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Techniques for evaluating managerial performance

Chapter 23 introduces other techniques for evaluating managerial performance. The concept of decentralization and its relationship to responsibility accounting will be explained. You will learn how to calculate and interpret return on investment and residual income. Finally, you will study approaches used to establish the price of products that are transferred between divisions of the same company. Questions below:

2. When the operating costs for Bill Smith's production department were released, he was sure that he would be getting a raise. His costs were $20,000 less than the planned cost in the master budget. His supervisor informed him that the results look good but that a more in-depth analysis is necessary before raises can be assigned. What other considerations could Mr. Smith's supervisor be interested in before she rates his performance?

9. Minnie Divers, the manager of the marketing department for one of the industry's leading retail businesses, has been notified by the accounting department that her department experienced an unfavorable sales volume variance in the preceding period but a favorable sales price variance.
Based on these contradictory results, how would you interpret her overall performance as suggested by her variances?

15. Sara Anderson says that she is a busy woman with no time to look at favorable variances. Instead, she concentrates solely on the unfavorable ones. She says that favorable variances imply that employees are doing better than expected and need only quick congratulations. In contrast, unfavorable variances indicate that change is needed to get the substandard performance up to par. Do you agree? Explain.

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2. When the operating costs for Bill Smith's production department were released, he was sure that he would be getting a raise. His costs were $20,000 less than the planned cost in the master budget. His supervisor informed him that the results look good but that a more in-depth analysis is necessary before raises can be assigned. What other considerations could Mr. Smith's supervisor be interested in before she rates his performance?

What we are not sure about is whether activity was down and that accounted for the reason his costs are down. If lower activity is the reason for the lower costs, it is not due to something exceptional or impressive about Bill's performance that led to the variance.

For example, what if the budget expected production to be 30,000 units. The actual demand was lower than budget and so production schedules were reduced to 28,000 units. Naturally, production used less material and labor than the budget expected during the period because they were making fewer units than the budget ...

Solution Summary

Your tutorial is 456 words and explains the variances, how to interpret them, common misunderstandings about variances and why favorable variances require followup.

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