Sales evaluation program for accounting

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so explain why companies use performance evaluations and look back with the performance measure you mean by alright so I'll give you an example so let's say we have a set of hotels all right look at the for example Double Tree Hotel so what they do in fact they submit their business by property and each property is going to share one centralized and one centralized website at the same time because it's a decentralized we sent by by one by property right if we have the centralized it means there is no duplication of cops right so when our person is calling in trying to let's say make a reservation or something right there go into one system right that's that's your avoiding duplication of call right whether if you have disinflation if you have a person sitting and doing it that in each location that's increased cost right so let's say I have one person sitting I don't know in Seattle and do you know the reservations for us versus if I'm calling to that particular location and the reserving right there do you see how many people I might be hiring and how my cost might be going so much all right doesn't make sense all right so right now is to second nature to you right but it's the second nature that the business is gonna try to avoid duplication of parts right but this is just for you to I know it's probably you're thinking okay well that could have unit disadvantage if they were to do that all right all right good forward so we're trying to explain why our companies are using performance evaluation systems all right so we have different performance measurements that we've talked about now let's just the world goal through the performance measurement that serves our managers purpose so what is it we provide our top management with it framework for maintaining control right so once our company decentralized as we've learned all these tools but now we're applying a new concept of decentralized company so once the company decided to decentralize our top manager is no longer going to be involved in every single decision making process right but at the same time top management needs to know in those decisions at the decentralized and that subunit level are effectively meetings company goals very centralized versus decentralized well like we said decentralized is going to be a bigger company right so centralized company huh so I'm going to give an example yes I'm just I don't know right it's hard to name it because it's usually a smaller section right it's not like other words highly-specialized it's usually a smaller business is what it is is worse okay right okay okay all right so let's let's talk a little bit more about the performance measurement so how would it go back to it okay so our decentralized organization they need such a system that would communicate different not only different goals but also some ways of evaluating achievement of those goals okay two hours of use managers and fun so what do you see primary goals we have a number of them promoting goal conversion credit card donation communicating expectations motivating unit managers providing feedback Benjamin and benchmarking alright so I wanna talk to you about something so obviously there are also going to be some limitations of our financial performance measures so what are those I'm just gonna talk briefly about it I don't want you to have the slide on it just for you to cover mine so obviously we're gonna have some systems that are outdated and they might not be entirely accounted for all of the financial performance of the company somehow so managers are gonna have the problem it's probably gonna be also with our managers leading or insisting on certain goals that it might not be a part of the business okay that's also some of the drawback and limitation and also not always our managers are going to be able to signal back predict performance of the over the longer period of that decentralized location so let's look our performance we've used to evaluate Ostrom in your profit Center the here again spend quite some time alright so what do we do with our performance report what is it for the performance report is so that we can capture the financial performance of cost revenue and profit centers right so we've talked about those centers a little bit now our cost center is going to include all the information where the actual costs are compared with budgeted our revenue centers is our actual revenue with budgeted alright and the profit Center where your actual and budget information on both revenues and costs is included so that's the performance before three parts of it also money to know that profit center while they are responsible for both wild exhausting driving you just have the app the actual comparison to the budgeted of the cost or either every year the profit is going to combine all of it okay so it's gonna have both parts so pay attention that that's the difference between them now let's look at each one and see how they look whether they composed off and how how we calculate them all right so constantly performance report let's look at the control cost so usually is the good indicators our flexible budget variance what is the flexible budget the difference between actual and the flexible it's awesome let's let's look at the payroll for example so we have our flexible budget variance it's a payroll processing Department performance where we have salary and wages payroll benefits with the depreciation supplies and other expenses and we calculate our total expenses now see this we have our flexible budget variance calculated it's either favorable and unfavorable and we also calculate the percent of variance all right so that indicate to us a level of the performance of a level of it before looks for these for that particular alright so also sometimes you are gonna see that the payroll processing Department only it's gonna incur expenses and not quite generating yet I can use so you will see salary wages fatal benefits and such and such calculating just not only total expenses so that's why we're gonna consider to the constant right or expenses this our table okay the next one driving is Center performance report so has this been a look I would generate well we'll be generating ourselves every can will look at the special activity department before the report we can take my touch okay so what do you is what you say our revenue Center any force that are gonna look at flexible budget and actual by comparing actual sale and the static master budget right okay so we're looking at flexible budget parents and the sales volume variance we have number of specialty tivity and special duty and have workout building our sales revenue for the actual sales we have flexible budgets and the okay we have here in profit centers as you remember I'm in the juice I get they were responsible for generating revenue and controlling cost right so we're going to become combining the two right now so a producing profit through generating sales and controlling hot so let's look at the DBT performance report just one line of product so what do we have we have sales revenue variable expenses contribution margin traceable fixed expenses and then additional segment margin we also calculate our flexible budget parents and the percent of variance right okay we also remember that one of the drawbacks of decentralized of the decentralization is that sometimes our units are going to be duplicating cost right as well as off yeah okay so how is it oh how can you see here what our costs and ask my duties with you what do you think if you're buying something that's a good example so let's look at the performance some other before we do the exercise will do support support we use management-by-exception to determine which appearances are worth investigating so we'll look at the field words and we'll see which one is probably because the outstanding one is for costs right and we'll investigate why we'll also look at many appearances only alright so you're not going to look at all the numbers more likely it will go just through your variances to see which one is really stating as for you all right usually it's done by the software and then you know they're in flag it's gonna pop up in some numbers then your smaller variances are not going to have and not going to require any attention right so only the ones that are of a larger number of the ones that requires most of the attention it also allows managers because it's you know quite could be moved when the company is decentralized for the manager it doesn't truly pose a lot of blame on the next thinking manager right the father makes you to investigate what's actually happening what's actually happening so this allows you to focus on the information itself rather than a person and also you are focusing on underlying reasons for performance and you are able to take corrective measures actions some parents are gonna be uncontrollable so those are also your lowest priority right any all right so let's look at this little example so what we're trying to do is to say which Center is described here so just to remind you to process 30 new investment costs right all right so each of the following managers has been given certain decision-making authority mothers are pollinating central reservation office so what are they doing in reservation office they are creating in revenue all right so that's where you should be coming from so that would be your revenue center managers of various corporate owned Holiday Inn locations do you have revenues profit investments and cost revenue investment profit and cost mr. travitt you okay where is it profit determine your tries to identify what is a certain decision making outdoors if they're given likely why the decentralisation took place right how companies decentralize so the innovation office by revenue centers the managers of various corporate owned Holiday Inns locations how you're trying to do the information from what - yes did you get it yes you will try to understand why it's drawn right so why disability benefits and tell me why this so we're trying to see what type of responsibility that that manager has a dead center Samantha Jo holiday in central reservation office if it's essentially this innovation office that manager is likely to have what distance ability right we've talked about managers of areas corazon quality in locations managers of various corporate owns quality in location what are they working on you have investment profit revenue and cost all right manager of the Holiday Inn corporate division if it's a corporate division why are they investment at the higher level right so we have a manager on the level of a corporate division it is unlikely to work with to this honcho for creation of the profit side maybe managing the investment yeah okay manager has the housekeeping department at the Holiday Inn why is it a cost so do you start in any better manager of the Holiday Inn Express or first division so we have again this corporate division side but so we're looking the investment strategist manager of the complimentary breakfast buffet at the Holiday Inn Express why is it well your revenue manager was doing here of what it was responsible for central reservation office okay and the office various corporate quality location this family recent sales so when it's given a description like that try to expand the concept rather than you know I need biography it's just for you before we go into all of the investment center definitions and evaluation this is just for you to get it feel of it is so different distinct realization is gonna lead to different level of responsibilities of a manager and that's how you will try to understand what what ventures that manager at what center and this manager have who have disabilities as falling all right so take a bit yes try to try to play with it and say put that picture Lord could that be true okay to pay more attention so we have our investment centers and that's all we're gonna be talking for the rest of the class today so as we said in our investment centers our managers are responsible for it for the following first we are going to be maximizing the income guys and that's gonna be based on that investment in the company investing capitals in the company base and we'll also use the company assets efficiently so the the best is taken out of that investment center is athletes so how would we do that I would be at the independent just do that first our manager is gonna take decision making accessibility our all of the assets of that unit of that division it's not it's not gonna be evaluated okay cannot evaluate investment centers in the same manner is profit centers true we'll look at this let's just concentrate on performance measurements right now so I was referring to measurements are going to serve a couple purposes first we're going to try to determine how much of that operating income our division is generating that centralized decentralized here and how efficiently the division is using the assets the company invest in it all right okay so our managers have decision-making responsibility over all of the assets and let's see how those others before these measurements I discussed further so what is an RI RI and EBA into a nose get that CV a phenolic body edit all right what's the KPI yes yeah okay so VI centuries this is a good illustration of how and what they're determining all right so we have our threes epi so divisions operating income and the divisions average so no matter what we're going to be working with so we have our return on investment ROI you can only edit a B a and B it is you just income so all of these incorporate our division assets and the operating income and we're going to be using just the data for the division that we are evaluating right not for the whole company we're trying to evaluate just the center here okay so never use the full company's numbers to to evaluate the center just a warning somewhere all right so let's look at the first one and that's return on investment or ROI so what is it it's an amount of income investors earns relative to the amount of its asset right so it's our operating income divided by average total assets okay so what are we measuring with this by measuring the amount of operating income and investment center arms right relative to the amount of every so little acid so the are my division with a high ROI therefore is going to be more likely to receive extra funds right is it's providing a high any trend right the higher the better the higher amount of funds is likely to get now luckily not so much is that we're comparing across all divisions and all time okay on the timing as well and it can be also used as a benchmark to compare against the industry competitors or itself so let's expand the definition of our eye and see what our managers how our managers are working with our eye so management often de states the ROI equation as polling what are they doing it for they're determining blood drive divisions all right with this so they take operating income they divided by sales and then they multiplied by sales overall the total assets that's the same thing right they're still operating operating income divided by average whole absolutely what is it giving to us expended the expanded version is going to show us first is the profit margin right operating income divided by sales so what he tells us how much operating income that division earns for each dollar and then the second is they have to turn over and asset turnover is how efficiently a division uses its average total assets to the generated sales so after turnover is this sales divided by average so you can say that big ROI is your profit margin multiplied by me has to turn over right all right so expanded version of our why gives a little bit more insight into what exactly is happening with that unit so let me go over the example real quick so what we have here is our extreme sports company they make snowboards don't kill skis and such the company found it beneficial to split operations into two divisions based on the climate required of sports snow sport and not snow sports the following division formation is available so we have our earthly and calculated our life so they specified that they want a 16% target rate of the trend then the company weighted average cost of capital is 10% its effectiveness effective tax rate is 38 so let me explain to how we actually maybe even - I'll see you how much I want to explain it calculate each division profit margin asset turnover and ROI all right so how do we calculate it first let's remember our profit margin is operating income and sales right that's one of the components with that correct so we said that profit margin is operating income divided by sales is one part of the equation and so we can calculate our profit margin we have all the information given through snow sports and not from sports so we plug it into the formula and get the profit margin so what do we see here we we see that profit margin is 17 percent right to save for sports and nominal sports what would it mean that simply means that we are able to make our 17 cents of it come on each dollar right of the sales okay so this is your interpretation so what does it mean that they have the same profit margin they're equally profitable guys on sale on sales all right so let's compute our asset turnover that began the second component guys who have done the first now let's work with the second it's your sales divided by total assets now put together again a table where I've just plug in the numbers and find the asset turnover but what is it saying to me that my snow sports is 1.22 right and the non snow sport is 1.25 those numbers are obviously drownded so what is it telling me telling me that it's telling me that non snow sport division is able to generate dollar and 25 of sales right for every dollar of assets that the company invested in all right so what is it telling us also it means that there's no sports or maybe non snow sports tell me that which one is more efficient and you're saying it so there's no sport division is generating is dollar and twenty cents 22 cents for every dollar of a city that's it guys alright so now we need to calculate our asset turnover and we calculated the profit margin somewhat slope guys we've just multiplying the two and what do we get twenty point seven and twenty one point three for this little sports announcer no sports guys we're just plugging in the numbers that you're just out who hit it into the formula so what does it mean okay you know the words anyone else return on investment right all right huh okay so let's look at the where do we use this investment we usually before we volunteer just give me a second so we usually going to use our return on investment when the manager is probably willing to investigate either profit margin or after turnover right so let's look at the second one busy tail income right so if a question is asking you what do you think message for you look at you remember the formula right it's so that the managers can litigate the profit margin that asset turnover and pinpoint where is the broken link right where is the weak spot of thing this is separation all right so residual income into second one we have another commonly used here so let's evaluate investment center with DT job income what does it do measuring the divisions profitability and the efficiency with which the division is using the Eversole so how by which means that we're going to do that first we'll compare the divisions operating income and the minimum operating income expected given the size of the division or unit so if that comparison shows us that the relationship is positive then our income exceeds targeted faith of return and if it's negative then we are not meeting the target okay that's great but let's look at the equation so what is the thing to us all right is operating income less minimum acceptable operating income so just to understand what is this minimum acceptable income find out the residual income formula and its operating income minus targeted rate of return multiplied by the average total asset right so that's what our top men the joins are going to expect - for distribution turn right turn iron and they with the average solo absent even these second average total awesome so this is your minimum acceptable operating income oh you're just writing it out so what is the target rate of return when you spend what is average for laughing targeted a the return is a minimum acceptable rate of return management expecting respecting in division to earn right so when we are when the relationship is positive it's sitting in expectation when it's negative we're not as effective so why would we use this residual income again just understanding from the definition of the individual income first it's better than ROI in the trends of gold congruence right we're working with the target date of the trying and the average total assets here and we're comparing it to the operating income all right one of the big advantages is that the RI number is that usually better motivating than ROI our division management economic value added EBA that's your special type of RA calculations okay we're still talking about the are I really all right so look at the we're looking at the divisions residual income and we're trying to understand what is its value to the company's primary stakeholders so we have to play and we have them evaluating stakeholders willing to evaluate how efficiently that division is using its assets so what are we going to consider here our after-tax income assets used to generate dr. fascinating for stakeholders and their minimum rate of return that's acquired by stakeholders as two players investors and the creditors right all right so let's compare the EBA with all right to make it clear what's the difference so look at this our RI is only updated and EBA is after-tax operating income right and then the second part was set for our average total assets multiplied the target today the big chart now what we're gonna do for the e be able to distract from the average total assets the current liabilities first right and then multiply it by a weighted average cost of capital okay so it's similar to RI but it's subtracting everything does needs to be about two to help stakeholders to make a decision all right so what are the differences again EBA is gonna use our after attacks updating eat them just as average total all right so I'll ask my Conklin mellitus and we need to place management targets all right let me see if there's we you are likely to do here and I'm gonna have a Cui's but I want to finish this yeah a lot of day so I decided not to but who knows maybe something really thick coming up all right so let's look at twenty four seventy and let me go over there are I dumped so extreme sports company again we're making snowboards the same story okay huh what we have the same information given to us and our dough is given to us I have the same the same the same the same directly now what we need to do is instead of our oh I will try to compute our I and then compare it to the previous results that we got all right so how we're gonna start with what with the formula so our income plus the minimum acceptable income and we said that its target rate of return multiply the total up so once we calculate these numbers for snow sports and dance now sports see that the snow sports are sports again we found that is 356,000 versus 215 indicators showing us the both values are positive right the busy to an income positive for both non sport than the sport we're earning looks like this is out there consistent right with our previous our line alright so let's look at the second part where we're going to be calculating de ve the same ri right because what said this EBA is an extended version of RI for all the stakeholders okay so how do we do this again with the formula together toward the EBE so after top right - total assets current liabilities and WTC so how do we plot we plug it numbers in okay they're all given to you and they will be given to you so this is an example just knowing the partner plugging in numbers okay so we calculated to the snow 8871 and the non snow is 284 860 so what is the shelling us they both have the positive economic value indicators right so both boats are generating income it's probably also telling us and tell me oh you can see that it's probably also telling us is the warmed up our long-term creditors are our long-term credit exceeds the expectations the expectations of our long-term creditors is exceeding the numbers that we're getting all right for both the stockholders so let me see guys we have the positive economic aid evaluated and so the divisions are generating enough income for the investors to have to have a positive outlook for our creditors and stakeholders right all right so also just for you to to see that we are all the different indexes that we've gone through there is a table in your book I didn't write down what what it was exactly it's the three investment centers for like kpi's and it summarizes the the equations so make sure you look at it alright it's a good summary of all of the formulas and chill easy to work with us but we're not having the quiz right but it's still 10 minutes so let's go work through exercises so any idea it's your maker okay here at profit which one is that and wipe drop it you have to wake up oops right the loss to Pepsi balls it's an investment that's right when it's an investment center all right the performance I have some cooperative so I'm going to go you're gonna have more by the way the slides are already available a video the performance evaluation of the cost Center is typically based on each cell phone bearings are I've started budget variance flexible budget variance for the cost Center what is it why is it a flexible budget performance evaluation of a cost center the budget so that would be a multiple-choice question okay if you were to calculate the point data applies to question assumed so you have some data for residential division of Kippur faucets it has sales operating from such-and-such you need to calculate your profit margin so here's what I'm expecting you to have is update is an understanding that the profit margin is operating income over sales actually we get the percentage that's as far as