PERFORMANCE EVALUATION CCPALE Syllabus Covered 1.3 Management accounting concepts and techniques for performance measurement 4.34 Responsibility accounting and transfer pricing 18:4 Concepts of decentralization, segment reporting, goal congruence and metwaton 13:42 Controllable and noncontollabe costs, direct and common costs 13:3 Woe of esponsibility centers (cost revenue, profit and investment centers) 13:14 Preparation of segmented income statement 48:15 Performance margin (manager vs. segment performance) 13:18 Return on investment (RO, residual income and economic value added (EVA) 1.3417 Rational and need for transfer pice 1.3:.8 Tanafr pricing schemes (minimum transfer pice, market-based translr price coatased transfer price and negotiated price) 4.32 Balance scorecard 4924 Nat 3 perspectives of balanced seoreeard 4.822 Financial and non-financial performance measures (productivity, cycle efficiency and throughput measures) 13.14 Concepts of decentalzaton, segment repeting, goal congruence and motivation Pertrmance evaluation she bass of a managemrt contal system. Perel compartons of he actual costs, reverues nd Investments with the budgeted cost, reverues an investments con hip management in fang Gecisans abot tre soeahone. Pertrmanos evaluation shou be dane in respec of al eepeneblty contr 2, cost contr, pot centre ang nveemen centr) to acorn the lvl peronse. The best way encourage managers io achive the deste level o parce to measure te petfarance compara fo budgets aul, Responsibility Accounting: on tere epotng systm that supports decantation ef decison making and generation of ntormaton specie tthe conte, Resoures, ovenues, ‘hd csi are sccalatod a apie by Tovlsfesparsity 6 by respensbhiy carters itn the agarzaton{A Decentralization vs Centralzation Decentraizaton isthe delagation of autorty and responsibly to superiors or mi-vel mansnement. refers tothe creation of isons or sepmets ofan organization bore move manageabio sub-unit nthe erganiation fis managed by he suporvkor cated to decid ad fad aazuniabl fr fs dacsionsAlfough a corpa ‘daconralza,t shoul practea Goal ongrusree. Goal Congruense shang departmental adjectives dreatyakgnos wen the ompan's eral qoale and objoctves Theo make ‘Sire ato ferent departs havo ona conmon goal cansonancs wi Ihe conan stage: abjoctves. Decenazaion works in 3 Sra dur and Lge eae buses rganators _contraizs Gocision making eaves decision making ow top lve eanagoment Decisions cascade to loner lve managoment fr implomentation, Usually tis works fr Mlro busiess organization, ‘Advantages and Disadvantages of Decentralization + t'se1es a @ mtvatonl oo tings ot he best tom the loner level managers. because they ae held accountable othe actions, Moreover, hey ae evaluated based on ‘he alament of tjctes or aulcomesdoogstd ham This station may nreaso ob satstacicn thus lowaring argloyesturover. wil aso enhance arganzatonal Pavermance an proauctvt. Hmevor his may cat toa mach docertratzation esuting to ack of eacrdinaton among dion manager, Dison managers bocame toe compattve agains tho pesr thatthe ond fo frget at ney belong to the same company Ts stan wl elsrate he advantages of earmaark Awa designed evaliaion syn soc ae Balan’ ‘Seoesar wl minmiza he i, 2 Top level managamnt can focus on state bsues and overal company concer. Lowe vel manages are delegated to die on operational sues encounaed on 2 dally basis This wil alow lower leva managers fhe capacity fo have aeons fo denied information needed decison making, thos kprovng te Seison making capt ef op level ‘management lower lovel managoman Howaver, his can aso load to “suboptirizaton”. Sub optimization harper when lower lvel managers ao to focused on ataning departmental cbocve hat thoy tnd to lease foo on he oveal company objective. Say fr samp, a Sion SOUR Inease ssl omy a he sypore of caplarng the sales loa ola Svan bstngin o the same com. «2 Malows ule response to operational probloms. Lower ove! managor can quik reso oF deeds on su8e under autor. These lsuos nude ut Not nted to usta sonplaisfeedback, predclon elon human rau, and he However, oo much lseway grate toloner lve manager in rcohing leave wil result losing nt on he big pct”. They ten o rsa letuee ana nor the overalimpaci of he soli tn company. Tas ca be avlded by hang eau! dalneaen ef auto atoss he eo any + Rs a vahing ground for lanes lve managers. Dscentalizston allons lowe level manageso grow professionally and develop ther shi in desson mang Ths wil enble he company to hav a poo of otetalturotop level managers that can be promoted when ihe aed ae, However, ths may esto “re-reading” Inarsading happens whon a company is deprived of naw ieas or extemal generated eas because offeo uch rains on wer lovl maragare beng promoted o top lve pasion. Ti tard mt ideas nehn company eracioae ae wl alow Morte,8B. Segment Reporting Businas sagrant reporting beaks out a conpany's ancl data by company divisions subsfaries,cr fhr Keds of business segmens. nan annual apr. business segment reporting groves an acurao euro ofa puble compas performance os shareldos: Manager uses busines ogront paring to otaluat tho Neon, expanse, esas, and Tabiies of eoch bushes Svs to assess ts gona hl induang prota and polenta pitas, Asegmentis a component of business that gaeratos ts own revenues and coasts omn product, product Ines or senice offerings. In general unt ofa business canbe lited outa he larger oompany and emaina sateen en, hon tay be classted a a ousness segment istration: msi Company produces and sel only two products that ae rtered to as RIPS an PITS. Production is “fo der onl, and no ish goods inventories are mantis ‘workinprocessrworteoe 9 negigbo. Tha follwing data have been exactod alah ts ast mon es errs Sales. 180000 80.000 anufacing cost Matra e000 24,000 Labor 54000 48,000 vaead 72000 84.000 Seling expanses. Praoo ro.0%0 Aemiisratve xperces 12.000 P1a.o00 An analyse hasbeen made f tha manufecutng oeried. Although the tas Ist! above are raesble othe products 36,000 of th averhsod asslgned to RIPS ane P72,000 of ‘hal ensigns to PITS fed. The Laanos of he oveead i varie Seling exoenses consist entry of commissions pet as percentage of sls, Direc boris completly variable, Adminsratveexpensesin th data above ae xed and cannot be raced to bie produc but have baen arbitrary allocated he product Required Prepare a segmented income statement. in tll an forthe to products. Use the contin approechnewer “ioterae 4200 18000 24000 Uber ‘820 Astrea ovrbnd “009 “ovat ea Tazawn “aca Cxtaon arg ia 93000 oer taed opr antaciea overtead soon 7.000 ‘segment marin seo Cai Sig tear cmon expense ‘nia expanse 0900 Neopersing core aed {C.Goal Congruence and Motivation Gal congruence is a suaton in which peoce n mute ves of n organization share he sare goal, Awe thoughout organizational desian causes goal congruenoe and resus In anorgaleaton bag able o work legato aceapish a sete. ‘Goal eangruene the orm which dseribs the svaton when th goal of eerent intros gous coincide. Away of halpng to aevove goal congruence between sharaholirs ‘and manages the mfoduton of cartuly designed remuneration packages fo aragers fe would matvato managers lake Uacsions Wh Wer css wi the opts ofthe sharahoiders.Aganey ter Eove empoyoos of blneeos, etd anager, a¢ lau oach wih so Pr wn objctvoe Win a doparent ot businoss, ‘hare ar deparmental cbeivesWacieney hese varous djecives aso leads he acveremen fhe cejectves othe oganzaion asa‘, hres so be 9a! congruenc, {Goal congruence is abou the alignment of bjetves. but proc agnrantis normally impossible. Knovng the cbocve of al partes invcved makes th process of agnmect smoother ana ineveaces he chances of sucess 5 lf Know what each areloje is oang to aca nore determine wheter ey ae a goed Mer your canton. ‘The eet that invuss and groups perceive tel own goals as beng satis bythe accomplishment of orgarizatonal goose the degre of integration of goals. When cxgazatona goals sre shared bya the rn goal congiuones con be used The lhrtaon below depts how gol conuense wrk inatanng orgartatonal goal,ican te seen inthe dagram that perfect agent of goal i not achieved butt sat it eat to a win ition rm tp level management dow to rark and fl. The loser wo can gel the naicus’s gals a cbesbve othe ogonzabon'e goss The rete il be tno argenaationsperfmance” sl canguence can be achieve, ane athe sare tne, ‘he agony potion can be del wth, provdng managers win incentives which are rid te profs or sare pica, or ela actors Wen his sluaen employes moral and motvaton wenn In contast an orgariaton that lacks goal congrunoa fen rst substantial losses or taining of of asa. infact organizations are ging ou of business evry day for these vor/teacons Tho folowing ustaton dope th sation, ‘Organization Goals Consequenty, both morale and performance wil nto be ow and eranzatona acompishmert wl be nage. In some cases, he egarzationsl go canbe so opposed ‘hal no postive progtes i bine, 41312 Controllable and non controllable costs, dvect and common costs Controllable Cost Those ae costs which maybe ct regulated at agen lovl of mnageal author and tme-rame, Contctablty goes wth aor, he higher he authority ‘hamere the conoiabs ose. Asoqmant manger hae dct contol ver snertrun costs. Mast common samp ot conralabe or shortoun cot varable coat As muh ae coe, Enider ony conalable cox hen evaluating segment manage performance. This © col ha can be altered based on a busines decane noes. These cos have ec! ‘elsonsc win a produc depanment artnton. Sxanpes nude erat noe ect matenas, donations, tanng eos, ones. ssrpsons snd sues and ovmmead Sots ist 2 ame ee Non-contolable Cost Thisis a cos hat cant beater basod on a persona businss decision or ood. The coss are allcatos by the top manapoment ie several deparinons branches Exarples rele dopodaton.neurance, adminis overhead alocatod and rent alocted sto rare a ow. ‘While contraliable costs can be altered in the short run, uncontrallable costs can be altered inthe long runDirece Traceable and Common Fixad Cost DicecuTraceable ied cost, 2 ed cost hats avidable a segnart or sens dsconrued tthe tad cost deel Wentfed 1 operate a segment ofan eganzation a Relevant costing te caied Avadaba hed cot. acasbl hed cost Is relavet nen evausting soponsbity center. ‘Common fied cost (Unavoidable fixed, Allocated fixed) is fad cost necessary to sustain operations of multiple segments can nt bo dra identified ea specif segment or Givsion The fed cos! il carne even a dvsion ls cowed. Moreover iso! coniolabie by» specie manager Sie common fod cos nether auaaabs nor coals, 6 Ignored perlomance evalua andi cecson making. Howove, fs dled agansrevenuce when compuing fr eperatng Income under Parca Account ns Cost Assuring, speticaly under Jon and By-eredut costing, common fed ost i alocated ts the ont products te cetrmine the unit oso a shed goed aentanT gr et Depart pac pe aor eas dare sc there pst act emt ya 4. Seater { Letmecons ratenee ect tes heparan BF ‘tetecos ratanrperonn any ene AB cetera etn ele pt cette nage?13:13 pe of responsibility centers (cost, revenve, profit and investment centers) RESPONSIBILITY CENTERS COMPARED ‘coe cores a department or segect of an organization ta does ntact generate revene but ncurs costo operate, Prof enters 3 branch r dion that dec ads to operating income of earpany Revene centre dhsion ht garertes rave Hom prosuel Slot eaves Ivesent canta isa buss Ut wt a company al Fequtes capt outa to operate, “Tho folowing tables a comparativo presentation of he aleront pes of cost contre TYPE OF CENTER ost Pron Revenue investment ‘Accounabitity Cost nd Epensas Revenues: CostandBxpenses Reverwes fnvesinae Revenues ost and etn on lvesment (ROY); Resa vauaton ‘sundardCostvaienes auton ara: sees! Roenys rane Inowr ty esonomic Ve Aad saya ea Esenssicsavisonina _vstnet Bran: vstnent Example Proton douinent Matting doparnet Ese to i lst 412.45 Pertarmance margin (manager vs. segment performance) 43.4.6 Return on investment (RO), residual income and eeonomic value added (EVA) [EVALUATING RESPONSIBILITY CENTERS 4.Cost Center Standard cost variance anal is used in evaluating @ cost center, Please refer the module cn Standard Cost Variances for dealt licusson and presentation 2. Proft Contr ‘Segment Cotton Marge (SCM) Thi a shor tet of potiabily The eo used hore no avoldabe fixed east. Continue operating the prot canara long a6 cantouton margins poste ‘SCM = Toa Revers =Total Vara Cost8 Segment Income (Sor Segment Marg This ongvun lst of protabay because Monsters Avoidable Fed cost hy evan pertormance. Ths se more superior han ‘Sonouton margin. meas how mua contbuted 1 recover comma aed Sst and eorpany rfl. Continue operations a ong as sogmen| income spose SI= Segment Cont tution Margin - Avoidable Fixed Cost ‘Akeni approach Net Operating neome (Ni ven ‘SI= Net Operating income + Common Feed Cost eee Bileo Mee ee ee ee ee ne Stee ee ee ‘Carron ed expanee 3000 Nkepertna nese eiizaae 3 Revenue Centr Revenue vias analysis usedn evalating a Revenue cana, Pease refer othe module on Ping and Revere Vranas or dete discussion an presentation 4. nvosent Conor ’Rotuon nvostnnt (RO! Tie a let of groftabityby smparng a dosed minimum rogued rao of etn (ROR). measure te roqiod invoetmant to goerato corn ‘2hount of rot. Theltvestnent canter spatiale slang as RO! sequal or greater han te minum ROR. refered hal he company uses he Weighted Average {Gos of Capital WAGC) as he minimum HOR. Asan aleatve he company ay opto use the pacing cost speetc To heinvestment. ROI = Operating Income Average Investment er Assets ‘Operating income earnings belo rest and txes (EBT, nes and axes are non-contolabe cos, ths excluded in the ROI formule Average Investment o Aste are comosee of caren and nan-curent asses needed to suttn operations ofthe center shoul not nce assets haere not ute by ‘na Geto ode acts rca eh be Velund al Bock or Markt value ar ress ht Snce RO sel govern by any reporting stand, hls a malter acompany ole on ‘ho veluston bare: Homover is suaaested thal he net book vale ll be sed boca it esaiy avaible rom Fnanl Aceounng repr,ROI can be expanded to measure asset iizaton and sles poftaityansysis by mutipyng ato of Rtum on Sele io Asst Turnover. Tho equation i expand to am" emanate FRoturn cn sales is atest of how officiont a company tums sls ino profs. While Assot Turnover i a testo actly tat measures how wella company ulizes ts assets to generate revenues Sines ROl esata in percentage, alone the conpanson of ciferent nyasment aematve of erent 30d owover, RI has is own pital. Managers easy manipulate ROI most specially if ts used asa performance metic. The oasis! way iso manipulate the valuation ofthe Investment bag at eated nthe adovediscusione, Managers can oven defer operating exponaes inthe cient period othe nad fo nsesee cent yon pets, Managers tend to become myopic and ignore the long tor ects of tor acons, |Amajr pitfall of RI manager ond ta ooo ivastments wt aver ROI than hie won bit would have incrased the overall company ROL Thies an inherent lescvantge of decanralzston. Moreover ROI is sated ass peteaniage Peeentage i a measureman fate anol an bsclute alos of mane 2 Resi Igome(R)- oases the absolit pose retum ofan investment ove the minimum ROR. Iti almost the same wih ROI but lated h mene. The lnvostment centers proftale as ong ae Repose, The higher he Rho beter. Getweon RO and Rl manages tan ory mare.n Ri bocause t measures abeoute paso retrn alminatae {he weakness of RO of rejcing investment that would increase overel company ROL Because off, Rl suppats the pile f goal congruence. Maaring investments a Sceaplos because I wl Imerove the proeably 3 the carter as wal a he Sompany as a whole. Unornatay, Rl dass ot alow the comparison of dierent invetmant ‘trate wih arent s2es bacaus is sztod in poses. = Operating Income = (minima ROR x Average nvestent or Asset) ‘Seles 20,120,000 Net operating income Prsi4200 ‘Average operating assets 8,000,000, The company’s mieimum requted rat of rtum 10% scone “aoe = Sues Average epmana ates =F28,12900040D000=38{ Ecanomi Value Added (EVA) Is a maosure of @conan/s ancl performance based onthe eskual sath calculated by deducting is os of capil tm is Earnings Before Intact but Aor Tax (IAT) or Not Oparatng Prof Afar Tax (NOPAT). EVA cn alo bo elored ts economic ro asi stamps to capture eco prot et 3 fmpany ls ako area af uno he conpans slaeholders because tends 0 Measure the abel peso ftum ater ecaverng inning cost Fem Longe Sultee of Financing. ise ony ol ha oneier tax aets because inerast an det trancng sex decid, Apasive EVA shows a jets ganarng eure ‘rcos of ho roquloa rnimom at, hones potable. The highe! hs EVA the beter. EVA _ = EBIAT -(WACC x Toa Long-atm Soures of Fancing) = NOPAT (Teal eo Curent Ascot x WAC. ne taoug enum seer en 2 ae tye ae ae rien sk Pin fern ec (operating income Assets Current abilities Tolae ogo 000 Pe milion 200.000 Quezon 11200.900 Po mtion 500,000 Manis 2,040,900 Przmiion 1,200,000 Sia ne evate rae? wae is Operngncame sox 809004755 Praoom CESAR Stor Craton sour tenor (pau tneooye Toe wes wa ean 4.3497 Rational and need fr Wanater price “Tanster Price is ho pie charge by one segment of an organza fr a produto sere tha it supe 6 anon segment fan erganizaton, Transer png an acouning proches ta ropasenis We prea thal ons cvs na company charges anater avn for goose ard seneos prvi. “Traster prcing allows fo: tho astabishmant of peas fore goods and sarvces exchanged betwoan subektaras,affltes, or commonly contoted comparies tha te pat of ho same srg clei. Tron prices are necessary lo compu fre rovenuns ard cost of he Cost, Pro, Revenue ns vost ener Sarpy sate, tis the slip be wthin te ee compary Tanto pices ae only tended performace evabton i hl aes the oval prof fon onarizaon -Aransor rose used to doterino the costo charg ante vison, subsidy, r holding company for sores vendorad. Tplaly Warstr pcos ar raftectve of tho ging market peor hat good or ear