Sec C - Performance Measurement Flashcards
Degree of operating leverage
Contribution Margin / Operating Income
% change in Operating Income /
% change in Sakes
Transfer Pricing - positive impacts
Goal congruence
Performance evaluation
Sub-unit autonomy
Managerial effort
If the savings from selling internally is higher than the opportunity cost of lost sales, then the buying division must purchase internally at the market price.
If the subdivision has excess capacity, the company must sell at the transfer price between the variable cost and the market price.
Transfer Pricing - methods
Market base price
cost based price
negotiated price
Dual-rate (rare)
variable cost method (excess capacity)
full cost method
Return on Investment (ROI)
Return on Investment (ROI) = Operating Income / Total assets
Operating income = Income before nonrecurring items plus interest net of income tax
Residual Income
Residual Income = Income – (Cost of Capital x Total Assets)
Balanced Scorecard components
1) Financial perspective
2) customer perspective
3) internal business process perspective
4) learning and growth perspective
Operating Income:
Absorption costing vs. Variable costing
A>V, P>S
Absorption Operating Income > Variable Operating Income when Production > Sales
A Sales
Production Costing
FIFO method
1) Prepare Quantity schedule
2) Calculate Equivalent Units of Production (EUP) for Direct Materials and Conversion Costs;
counts beg WIP based on % completed
3) Calculate Cost per equivalent units = Total Costs / EUP (Cost of Beg WIP is not included)
4) Calculate Cost of units transferred = Beg WIP cost + (units started/completed x whole unit EUP)
5) Calculate Ending inventory = Ending WIP units x Material cost per EUP + Ending WIP units of conversion costs x Conversion cost EUP
Production Costing
Weighted average method
1) Prepare Quantity schedule
2) Calculate Equivalent Units of Production (EUP) for Direct Materials and Conversion Costs; counts beg WIP units 100%
3) Calculate Cost per equivalent units = Total Costs / EUP (Cost of Beg WIP is included)
4) Calculate Cost of units transferred = Beg WIP cost + (units started/completed x whole unit EUP)
5) Calculate Ending inventory = Ending WIP units x Material cost per EUP + Ending WIP units of conversion costs x Conversion cost EUP
In the short term, which profitability measure is the most important?
The contribution margin is the most important in the short term because it tells which products will be the most profitable
Transfer pricing — method to use when selling division has excess capacity
variable cost (minimum)
