Pertemuan 5 6 Cvp Performance Evaluation

7/26/2019 Pertemuan 5 6 Cvp Performance Evaluation

1/50

CVP analysis is a method for analyzinghow operating decisions and marketingdecisions aect prot

CVP relies on an understanding of therelationship between variable costs,

xed costs, unit selling price, andoutput level volume!

CVP"nalysis


2/50

CVP analysis can be used in#

Setting prices for products and services

Determining whether to introduce a new

product or service Replacing a piece of equipment

Determining breakeven point

Making Make-or-buy i!e!" sourcing#decisions

Determining the best product mi$

%erforming strategic what-if sensitivity#analysis

CVP "nalysiscontinued!


3/50

10-3

$he CVP model is as follows#

&



4/50

10-4

CVP "nalysis

continued!%or convenience, the model is commonly shownin symbolic form#

(p$ Q)' F((v$ Q)( N

)here*

Q' units sold

p'

unit selling

priceF' total +$ed cost

v'unit variablecost

N' operating profit (before tax)


5/50

CVP analysis can be used in#

Setting prices for products and services

Determining whether to introduce a new

product or service Replacing a piece of equipment

Determining breakeven point

Making Make-or-buy i!e!" sourcing#decisions

Determining the best product mi$

%erforming strategic what-if sensitivity#analysis



6/50

10-6

$he CVP model is as follows#

,



7/50

10-7

CVP "nalysis

continued!%or convenience, the model is commonly shownin symbolic form#

(p$ Q)' F((v$ Q)( N

)here*

Q' units sold

p'

unit selling

priceF' total +$ed cost

v'unit variablecost

N' operating profit (before tax)


8/50

10-8

$hree additional concepts regarding the CVP model#

Contribution margin*

Unit contribution margincm# ' nit sales price p#. nit variable cost v#

nit contribution margin cm# ' the increase inoperating pro+t for a unit increase in sales ' p . v#

Total contribution margin/M# ' nit contributionmargin cm# $ nits sold 0#

CVP "nalysis continued!


9/50

10-9

Contribution margin ratio = nit contribution margincm#1unit sales price p#

' p . v#1p ' cm1p

2he contribution income statement*

3 useful way to show information developed in /4%analysis

/lassi+es costs based on cost behavior+$ed versusvariable# rather than cost type product versus period#

%rovides an easy and accurate prediction of the e5ectof a change in sales on pro+ts

CVP "nalysis continued!


10/50

CVP analysis can help a rm choose its

competitive position and execute its strategy

by providing an understanding of howchanges in sales volume aect costs andprots

2his process is most important for costleadership +rms during the manufacturingstage

Di5erentiated +rms use /4% analysis toassess ro+tabilit and desirabilit of new

&trategic 'ole of CVP

"nalysis


11/50

CVP analysis is also important in life(cycle

costing and target costing

/4% analysis can assist in life-cycle costingbyhelping to determine whether a product is likely toachieve its desired pro+tability" the most cost-e5ective manufacturing process" the best marketing

and distribution channels" the best compensationplan" whether to o5er discounts" etc!

/4% analysis can assist in target costingby showingthe e5ect on pro+t of alternative product designsthat have di5erent target costs

&trategic 'ole of CVP

"nalysis continued!


12/50

)reakeven )*+!Planning

etermining the -breakeven point. is thestarting point of many business plans#

Breakeven is the point at which revenuesequal total costs and pro+t is 6ero

2he breakeven 718# point can be determinedin either of two ways*

8quation Method*

7ased on nits Sold 0 units#7ased on Sales Dollars 9:#

/ontribution Margin Method*

7ased on units sold 0 units#


13/50

)*+ Planning continued!


14/50

)*+ Planning continued!


15/50

+xample# )reakeven Planning

;ousehold


16/50

)reakeven+xamplecontinued!


17/50

)reakeven+xamplecontinued!


18/50

)reakeven +xamplecontinued!


19/50



20/50


)hen price and unit variable cost are notknown" the management accountant usesthe contribution margin ratio ' p-v#1p to+nd breakeven in dollars*


21/50

CVP /raph and Prot(Volume

PV! /raph

$he CVP graph illustrates how the levelsof revenues and total costs change asoutput sales volume! changes

"proft-volume (PV) graphillustrateshow the level of operating prot changesas output sales volume! changes2his graph allows a person to clearly see how

total contribution margin" and therefore pro+t"changes as the output level i!e!" volume#changes


22/50

9-22

CVP /raphandPV /raph continued!


23/50

Performance +valuation andControl

Perormance evaluationis the process bywhich managers at all levels gaininformation about the performance of taskswithin the rm and 0udge that performanceagainst pre(established criteria as set out inbudgets, plans, and goals

2op management" middle management" andoperating-level personnel should beevaluated

Management controlrefers to the(


24/50

Performance +valuation

and Control continued!

Operational control means the evaluation ofoperating-level employees by mid-level

managersManagement controlfocuses on higher-level

managers and long-term strategic issues abroader obAective#" while operational controlfocuses on detailed short-term performance

Bperational control is a management-by-exceptionapproach while management control

is more consistent with the management-by-


25/50

Performance +valuation and Controlcontinued!

1ana

gement

Control

2pera

tiona

lCont

rol

%inancial1anageme

nt

%inancial1anageme

nt

2perations1anageme

nt

2perations1anageme

nt

1arketing1anageme

nt

1arketing1anageme

nt

Plant "Plant " Plant )Plant )'egion)

'egion)

'egion"

'egion"

Chief+xecutiv

e

Chief+xecutiv

e

+mploye

e3

+mployee3

+mploye

e4

+mployee4

+mploye

e5

+mployee5

+mploye

e6

+mployee6


26/50

1anagement(by(2b0ectives

=n a management-by-obAectives M7B#approach" top management assigns a set ofresponsibilities to each mid-level managerdepending on the functional area involved and

the scope of authority of the mid-level manager

3reas of responsibility are often called strategicbusiness units S7s#

3n S7 consists of a well-de+ned set ofcontrollable operating activities over which theS7 manager is responsible


27/50

1anagement Control2b0ectives

Motivatemanagers to e$ert a high level ofe5ort to achieve the goals set by topmanagement

%rovide the right incentivefor managers tomake decisions consistent with the goals set bytop management that is" to align managersC

e5orts with the desired strategic goals#

Determine airly the rear!searned bymanagers for their e5orts and skill and the

e5ectiveness of their decision making


28/50

"chieving 1anagement

Control 2b0ectives

3 common mechanism for achieving thesemultiple obAectives is to develop an employment

contractbetween the manager and topmanagement

3 contract promotes goal congruence* the

contract speci+es the managerCs desiredbehaviors and the compensation to be awardedfor achieving speci+c outcomes by using thesebehaviors

/ontracts can be written or unwritten" e$plicit or


29/50

&trategic Performance1easurement

Strategic perormance measurement is asystem used by top management toevaluate &)7 managers

)efore designing strategic performancemeasurement systems, top managersdetermine when delegation of

responsibility is desirable3 +rm is !ecentrali"e!if it has chosen to

delegate a signi+cant amount of responsibility toS7 managers

3 centrali"e!+rm reserves much of the decision-


30/50

&trategic Performance1easurement continued!

/entrali6ed +rms provide more control and thee$pertise of top management can be e5ectively

utili6ed

Decentrali6ed +rms are able to make moretimely decisions at the operational level topmanagement lacks the necessary localknowledge

Decentrali6ed +rms are often more motivatingfor managers" are an e$cellent environment for

training future top-level managers" and can be


31/50

$ypes of &)7s

Cost Centersare a +rmCs production or supportdepartments that are charged with the responsibilityof providing the best quality product or service at thelowest cost e$amples* a plantCs assembly

department" data-processing department" and itsshipping and receiving department#

Revenue Centersfocus on the selling function andare de+ned either by product line or by geographic

area

)hen an S7 both generates revenues and incurs themaAor portion of the cost for producing theserevenues" it is considered aproft center


32/50

$ypes of &)7scontinued!

$he choice of a prot, cost, or revenuecenter depends on the nature of theproduction and selling environment in the

rm#%roducts that have little need for coordination

between the manufacturing and selling functionsare good candidates for cost and revenue centers


33/50

$wo 1ethods of 8mplementing CostCenters in Production and &upport

epartments


34/50

10-34

8mplementing Cost Centers in/eneral and "dministrative

epartments$hese departments have the same twomethods to choose from, but the properchoice may change over time#


35/50

10-35

8mplementing Cost Centers in/eneral 9 "dministrative

epartments$otalCost

4,800

3,600

2,400

1,200

Costrivernumber ofapplications!

100 200 300 400

CostVariance

250

Cost behavior inadministrativesupport centers

is often astep cost

+ngineered Cost


36/50

'evenueCenters

Management commonly uses revenue driversin evaluating the performance of revenue/enters

#evenue !rivers in manufacturing +rms are thefactors that a5ect sales volume" such as pricechanges" promotions" discounts" customer

service" changes in product features" deliverydates" and other value-added factors

Revenue drivers in service +rms focus on the

$uality of the service


37/50

1arketingepartments

1arketing departments can be either arevenue or a cost Center#

2he revenue centerresponsibility stems from thefact that the marketing department manages therevenue-generating process and produces revenuereports for evaluation

2his department can also be a cost centeras itincurs two types of costs" order-getting advertisingand promotion# and order-+lling warehousing"packing" and shipping# costs


38/50

Prot Centers$he prot center manager:s goal is to earn

prots

$hree strategic issues cause rms to

choose prot Centers rather than cost orrevenue Centers#

%ro+t /enters provide the incentivefor the

desired coordination among marketing"production" and support functions

%ro+t /enters motivateservice departmentmanagers to consider their product as marketableto outside customers

%ro+t /enters motivatemana ers to develo new


39/50

&)7s# $wo ierent &trategic

Contexts

Manufacturing%lant

)arehouse

Sales

Manufacturing%lant

%ro+t

/enter

%ro+t/enter

Sales

/ost /enter Revenue /enter

Cost;eadership&trategy

ierentiation &trategy


40/50

Controllable and


41/50

8nvestment Centers

1any rms use prot centers Chapter 3=!to evaluate managers, but rms cannot useprot alone to compare one business unit to

other business units because of#Di5erences in si6e

Di5erences in operating characteristics

$o evaluate the nancial performance ofinvestment centers, we need to somehowincorporate the level of invested capital intothe performance measure


42/50

1easures of %inancialPerformance# 8nvestment

Centers

"lternative measures for evaluatingthe nancial performance of

investment centers#

Return on investment RB=#

Residual income R=#

8conomic value added 843G#


43/50

10-43

'eturn on 8nvestment'28!

'28 is the most common measure ofinvestment center short(run nancialperformance

2he higher the percentage" the better the

indicated +nancial performance

8n practice, be aware that there aredierent ways to dene -prot. and

-investment. for purposes of determining


44/50

10-44

&ummary Comments# &elected"dvantages and ;imitations of

'28

Easily understood by

managers

Comparable to interest

rates and the rates of

return on alternative

investments

Widely used and

reported in the

business press

Easily understood by

managers

Comparable to interest

rates and the rates of

return on alternative

investments

Widely used andreported in the

business press

Goal congruency issue:

incentive for high ROI

units to invest in

projects with ROI higher

than the minimum rate

of return but lower than

the units current ROIComparability across

investment centers can

be problematic

Goal congruency issue:

incentive for high ROI

units to invest in

projects with ROI higher

than the minimum rate

of return but lower than

the units current ROIComparability across

investment centers can

be problematic

"dvantages ;imitations


45/50

'esidual 8ncome '8!

8n contrast to '28 which is a percentage,i>e>, a relativeperformance indicator!,resiual income'8! is a dollar amount#

R= ' investment center income less animpute! chargefor the investment in the unit

'8 is e?ual to the desired minimum rate ofreturn times the level of -investment. inthe unit

'8 can be interpreted as the incomeearned after the unit has -paid. a charge

for the funds invested in the unit


46/50

10-46

'esidual 8ncome '8! +xample

+xhibit 3@>A, partial!


47/50

10-47

'esidual 8ncome '8! +xample+xhibit 3@>A!

=n this casebut notalays#" theR= calculationfor/ompu/ityproduces thesame relativepro+tabilityranking asthe RB=calculation

l d d


48/50

10-48

&elected "dvantagesand

;imitations of '8"dvantages ;imitations !upports incentive to

accept all projects with

ROI " minimum rate ofreturn

Can use the minimum

rate of return to adjust

for differences in ris#

Can use a different

minimum rate of return

for different types of

assets

!upports incentive to

accept all projects with

ROI " minimum rate ofreturn

Can use the minimum

rate of return to adjust

for differences in ris#

Can use a different

minimum rate of return

for different types of

assets

$avors large units when

the minimum rate of

return is low%ot as intuitive as ROI

&ay be difficult to

obtain a minimum rate

of return at the subunitlevel

$avors large units when

the minimum rate of

return is low %ot as intuitive as ROI

&ay be difficult to

obtain a minimum rate

of return at the subunitlevel


49/50

+conomic Value "dded+V"B!

'conomic value a!!e! 843G# is a business unitCsincome after ta$es and after deducting the costof capital

843G

is a Registered 2rade Mark of Stern StewartH /o!

843Gappro$imates an entityCs economic pro+t

843G

involves numerous adAustments to reportedaccounting income and level of investment SternStewart reports up to @,? such adAustmentsII#

Similar to Residual =ncome R=#" 843 motivates

managers to increase investment as long as the


50/50

+conomic Value "dded+V"B!

continued! 843G' JB%32 . k$ 3verage invested capital#

JB%32 ' after-ta$ cash operating income" after

depreciation i!e!" the total pool of cashfunds available to suppliers of capital#

' Revenues . /ash operating costs .Depreciation . /ash ta$es on operating

income k' minimum rate of return hurdle rate#"e!g!" )3//

2hus" 843G' r. k# $ capital" where r 'JB%321invested capital cash on cash

Pertemuan 5 6 Cvp Performance Evaluation

Documents

Transcript of Pertemuan 5 6 Cvp Performance Evaluation