Management Reponsibility & Performance Measurement

Question 1

Responsibility centre

Answer 1

A function/department of an organisation that is headed by a manager who has direct responsibility for its perfomance

Question 2

Responsibility accounting

Answer 2

A system of accounting that segregates revenue & costs into areas of personal responsibility in order to monitor & assess the performance of each part of an organisation

Question 3

Cost centre

Answer 3

A production/service location, function, activity or item of equipment for which costs are accumulated

OR

Any section of an organisation to which costs can be separately attributed

Question 4

Profit centre

Answer 4

Part of a business accountable for both costs & revenue

Question 5

Does profit centre consists of several cost centres

Answer 5

Yes

Question 6

Investment centre

Answer 6

A centre which had additional responsibilities for capital investment

Question 7

Does investment centre includes severel profit centres

Answer 7

Yes

Question 8

Perfomance measurement

Answer 8

How well something / somebody is doing in relation to a planned activity

Question 9

Performance measurement for cost centres

Answer 9

1) Productivity - how efficiently resources are being used
2) Cost per unit produced - total costs/number of units produced
3) Hour per unit produced
4) Transport cost/tonne/km
5) Efficiency, capacity utilisation, production volume
6) Standard hours

Question 10

Standard hour

Answer 10

Quantity of work achievable at a standard performance

–> standard unit of work done / standard period of time

Question 11

Efficiency ratio

Answer 11

Standard hour / Actual hour

Question 12

Capacity utilisation ratio

Answer 12

Actual hour / Budgeted hour

Question 13

Production volume ratio

Answer 13

Standard hour / Budgeted hour

Question 14

Budgeted hour =

Answer 14

(Standard hour/unit) x (Budgeted production unit)

Question 15

Actual hour =

Answer 15

(Actual hour/unit) x (Actual production unit)

Question 16

Standard hour =

Answer 16

Standard hour/unit x Actual output

Question 17

(Efficiency) x (Capacity) =

Answer 17

Production volume

Question 18

Standard time

Answer 18

Expected amount of time to produce a unit of output

Question 19

Performance measures for profit centres

Answer 19

1) Net profit margin
2) Operating profit margin
3) Gross profit margin
4) Cost/sales ratio

Question 20

Net proft margin

Answer 20

= Net profit/sales x 100

Question 21

Operating profit margin

Answer 21

= Profit before interest & tax /
Sales x 100

Operating profit = Sales (exclude sales tax) - Total operating expenses

Question 22

Gross profit margin

Answer 22

Gross profit / Sales x 100

Gross profit = Sales (exclude sales tax) - COGS

Question 23

Cost/sales ratio

Answer 23

When target profits are not met :

○ Production cost of sales/ Sales
○ Distribution & marketing cost/ Sales
○ Administrative cost/ Sales
○ Material cost/Sales value of production
○ Work labour cost/ Sales value of production
○ Production overhead/ Sales value of production

** To examine problem areas in greater depth

Question 24

ROCE/ROI

Answer 24

Shows how much profit has been made in relation to the amount of resources invested

= (Profit/Capital employed) x 100

Profit –> Profit before interest & tax

Question 25

Capital employed formula

Answer 25

1) Debt (non current liability) + Equity
2) NCA + (CA-CL)

!! All assets of a non-operational nature (etc : intangible asset - goodwill & trade investment) should be EXCLUDED from capital employed

• profit should be related to average capital employed

Question 26

Residual income

Answer 26

Measure of the centre’s profit after deducting a notional/imputed interest cost

= Profit before interest & tax - Notional interest charge for invested capital

Question 27

Asset turnover

Answer 27

How efficiently assets of the business are being used to generate sales

= Sales / Capital employed

!! An absolute figure , NOT a percentage

Question 28

ROCE =

Answer 28

Asset turnover x Net profit margin

∴ changes in net profit margin & asset turnover can account for any changes in ROCE

Question 29

Contribution margin =

Answer 29

Sales - Variable expense

Question 30

Contribution margin ratio =

Answer 30

(Sales - Variable expense) / Sales

OR

Contribution margin / Sales