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Lecture Fundamental accounting principles (21/e) - Chapter 24: Performance measurement and responsibility accounting

After completing this chapter you should be able to: Define standard costs and explain how standard cost information is useful for management by exception, describe variances and what they reveal about performance, analyze changes in sales from expected amounts, prepare a flexible budget and interpret a flexible budget performance report. | Chapter 24 Performance Measurement and Responsibility Accounting Chapter 24: Performance Measurement and Responsibility Accounting Provide information for managers to use in performance evaluation. Assign costs to managers who are responsible for controlling the costs. Primary goals Responsibility Accounting Most large companies are made up of subunits called departments. Top management is interested in the performance of each of the departments. To assist management in the performance evaluation of departments, we prepare responsibility accounting reports. The responsibility accounting report for each department emphasizes costs that are under the control of the departmental manager. Large complex businesses are divided into departments enabling managers to have a smaller effective span of control. Motivation for Departmentalization Production Sales Service Departments are established for specialized functions. Even the best managers can only do so much. It is necessary to divide businesses into smaller departments so a manager’s span of control is not too large. Each department in a business has a unique purpose. Departmental accounting reports must be designed to adequately report on the performance of the different activities of these departments whose functions are specialized and varied. Departmental Evaluation The accounting system provides information about resources used and outputs achieved. Managers use this information to control operations, appraise performance, allocate resources, and plan strategy. The type of accounting information provided depends on whether the department is a . . . Evaluated on ability to control costs. Cost center Evaluated on ability to generate revenues in excess of expenses. Profit center Evaluated on ability to generate return on investment in assets. Investment center All departments, whether production, sales, or service, use resources to achieve a desired output. If our departmental accounting system is properly designed | Chapter 24 Performance Measurement and Responsibility Accounting Chapter 24: Performance Measurement and Responsibility Accounting Provide information for managers to use in performance evaluation. Assign costs to managers who are responsible for controlling the costs. Primary goals Responsibility Accounting Most large companies are made up of subunits called departments. Top management is interested in the performance of each of the departments. To assist management in the performance evaluation of departments, we prepare responsibility accounting reports. The responsibility accounting report for each department emphasizes costs that are under the control of the departmental manager. Large complex businesses are divided into departments enabling managers to have a smaller effective span of control. Motivation for Departmentalization Production Sales Service Departments are established for specialized functions. Even the best managers can only do so much. It is necessary to divide .