Lectures 8 - 10 Flashcards
Standard costs
a budget for the production of one unit of product or service
Actual costs
incurred and recorded in the production of the product or service
Cost variance
the difference between the actual cost and the standard cost
price variance
the difference between the actual price and the standard price
quantity variance
the difference between the actual quantity and the standard quantity
price/rate variance =
AQ * AP - AQ * SP
Quantity/efficiency variance =
AQ * SP - SQ * SP
variances are favourable when
the actual costs are less than the budget
variances are unfavourable when
the actual costs are higher than the budget
Fixed o/hd budget variance =
actual fixed o/hd - budgeted fixed o/hd
fixed o/hd volume variance =
budgeted fixed o/hd - applied fixed o/hd
applied fixed o/hd =
predetermined fixed o/hd rate * standard hours allowed
cost-benefit decision
the decision to investigate a variance is a cost benefit decision
behavioural effects of standard costing
they can influence behaviour when they’re used to determine salary increases and bonuses
criticisms of standard costing
reports are given too late to be useful and not applicable to short lived products
Decentralisation
assigning of specific responsibilities to sub-units of organisations
Goal congruence
when sub-unit managers in the organisation hold a common set of objectives
Individual goal congruence
when the members personal goals match that of the organisation as a whole
behavioural congruence
when individuals behave in the best interest f the organisation regardless of their own goals
responsibility accounting
a system of internal reporting tailored to specific organisational structures
centralised
decisions are handed down from the top and subordinates carry them out
benefits of decentralisation
shares workload, specialised people focus on depts.
costs of decentralisation
some tasks could be duplicated, local managers might make decisions that wont match top managers
Return on Investment
the ratio of profits to investment in the assets that generate those profits
ROI =
income/ invested capital * 100
Weighted average cost of capital
weighted average cost of debt and equity
what is the most commonly used measure of business unit performance ?
ROI
non financial performance measures
these measures help managers focus on profit drivers and recognise time lags
performance measurement in non profit organisations
they may have different controls than those found in business environments
transfer prices
TP is one responsibility centres sales price and anothers purchase price
balance scorecards are
performance measurement systems or business models that tie together knowledge of strategy, processes, activities and operational and strategic performance measures
An incentive system communicates
strategy, motivates employees and reinforces achievement of organisational goals
leading indicators
are measures that identify future financial and non financial outcomes to guide managements decisions
lagging indicators
are measures of the final outcomes of earlier management pans and their execution
organisational learning and performance
employee training, education, satisfaction and turnover
business and production process performance
new service development, service costs and process improvements
customer performance
customer satisfaction, retention, loyalty and risk
financial performance
revenue growth, net interest margin and return on assets
benefits of a bsc
works in lots of organisations and makes employees think about their decisions
costs of a bsc
choosing and validating measures, training and managing multiple measures
relative performance evaluation
compares an individuals performance to that of others
absolute performance evaluation
compares individual performance to set objectives or expectations
expectancy theory
people are motivated to act in ways that they expect to provide them with desired rewards
agency theory
an employee contracts with an employer to perform certain work, incentives must motivate the employee to work.
current rewards
are given now, based on current performance (immediate cash bonuses)
deferred rewards
rewards given later if sustained performance is desired (cash stocks payable later)
Cash bonuses
most liquid and immediate
share awards
usually not redeemable right away
share appreciation rights
confer a bonus to employees based on increases in stock price for a predetermined number of shares
share options
give an individual the right to purchase a number of shares at a specified price of a specified time period
incentive plans in non profit organisations
despite NPO’s being different they use features of executive incentive plans developed in the private sector
financial performance reflects the achievement of financial goals such as
cost control, revenue growth, earnings residual income
