Page 214 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 10: Responsibility Accounting and Transfer Pricing

Notes

Notice that Location A’s performance report is very detailed, and provides a basis for
analysis of numerous facets of the business. Graphics are frequently used to facilitate
understanding by those not accustomed to accounting reports. For example, each store
supervisor knows that fries and drinks have the highest profit margins and they are
encouraged to train employees to soft-sell these items by asking customers “what type of
drink did you prefer?” rather than “did you want a drink with this order?” As a result, the
report is “specialized” to show the product mix proportions. In addition, each manager gets
a bonus if food costs are below 20% of sales; this incentive is designed to reduce food waste
and encourage sales of high margin products. The report provides sufficient detail to show
if the objectives are being met. Notice that unfavorable variances are highlighted in red.
Summarizing the results for Location A, note that the budgeted goal for hamburger sales
was not met. But, the profit objectives were nevertheless exceeded because the product mix
of fries and drinks produced offsetting higher margins. In addition Location A managed to
contain other variable costs.
The next step up in the organizational chart is the Senior Manager of Store Operations.
This person is concerned with making sure that each unit is profitable. Underperforming
stores are identified, problems are studied, and corrective measures are taken. Very little
time is spent on locations that are meeting or exceeding corporate profit goals. Although
this manager has access to the detailed reports for each store, the performance report of
interest is a compilation of summary data for each location that quickly highlights the
areas of needed improvement. Review the following performance report, noting the carry
forward of Location A’s data into the report. Obviously, some stores are performing much
better than others; the senior manager will certainly want to focus on store E immediately!
Also notice that there is $1,500,000 of fixed costs associated with store operations that are
not traceable to any specific location; nevertheless, the senior manager of store operations
must control this cost and it is subtracted in calculating the overall margin. Thus, the total
fixed cost for all store operations is $9,500,000 ($8,000,000 + $1,500,000).

Contd…

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