Albrecht 19.pdf - Marriott School

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EOC | Controlling Cost, Profit, and Investment Centers Chapter 19 977
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Use segment margin statements and revenue variance analysis to explain
how performance is controlled in profit centers.
• The most common profit center measurement tool is the segment margin statement. This
statement identifies both direct and indirect costs and charges only the direct costs to
segments.
• In addition to cost variances, revenue variances are also used to manage performance in profit
centers.
• The two revenue variances are based on sales price and sales volume.
• The formula for the sales price variance is:
• The formula for the sales volume variance is:
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(Actual price Standard price) Actual quantity sold.
(Actual quantity sold Expected quantity sold) Standard price.
Use ROI and residual income analysis to explain how performance is controlled
in investment centers.
• Managers of investment centers are usually held responsible for costs, revenues, and assets.
• The most common performance measures used in investment centers are ROI (return on investment)
and residual income.
• The formula for ROI is:
Investment center ROI
• The formula for residual income is:
Operating profit (Minimum required rate of return Average total assets) = Residual income
• The ROI formula can be broken down into two subcomponents. The formulas for these two
subcomponent ratios are:
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Profit margin Asset turnover ROI
Compute and interpret variable overhead cost variances.
• Variable manufacturing overhead costs and activities can be analyzed using two variances:
spending and efficiency.
• The formula for the variable overhead spending variance is:
(Actual activity level Standard overhead rate) Actual overhead costs.
• The formula for the variable overhead efficiency variance is:
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Operating profit
Revenue
Investment center operating profit
Investment center average assets
Revenue
Average total assets
(Standard level of activity allowed Actual activity level) Standard overhead rate.
Compute and interpret fixed overhead cost variances.
• Fixed manufacturing overhead costs are analyzed using a single variance called the fixed manufacturing
overhead budget variance.
• The formula for the fixed manufacturing overhead budget variance is:
Budgeted fixed overhead costs Actual fixed overhead costs.
• The volume variance does not report on how fixed manufacturing overhead costs. Instead, the
volume variance reports on the difference between expected production volume and actual
production volume.
Operating profit
Average total assets