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Managerial Accounting Ch08 by Needles, Chapter Outline Man Ch08

Managerial Accounting Ch08 by Needles, Chapter Outline Man Ch08

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06/16/2009

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CHAPTER 8
Performance Management and Evaluation
00001REVIEWING THE CHAPTER
Objective 1: Describe how the balanced scorecard aligns performance with organizationalgoals.
10.The
balanced scorecard
is a framework that links the perspectives of an organization’s four  basic stakeholder groups with the organization’s mission and vision, performance measures,strategic and tactical plans, and resources. The four groups are investors, employees,internal business processes, and customers. To add value for these groups, an organizationdetermines each group’s objectives and translates them into performance measures that havespecific, quantifiable targets.20.During the planning phase of the management process, managers use the balanced scorecardto translate their organization’s vision and strategy into operational objectives that will benefit all stakeholder groups. Once they have established these objectives, they set performance targets and select performance measures. In the performing phase, managersuse the organization’s operational objectives as the basis for decision making within their individual areas of responsibility. Managers evaluate the effectiveness of their strategies inmeeting performance targets set during the planning stage and compare planned performance with actual results. Managers prepare a variety of performance reports tocommunicate results to stakeholder groups.
Objective 2: Discuss performance measurement, and identify the issues that affectmanagement’s ability to measure performance.
30.A
performance management and evaluation system
is a set of procedures that accountfor and report on both financial and nonfinancial performance. Such a system enables acompany to identify how well it is doing, the direction it is taking, and what improvementswill make it more profitable.40.
Performance measurement
is the use of quantitative tools to gauge an organization’s performance in relation to a specific goal or an expected outcome. Each organization mustdevelop a unique set of performance measures appropriate to its specific situation that willhelp managers distinguish between what is being measured and the actual measures used tomonitor performance.
Objective 3: Define
responsibility accounting 
, and describe the role that responsibilitycenters play in performance management and evaluation.
50.
Responsibility accounting
is an information system that classifies data according to areasof responsibility and reports each area’s activities by including only the revenue, cost, andresource categories that the assigned manager can control.60.A
responsibility center
is an organizational unit whose manager has been assigned theresponsibility of managing a portion of the organization’s resources. The five types of responsibility centers are as follows:
 
a0.A
cost center
is a responsibility center whose manager is accountable only for controllable costs that have well-defined relationships between the center’s resourcesand products or services. b0.A
discretionary cost center
is a responsibility center whose manager is accountableonly for costs in which the relationship between resources and products or services produced is not well defined. These centers, like cost centers, have approved budgetsthat set spending limits.c0.A
revenue center
is a responsibility center whose manager is accountable primarilyfor revenue and whose success is based on its ability to generate revenue.d0.A
profit center
is a responsibility center whose manager is accountable for bothrevenue and costs and for the resulting operating income.e0.An
investment center
is a responsibility center whose manager is accountable for  profit generation; the manager can also make significant decisions about the resourcesthe center uses. The manager can control revenues, costs, and the investments of assetsto achieve the organization’s goals.70.An
organization chart
is a visual representation of an organization’s hierarchy of responsibility for the purposes of management control. A responsibility accounting systemestablishes a communications network within an organization that is ideal for gathering andreporting information about the operations of each of these areas of responsibility. Thesystem is used to prepare budgets by responsibility area and to report on the actual performance of each responsibility center. The performance report for a responsibility center should contain only
controllable costs and revenues
 —that is, the costs, revenues, andresources that the manager of the center can control.
Objective 4: Prepare performance reports for cost centers using flexible budgets and forprofit centers using variable costing.
80.Performance reports allow comparisons between actual performance and budgetexpectations. Such comparisons enable management to evaluate an individual’s performance with respect to responsibility center objectives and companywide objectivesand to recommend changes. The content and format of a performance report depend on thenature of the responsibility center.90.The performance of a cost center can be evaluated by comparing its actual costs with thecorresponding amounts in the flexible and master budgets. A
flexible budget
(also called a
variable budget 
) is a summary of expected costs for a range of activity levels. A flexible budget is derived by multiplying actual unit output by predetermined unit costs for each costitem in the report. The flexible budget is used primarily as a cost control tool evaluating performance at the end of a period.100.A profit center’s performance is usually evaluated by comparing its actual income statementwith its budgeted income statement. When
variable costing
is used, the profit center manager’s controllable costs are classified as variable or fixed. The variable cost of goodssold and the variable selling and administrative expenses are subtracted from sales to arriveat the center’s contribution margin; all controllable fixed costs are subtracted from thecontribution margin to determine operating income. The variable costing income statementtakes the form of a contribution income statement rather than a traditional incomestatement. A traditional income statement (also called a
 full costing 
or 
absorption costing income statement 
) assigns all manufacturing costs to cost of goods sold. A variable costingincome statement uses only direct materials, direct labor, and variable overhead to compute
 
variable cost of goods sold. Fixed overhead is considered a cost of the current accounting period and is listed with fixed selling expenses.

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