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Chapter 14 - Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
14-72
14-52 (Continued-1)
▪
Assembly Group 2,200 × 2.0 = 4,400 hours
PCB Group 2,200 × 1.0 = 2,200 hours
RH Group 2,200 × 1.5 = 3,300 hours
▪ Calculation of direct labor efficiency variance:
d. Direct labor rate variance:
▪ Formula: Total wages paid − (AQ × SP)
e. Selling price variance:
▪ Formula: Units sold × (AP − SP)
▪ Calculate budgeted selling price per unit, SP:
Total budgeted sales Budgeted unit sales volume
f. Sales volume variance, in terms of contribution margin:
▪ Formula: Budgeted cm/unit × (Actual Sales – Budgeted Sales)
▪ Calculate budgeted unit contribution margin:
Chapter 14 - Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
14-73
14-52 (Continued-2)
2. The unfavorable variance of $58,660 between budgeted and actual contribution
margin for Funtime, Inc. during May 2013 can be explained by aggregating the
variances calculated above in part (1):
Direct materials price variance $ 13,900U
Direct materials usage variance 8,500U
Direct labor efficiency variances 400F
3. Behavioral factors that may promote friction among the production managers and
between the production managers and the maintenance manager include the
following:
▪ The managers of the PCB and RH groups will be dissatisfied with the
maintenance manager as equipment downtime has caused them to incur
reason why the PCB and RH groups began rejecting parts that would normally
have been modified and then used.
4. An evaluation of Constance Brown's report leads to the conclusion that it is
incomplete as she has not identified the real causes of the unfavorable results and
has left management to draw its own conclusions. In addition, Brown has only
Chapter 14 - Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
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Note to Instructor: An Excel file solution covering parts (1) and (2) of this
assignment is embedded below. You can open this “object” by doing the following:
1. Right click anywhere in the worksheet area below.
2. Select “worksheet object” and then select “Open.”
3. To return to the Word document, select “File” and then “Close and return
to...” while you are in the spreadsheet mode. The screen should then
return you to this Word document.
Solution to Pr. 14-
(6e).xlsx
Chapter 14 - Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
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14-53 Production Planning and Control Strategy (30 minutes)
There may be a happy ending to this story if Kristen and Bryan change the focus in
the plant from productivity at each work station and meeting budgets to a focus on
speed and throughput. The current emphasis on productivity at each work station has
the effect that each employee has the incentive to work very hard to meet their
department manager), creates incentives to reduce costs in ways which can cause
delays and defective products. The purchase of discounted material which apparently
led to product defects is an example.
The emphasis on individual productivity has other effects. Since it creates a focus
only on moving product through individual processes, inadequate attention appears to
defects rather than to spend time on inspection and re-work. Inspection and re-work are
non-value adding processes that should be eliminated.
Another unfortunate result of the cost allocation method in the plant is that
department managers apparently have the incentive to reduce the amount of space in
which they operate in order to reduce the overhead costs allocated to them. This means
and employees are rewarded for moving total product through the plant, not just through
their individual work stations. Everyone in the plant has the incentive to look for
bottlenecks and to find ways to reduce the effect of these bottlenecks. Moreover,
employees have the incentive to work together to reduce the bottlenecks and improve
throughput, since the focus is no longer on individual productivity, but on overall
productivity, which is the plant’s ultimate goal.
Summary Presentation of Problem on Chalk/White Board
(see next page)
Chapter 14 - Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
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14-53 (continued)
Chapter 14 - Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
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14-54 Research Assignment: Service-Based Innovation; Strategy (45-60 minutes)
1. Chapter 14 covers (among other topics) the control of labor and raw material
resource inputs to the manufacturing process. Traditional financial control systems for
these resource inputs consist of the use of standard costs, flexible budgets, and end-of-
period standard cost variance analyses (for example, for price/rate and
quantity/efficiency components of an overall cost variance). At the end of the chapter
the discussion is expanded to make the point that operational control extends beyond
used could improve health-care practice. The latter point is particularly important given
the current health care debate in the U.S.
2. Kaiser Permanente (KP) (www.kaiserpermanente.org/) is one of the nation’s largest
not-for-profit health plans, serving more than 8.8 million members, with headquarters in
Oakland, CA. Innovation Consultancy comprises a small group of
individuals(“innovation specialists”) within KP whose function it is to help develop better,
more efficient ways of performing activities related to the health-care delivery process.
(Go to http://xnet.kp.org/newscenter/opexcellence/2010/081810hbr.html for additional
information.) Innovation Consultancy uses what the unit calls “human-centered design”
or “design thinking” to address operational issues in health-care delivery.) In some
respects, this approach parallels the industrial engineering approach (“time-and-motion
nurse shift handoff (Nurse Knowledge Exchange), and pain management (Painscape).
(See part 4, below.)
14-78
14-54 (Continued)
3. Design thinking (or, “human-centered design”) is the term used for the research
methodology used by KP to develop improvements in operating activities/processes
associated with the health-care delivery process. In this method, the consultants work
with nurses (i.e., frontline staff) and patients as collaborators to develop process
health care providers interact with one another, with patients, with technology, and how
patients respond. To learn more about how Kaiser Permanente’s Innovation
Consultancy has used design thinking, please go to:
http://xnet.kp.org/innovationconsultancy/.
4. Examples:
a) KP MedRite:As the name implies, the goal of this project was to develop and
implement a plan that would reduce medication errors in hospitals. This requires a
process that ensures that the right medication is given in the right dose to the right
individual. Observation of the existing process by members of Innovation
Consultancy revealed that interruptions and distractions were leading causes of
addition, the team developed a five-step sequential process that would ensure that
medications were appropriately dispensed.
b) Nurse Knowledge Exchange: The focus of this project was to improve how
nurses exchanged patient information between shifts, which can typically take 45
minutes or more using conventional procedures. During this “shift-transfer time,”
patients basically have little-to-no direct contact with members of the nursing staff.
Further, the underlying exchange process was unreliable and idiosyncratic. KP’s
Innovation Consultancy team created a new process for passing on higher-quality
Chapter 14 - Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
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c) Inflection Navigator:The focus of this project was to help patients who have
received a frightening diagnosis (serious cardiac disease, cancer, etc.) deal with
the ensuing steps (follow-up tests, visits to specialists, etc.) for dealing with the
diagnosis. (The delivery of such life-threatening diagnoses is referred to as an
life-threatening diagnosis.
d) Cardiac surgery: Cardiac surgeon Devi Shetty has shown that speed and
efficiency of by-pass surgery can be increased without sacrificing quality of care.
The key is decomposing surgical procedures into basic elements and actions, and
Chapter 14 - Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
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14-55 Research Assignment: Supply-Chain Management; Strategy (30-40 minutes)
1. Chapter 14 covers (among other topics) the control of labor and materials. For the
most part, the discussion in Chapter 14 centers on the financial control of these two
resource inputs through the development of cost standards, flexible budgets, and cost-
variance analysis techniques. As discussed at the end of the chapter, however,
the use of innovative technology. As such, the topics covered in the article relate
broadly to the material covered in Chapter 14.
2. As used in the assigned reading, the term “provenance” refers to the origin or source
of materials added to a company’s product across the entire supply chain (suppliers of
the suppliers of the company, for example). Consumers, governments, and companies
along the supply chain are demanding increased disclosure about a given product’s
provenance. These stakeholders are concerned (for example) about product safety,
ethics, and assessing the environmental impact associated with a given product’s
example).
3. The larger point here is that until recently stakeholders had a limited view of a
product’s supply chain. The availability of sophisticated technology is changing this in
dramatic fashion. (The author, p. 79, refers to this as “transparency at a granular level.”)
As pointed out in the article, companies such as Wal-Mart, Tesco, and Kroger are using
such technology to “open up” their supply chains to public scrutiny. The following two
examples are offered in the assigned article:
a) Smaller generations of radio-frequency identification (RFID) tags can be
inconspicuously embedded in a product; such tags can be used directly to store
things as sourcing maps for a given product, live (i.e., real-time) video capture
of manufacturing floors for the product, and detailed information regarding both
environmental and ethical certifications associated with the product.
One final point worth mentioning is the fact that data collected via sophisticated tracking
systems will provide management accountants with an incredible amount of data that
Chapter 14 - Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
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could be used to analyze a product’s durability, safety, quality, etc. In short, such data
analytics in this area could be used to support a continuous-improvement strategy of the
business.
Chapter 14: Check Figures
14-23 No check figure available.
14-24 No check figure available.
14-25 No check figure available.
14-26 1. Sales volume variance = $1,800U; flexible budget variance, in terms of
contribution margin = $7,700U; flexible budget variance, in terms of operating
14-33 1a. $36,000; 1b. $3,000U; 1c. $11,000U; 1d. $5,600F; 1e. $5,600F.
14-34 No check figure available.
14-35 $196.00
14-36 No check figure available.
Chapter 14 - Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial
Performance Measures
14-82
Percentage improvement = 21.87% (22%, rounded).
14-43 1. Actual operating income = $20,000; flexible-budget operating income =
$74,000; master budget operating income = $70,000; 2a. total master (static)
variance = $1,100U; 2. Labor rate variance = $1,500U; labor efficiency (quantity)
variance = $100F.
14-50 No check figure available.
14-51 1. Flexible budget: unit sales = 50,000; sales revenue = $500,000; contribution
margin = $150,000; operating income = $75,000; 2a. Total master (static)
labor rate variances + selling price variance + sales volume variance.
14-53 No check figure available.
14-54 No check figure available.
14-55 No check figure available.
