Assignment 04bu330: Accounting For Managers Directions Be Su

Assignment 04bu330 Accounting For Managersdirections Be Sure To Make

Assignment 04 BU330 Accounting for Managers Directions: Be sure to make an electronic copy of your answer before submitting it to Ashworth College for grading. Unless otherwise stated, answer in complete sentences, and be sure to use correct English spelling and grammar. Sources must be cited in APA format. Your response should be a minimum of one (1) single-spaced page to a maximum of two (2) pages in length; refer to the "Assignment Format" page for specific format requirements. Return on Investment and Residual Income Portia Carter is the president of a company that owns six multiplex movie theaters. Carter has delegated decision-making authority to the theater managers for all decisions except those relating to capital expenditures and film selection. The theater managers’ compensation depends on the profitability of their theaters. Max Burgman, the manager of the Park Theater, had the following master budget and actual results for the month. Master Actual Budget Results Tickets sold 120,000 Revenue--tickets $840,000 $880,000 Revenue--concessions 480,000 Total revenue $1,320,000 $1,210,000 Controllable variable costs Concessions 120,000 Direct labor 420,000 Variable overhead 540,000 Contribution margin $240,000 $231,000 Controllable fixed costs Rent 55,000 Other administrative expenses 45,000 Theater operating income $140,000 $126,000 Assuming that the theaters are profit centers, prepare a performance report for the Park Theater using the chart below. Include a flexible budget. Determine the variances between actual results, the flexible budget, and the master budget. (25 points) Actual Flexible Master Results Variance Budget Variance Budget Tickets sold 110,000 Revenue--tickets $880,000 ( ) ( ) $840,000 Revenue--concessions 330,000 Total revenue $1,210,000 ( ) $1,320,000 Controllable variable costs Concessions 99,000 Direct labor 330,000 Variable overhead 550,000 Contribution margin $231,000 ( ) ( ) $240,000 Controllable fixed costs Rent 55,000 Other administrative expenses 50,000 Theater operating income $126,000 ( ) ( ) $140,000. Evaluate Burgman’s performance as a manager. (25 points) 3. Assume that the managers are assigned responsibility for capital expenditures and that the theaters are thus investment centers. Park Theater is expected to generate a desired ROI of at least 6 percent on average invested assets of $2,000,000. a. Compute the theater’s return on investment and residual income using the chart below. (25 points) Actual Flexible Master ROI à· à· à· = 0.00% = 0.00% = 0.00% Residual income – ( 0% x ) – ( 0% x ) – ( 0% x ) = = = b. Using the ROI and residual income, evaluate Burgman’s performance as a manager. (25 points) This is the end of Assignment 04.

Paper For Above instruction

The given case study revolves around the performance evaluation of Max Burgman, the manager of the Park Theater, within the framework of managerial accounting tools such as flexible budgeting, variance analysis, Return on Investment (ROI), and Residual Income (RI). This comprehensive assessment aims to analyze his managerial effectiveness both from operational and investment perspectives.

Introduction

Performance measurement in theater management involves evaluating operational efficiency and profitability. With the context of decentralized decision-making, theater managers' incentives are aligned with profitability, which necessitates accurate performance measurement tools. Here, we analyze Burgman’s performance based on variances from budgets, ROI, and residual income, to determine managerial effectiveness and suggest areas for improvement.

Performance Report and Variance Analysis

The performance report compares actual results with flexible and master budgets, highlighting variances. It sheds light on operational efficiency and cost control, crucial factors impacting profitability.

Revenue Analysis

Actual ticket sales amounted to 110,000 tickets, generating $880,000—exceeding the flexible budget of $880,000 based on the actual ticket sales (a break-even point assuming budgeted revenue per ticket). The actual revenue from tickets aligns with the flexible budget, indicating consistent ticket pricing. Conversely, revenue from concessions was $330,000, which is below the flexible budget derived from actual ticket sales, indicating potential underperformance in concessions sales or consumer spending habits.

Variable Costs and Contribution Margin

Controllable variable costs such as concessions, direct labor, and variable overhead are vital for operational efficiency. The actual concessions cost was $99,000, lower than the flexible budget proportionally aligned with actual sales, implying efficient cost management. However, from an overall perspective, the contribution margin decreased from $240,000 to $231,000, indicating a slight decline in profitability which warrants further analysis.

Fixed Costs and Operating Income

Fixed costs like rent and administrative expenses remained close to budgeted figures, with minor variances. Operating income showed a decline from $140,000 (master budget) to $126,000 (actual), reflecting operational challenges or unforeseen expenses. Variance analysis indicates that, despite revenue efficiency at the ticket sales level, lower concession revenues impacted overall profitability.

Evaluation of Burgman’s Performance

Burgman’s operational performance shows strengths in managing variable costs, as evidenced by the favorable cost variances. However, his performance concerning revenue generation, especially concessions, was less effective. The slight decline in contribution margin and operating income suggests the need for strategic sales initiatives in concessions or pricing strategies.

ROI and Residual Income Analysis

Analyzing from an investment standpoint, assuming that the theater is an investment center, Burgman’s ROI must meet or exceed 6% on assets valued at $2 million. ROI is calculated as operating income divided by average invested assets:

• ROI = (Operating Income / Total Assets) x 100%

Using actual results, ROI is:

ROI = ($126,000 / $2,000,000) x 100% = 6.3%.

This indicates that Burgman’s management has achieved the target ROI, and his efficiency in generating returns aligns with organizational goals.

Residual Income Calculation

Residual Income is calculated as:

RI = Operating Income – (Minimum Required Return x Investment in Assets)

Where minimum required return is 6%, thus:

RI = $126,000 – (0.06 x $2,000,000) = $126,000 – $120,000 = $6,000.

Hence, Burgman’s management has generated a residual income of $6,000, indicating value creation above the minimum threshold.

Managerial Performance Interpretation

Burgman’s operational management shows proficiency through favorable variances and managing costs efficiently. His ROI surpasses the targeted 6%, and residual income is positive, implying value addition. Nevertheless, the marginal decline in revenues from concessions points to areas for strategic improvement—such as enhancing concession sales through promotion or diversified product offerings.

Conclusion

Overall, Burgman’s performance, as reflected by financial metrics, demonstrates effective management at the operational level and satisfactory investment efficiency. Continual monitoring and strategic initiatives to boost revenue, especially concessions, could further improve performance. The balanced approach of operational cost control paired with investment efficiency assessments provides a comprehensive view of managerial success, reinforcing the importance of using metrics like variances, ROI, and residual income in managerial decision-making.

References

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