Management Reponsibility & Performance Measurement Flashcards
CHAPTER 4
Responsibility centre
A function/department of an organisation that is headed by a manager who has direct responsibility for its perfomance
Responsibility accounting
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
Cost centre
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
Profit centre
Part of a business accountable for both costs & revenue
Does profit centre consists of several cost centres
Yes
Investment centre
A centre which had additional responsibilities for capital investment
Does investment centre includes severel profit centres
Yes
Perfomance measurement
How well something / somebody is doing in relation to a planned activity
Performance measurement for cost centres
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
Standard hour
Quantity of work achievable at a standard performance
–> standard unit of work done / standard period of time
Efficiency ratio
Standard hour / Actual hour
Capacity utilisation ratio
Actual hour / Budgeted hour
Production volume ratio
Standard hour / Budgeted hour
Budgeted hour =
(Standard hour/unit) x (Budgeted production unit)
Actual hour =
(Actual hour/unit) x (Actual production unit)
Standard hour =
Standard hour/unit x Actual output
(Efficiency) x (Capacity) =
Production volume
Standard time
Expected amount of time to produce a unit of output
Performance measures for profit centres
1) Net profit margin
2) Operating profit margin
3) Gross profit margin
4) Cost/sales ratio
Net proft margin
= Net profit/sales x 100
Operating profit margin
= Profit before interest & tax /
Sales x 100
Operating profit = Sales (exclude sales tax) - Total operating expenses
Gross profit margin
Gross profit / Sales x 100
Gross profit = Sales (exclude sales tax) - COGS
Cost/sales ratio
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
ROCE/ROI
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
Capital employed formula
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
Residual income
Measure of the centre’s profit after deducting a notional/imputed interest cost
= Profit before interest & tax - Notional interest charge for invested capital
Asset turnover
How efficiently assets of the business are being used to generate sales
= Sales / Capital employed
!! An absolute figure , NOT a percentage
ROCE =
Asset turnover x Net profit margin
∴ changes in net profit margin & asset turnover can account for any changes in ROCE
Contribution margin =
Sales - Variable expense
Contribution margin ratio =
(Sales - Variable expense) / Sales
OR
Contribution margin / Sales
