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It is important to have performance measures to evaluate managers as they contro

ID: 2381312 • Letter: I

Question

It is important to have performance measures to evaluate managers as they control resources and invest in assets for the company. Describe how you could use different variances (actual to standard) to evaluate performance. Additionally, there are nonfinancial performance measures that can be used. Are there any that you think would be more or less important to a manufacturing company or a service company? Can you provide an example of a personal spending variance that you have experienced? I need a decently detailed response to this question.

Explanation / Answer

The price and quantity variances are generally reported by decreasing income (if unfavorable debits) or increasing income (if favorable credits), although other outcomes are possible.The logic for direct labor variances is very similar to that of direct material. The total variance for direct labor is found by comparing actual direct labor cost to standard direct labor cost. If actual cost exceeds standard cost, the resulting variances are unfavorable and vice versa. The overall labor variance could result from any combination of having paid laborers at rates equal to, above, or below standard rates, and using more or less direct labor hours than anticipated.

Variance analysis should also be performed to evaluate spending and utilization for factory overhead. Overhead variances are a bit more challenging to calculate and evaluate. As a result, the techniques for factory overhead evaluation vary considerably from company to company. To begin, recall that overhead has both variable and fixed components (unlike direct labor and direct material that are exclusively variable in nature). The variable components may consist of items like indirect material, indirect labor, and factory supplies. Fixed factory overhead might include rent, depreciation, insurance, maintenance, and so forth. Because variable and fixed costs behave in a completely different fashion, it stands to reason that proper evaluation of variances between expected and actual overhead costs must take into account the intrinsic cost behavior. As a result, variance analysis for overhead is split between variances related to variable overhead and variances related to fixed overhead.

Return on assets (ROA) is a financial ratio that shows the percentage of profit that a company earns in relation to its overall resources. It is commonly defined as net income (or pretax profit) / total assets. ROA is known as a profitability or productivity ratio, because it provides information about management's performance in using the assets of the small business to generate income. ROA and other financial ratios can provide small business owners and managers with a valuable tool to measure their progress against predetermined internal goals, a certain competitor, or the overall industry. ROA is also used by bankers, investors, and business analysts to assess a company's use of resources and financial strength.

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