Acct3210

Topic 11: Performance Measurement, Incentives, and Compensation (Ch.23)
Scope: A. General issues B. Performance measurement for profit centers - Segment reporting C. C Performance measurement for investment centers - ROI - Residual income; EVA

ACCT3210 – Spring 2013 (G Zhang)

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A. General Issues
Purposes of performance measurement
 

Employee motivation (requiring a reward system) Resource allocation

Examples of performance measures
Financial Fi i l Internal External ROI, Income Stock price Non-Financial N Fi i l Manuf. lead time Customer satisfaction

Balanced scorecard
ACCT3210 – Spring 2013 (G Zhang) 2

Accounting Based Evaluation Techniques for Different Responsibility Centers Diff R ibili C
Cost center: Flexible budgets g Variance analysis for input costs Productivity analysis Flexible budgets Sales variance analysis Customer profitability analysis Segment reporting g p g

Revenue center:

Profit center:

Investment center: ROI; Residual income; EVA

ACCT3210 – Spring 2013 (G Zhang)

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B. Performance Measurement for Profit Centers
Two issues:  How to measure the “profit” of a division  How to set the prices of transferred goods/services f f / (transfer pricing) Segment reporting: Use segmented income statements in contribution format. It shows, for each segment, sales, contribution margin and segment margin margin, margin. Guidelines to assign costs to segments:  assign costs according to cost behavior  assign costs according to whether the costs are directly traceable to segments
ACCT3210 – Spring 2013 (G Zhang) 4

Performance Measurement for Profit Centers
Variable costs are first traced to segments: Sales – Variable costs = Contribution margin Fixed costs are classified as traceable (direct) and common (indirect) costs
Traceable fixed costs arise because of the existence of the particular segment; these costs would disappear over time if the segment itself disappears. t it lf di Common fixed costs support