00
Direct labor
360,000
6.00
Variable MOH
96,000
1.60
Flexible Budget
Actual Results
Variances
Production in units
64,000 Kits
64,000 Kits
Direct materials
$448,000
$524,000
$76,000 U
Direct labor
384,000
371,200
12,800 F
Variable MOH
102,400
108,000
5,600 U
Total variable costs
934,400
1,003,200
68,800 U
Fixed MOH
420,000
410,000
10,000 F
Total manufacturing costs
$1,354,400
$1,413,200
$58,800 U
According to the analysis of flexible budget variances, Albert Kaiser, the production
manager, did a good job in controlling the direct labor cost and the fixed
manufacturing costs.
c. Because Mr. Kaiser does not have the authority to make pricing and marketing
Exercise 15-11
a.
Master
Budget
30,000 Hours
Flexible
Budget
31,500 Hours
Volume
Variance
Sales ($100 per hour)
$3,000,000
$3,150,000
$150,000 F
Chapter 15 Performance Evaluation
15-9
b.
Flexible
Budget
31,500 Hours
Actual
Revenue at
31,500 Hours
Flexible
Budget
Variance
Sales
$3,150,000
$2,992,5001
$157,500 U
1Actual Sales: $95 x 31,500 hours = $2,992,500
c. Reducing the sales price was unprofitable. The favorable volume variance is less than
Exercise 15-12
Operating income ÷ Operating assets = ROI
Exercise 15-13
Operating income ÷ Operating assets = ROI
Operating income ÷ $480,000 = 10%
Operating income = Operating assets x ROI
a. If expenses are reduced by $30,000, they would become $222,000. Accordingly, the
operating Income will become $78,000 ($300,000 – $222,000).
Exercise 15-13 (continued)
b. If both sales and expenses cannot be changed, the operating Income would remain
Operating income ÷ Operating assets = ROI
The operating assets must be decreased from $480,000 to $295,385 to achieve
Exercise 15-14
Chapter 15 Performance Evaluation
15–10
Exercise 15-15
a. Division A: Residual income = $26,000 – (16% x $125,000) = $6,000
b. Division A had residual income of $6,000 and Division B had no residual income.
Exercise 15-16
ROI
Operating profit margin x Turnover
0.08 x 2.2 = 0.176 or 17.60%
Investment in operating assets
Turnover = Sales/Operating assets = 2.2
$484,000/X = 2.2
X = $220,000
Operating income
Operating profit margin = Operating income/Sales
0.08 = X/$484,000
X = $38,720
Residual income
$38,720 – [10% x $220,000] = $16,720
Exercise 15-17
Current residual income:
($10,000,000 x 12%) – ($10,000,000 x 8%) = $400,000
New residual income if the investment opportunity is adopted:
Division will be better off taking the opportunity.
Problem 15-18
a. The characteristics that differentiate a cost center, a profit center, and an
investment center from each other are tied to or depend on the concept of