Performance Management Flashcards
Explain what management by exceptions means
The Practice of examining financial & operational results that deviate significantly from what is expected, whether favorable or unfavorable.
Define the standard cost system
Is a system for applying standard cost into an accounting system. A standard cost is the input cost expected for the actual output received.
Reasons for adopting a standard cost system
1) Useful in planning (budgeting, project planning etc)
2) For control purposes (actual vs. standard costs)
3) Provides available costs immediately (decision making)
Describe the Performance Evaluation Cycle
- Prepare std. cost performance variance
- Analyze variances
- Receive feedback
- Respond to feedback
- Take corrective actions
- Conduct next periods operations
Identify & explain the different cost centers
1) Cost center - controls costs only
2) Revenue center - controls revenue only
3) Profit center - controls profit only
4) Investment center - controls cost, revenues & invested capital
Explain the Degree of Operating Leverage and how to calculate it
An evaluation tool to determine how responsive (or volatile) the changes in OI is to change in sales.
1) CM / OI
2) % chg in OI / % chg in Sales
Explain the product line as a segment evaluated by the organization
It’s evaluated by the product profitability analysis, which enables a company to identify product that will provide the max total CM or OI.
Explain the geographical area as a segment evaluated by the organization
It’s evaluated by the area profitability analysis in order to either reduce costs in low profit areas or increase sale in high profit areas.
Explain why the allocation of common costs among segments can be an issue in performance evaluations.
Common costs can’t be distributed using cause/effect relationship. They aren’t controllable and are imposed which demotivates management if not reasonably allocated.
Explain Stand-alone cost allocation
A method of allocating common costs which assumes each users is a separate entity. Total costs are allocated proportionately.
Explain Incremental cost allocation
A method of allocating common costs that categorize users as primary and secondary (incremental). Costs are charged first to primary users and remaining costs are allocated to secondary users.
Define transfer pricing
Transfer pricing is the price to transfer within an organization. It’s the price set by the selling division to the buying divisions for internal transfer of goods.
What are the objectives of transfer pricing
(MoGoFair)
Motivation - encourage autonomy
Goal Congruence - advantageous to the whole company
Fair Reward - efforts & effectiveness of decisions making must be rewarded fairly.
Explain what transfer prices impact
(GPS-M)
- Goal Congruence
- Performance Evaluation
- Sub-unit Autonomy
- Managerial Effort
Explain the advantages/disadvantages of Market Based Price in transfer pricing
The price @ which the services being transferred is sold to the outside market
Advantage: Used in a perfectly competitive market, it can promote the GPS-M
Disadvantage: Market price may not be available or easily determinable. Some products can fluctuate quickly/significantly. If the market prices are not competitive it can lead to unpractical decision making.
Explain the advantages/disadvantages of Cost Based Price in transfer pricing
The price used when market price isn’t available. Can be full cost, variable or others
Advantage: Costs are readily available from accounting records
Disadvantage: May lead to sub-optimization. The selling division has little or no incentive to control costs. Ignores the selling division’s effort to generate a profit.
