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Horngren'S Financial And Managerial Accounting

Book edition 6th
Author(s) Tracie L. Miller-Nobles, Brenda L. Mattison
Pages 992 pages
ISBN 9780134486833

One subunit of Racer Sports Company had the following financial results last month:Subunit X Actual Results Flexible Budget Flexible Budget % Variance Variance (F or U) (F or U)Net Sales Revenue $476,000$ 451,000Variable Expenses 261,000 251,000Contribution Margin 215,000 200,000Traceable Fixed Expenses 40,000 26,000Divisional Segment Margin $175,000$ 174,000Requirements1. Complete the performance evaluation report for this subunit (round to two decimal places).2. Based on the data presented and your knowledge of the company, what type of responsibility center is this subunit?3. Which items should be investigated if part of management’s decision criteria is to investigate all variances equal to or exceeding $8,000 and exceeding 10% (both criteria must be met)?4. Should only unfavorable variances be investigated? Explain.5. Is it possible that the variances are due to a higher-than-expected sales volume? Explain.6. Will management place equal weight on each of the variances exceeding$8,000? Explain.7. Which balanced scorecard perspective is being addressed through this performance report? In your opinion, is this performance report a lead or a lag indicator? Explain.8. List one key performance indicator for the three other balanced scorecard perspectives. Make sure to indicate which perspective is being addressed by the indicators you list.

(1) Performance evaluation report is completed in Step 1.

(2) Profit center

(3) Variance equal to and exceeding $8,000 and exceeding 10% should be investigated. (4) No, both should be investigated, for effective decision making. (5) No, not possible as fixed expenses may vary (6) No, equal weights cannot be assigned due to degree of variances. (7) Financial performance and operational performance (8) Customer, Internal Business, and Learning & Growth See the step by step solution Step by Step Solution Step 1: Performance Evaluation Report A responsibility accounting system is a system of evaluating the performance of the business based on the performance of different responsibility centers and their managers.  Subunit X Actual Results Flexible Budget Flexible Budget Variance (F or U) % Variance (F or U) Net Sales Revenue$ 476,000 $451,000$ 25,000 (F) 5.54% (F) Variable Expenses 261,000 251,000 10,000 (U) 3.98% (U) Contribution Margin 215,000 200,000 15,000 (F) 7.5% (F) Traceable Fixed Expenses 40,000 26,000 14,000 (U) 53.85% (U) Divisional Segment Margin 175,000 174,000 1,000 (F) 0.57% (F)

% Variance has been computed by the following formula –

Step 2: Responsibility Center

A responsibility center is a part of the organization for which a manager has been appointed as an authority for decision-making and has the accountability for those decisions.

Based on the given data, the responsibility center is the profit center. The responsibility center is responsible for both revenue and cost. In the given data set, the responsibility center presented the performance report for Sales revenue and all expenses. So this is a profit center.

Step 3: Investigated items

The management criteria are to investigate all items having variances –

a) Equal to and exceeding $8,000 and b) Exceeding 10% Since both the conditions must be met, so from the performance report, only the “Traceable Fixed Expenses” should be investigated as it has a$14,000 unfavorable variance and variance exceeds 10%.

Besides this other items has more than $8,000 variance, but no item has a variance exceeding 10%. Step 4: Investigated variances – favorable vs unfavorable For making an effective analysis both favorable and unfavorable variances should be investigated. Unfavorable variances are given priority as the business wants to locate the reasons for having an unfavorable estimate. But at the same time investigating favorable variances also helps in knowing the factors for having favorable results. Thus for effective decision making both favorable and unfavorable variances should be investigated. Step 5: Variances and sales volume Variances are the difference between estimated and actual results. In the given case, the responsibility center is the profit center. In the profit center, both revenue and cost are controlled. For every generated revenue, there is some cost associated with it. Some cost is variable and changes as per the sales volume. But some costs are fixed and are not affected by the sales volume. Thus it is not possible that variances are due to higher-than-expected sales volume. Irrespective of sales volume, the fixed expense may vary from the expected amount. Step 6: Management’s decision on variances Although management is investigating variances above$8,000 and 10%. But it will not pace equal weight on all variances exceeding $8,000. Some variances having$8,000 value do not vary very much from the flexible budget. While some variances exceeding \$8,000 has even higher variance percent from the benchmarking.

So management would place the weight as per the degree of variance for each item. Variance having a 50% result would be given more priority than the variance having only a 10% change.

Step 7: Balanced Scorecard Perspective

The balanced scorecard is a performance evaluation report that consists of both financial performance and operational performance. Thus based on these two areas, a balanced scored card can have different four perspectives

In the given case, the balanced card perspective is Financial. This is justified as the key performance indicators are – Sales revenue growth, gross margin growth, Net income, etc.

Step 8: Other Balanced Scorecard Perspective and key indicators

The other three different perspectives are – Customer, Internal Business, and Learning & Growth.

The key performance indicator for each perspective is as follows –

 Perspective Key Performance Indicator Customer Customer satisfaction ratings Internal Business Number of units produced per hour Learning and Growth Number of cross-trained employees