One subunit of Track Sports Company had the following financial results last month:

Subunit X Actual Results Flexible Budget Flexible Budget % Variance

Variance (F or U) (F or U)

Net Sales

Revenue \( 474,000 \) 455,000

Variable

Expenses 261,000 255,000

Contribution

Margin 213,000 200,000

Traceable

Fixed Expenses 38,000 29,000

Divisional

Segment Margin \( 175,000 \) 171,000

Requirements

1. Complete the performance evaluation report for this subunit (round to two decimal places).

2. Based on the data presented and your knowledge of the company, what type of responsibility center is this subunit?

3. Which items should be investigated if part of management’s decision criteria is to investigate all variances equal to or exceeding \(8,000 andexceeding 10% (both criteria must be met)?

4. Should only unfavorable variances be investigated? Explain.

5. Is it possible that the variances are due to a higher-than-expected sales volume? Explain.

6. Will management place equal weight on each of the variances exceeding \)8,000? Explain.

7. Which balanced scorecard perspective is being addressed through this performance report? In your opinion, is this performance report a lead or a lag indicator? Explain.

8. List one key performance indicator for the three other balanced scorecard perspectives. Make sure to indicate which perspective is being addressed by the indicators you list.

% Variance has been computed by the following formula –

$\mathit{\%}\mathbf{}\mathit{V}\mathit{a}\mathit{r}\mathit{i}\mathit{a}\mathit{n}\mathit{c}\mathit{e}\mathbf{=}\frac{\mathbf{F}\mathbf{l}\mathbf{e}\mathbf{a}\mathbf{x}\mathbf{i}\mathbf{b}\mathbf{l}\mathbf{e}\mathbf{}\mathbf{B}\mathbf{u}\mathbf{d}\mathbf{g}\mathbf{e}\mathbf{t}\mathbf{}\mathbf{V}\mathbf{a}\mathbf{r}\mathbf{i}\mathbf{a}\mathbf{n}\mathbf{c}\mathbf{e}}{\mathbf{F}\mathbf{l}\mathbf{e}\mathbf{a}\mathbf{x}\mathbf{i}\mathbf{b}\mathbf{l}\mathbf{e}\mathbf{}\mathbf{B}\mathbf{u}\mathbf{d}\mathbf{g}\mathbf{e}\mathbf{t}}\mathbf{\times }\mathbf{100}$

Responsibility centers are created in a decentralized organization to divide the different responsibilities into different subunits so that there can be effective in the decision-making process.

There can be different 4 types of responsibility centers.

Based on the given data, the responsibility center can be categorized as a profit center. The profit center is the center that is responsible for both revenue and cost. The given data set is related to the performance report for Sales revenue and all expenses. So this is a profit center.

The management has set the criteria are for investigating all items having variances –

a) Equal to and exceeding $8,000 and

b) Exceeding 10%

As it is necessary that both conditions must be met, so only the “Traceable Fixed Expenses” should from the performance report be investigated as it has a $9,000 unfavorable variance and variance is 31% (exceeding 10%).

Besides this, items having equal to or more than $8,000 variance has no variance degree exceeding 10%.

Favorable variances are those that perform better than the flexible budget. On the contrary, unfavorable variances are those that perform against the flexible budget.

Businesses give priority to Unfavorable variances to get the reason for having an unfavorable estimate. But at the same time investigating favorable variances also helps in knowing the factors for having favorable results.

Thus for effective decision making both favorable and unfavorable variances should be investigated.

In the given case, the responsibility center is the profit center. And in the profit center, both revenue and cost are controlled.

For every generated revenue, there are some costs associated with it. But some costs are also independent of sales like fixed costs.

Variances are the difference between estimated and actual results.

So in the given case, the variable cost may vary as per the sales level but the fixed cost variance would not be associated with the sales revenue variance.

Thus it is not possible that variances are due to higher-than-expected sales volume. Irrespective of sales volume, the fixed expense may vary from the expected amount.

In the given case, some variances are having $8,000 value but do not vary very much from the flexible budget. On the contrary, some variances exceeding $8,000 has even higher variance percent from the benchmarking. As the management is investigating variances above and equal to $8,000 and also exceeding the 10% benchmark, it will not place equal weight on all variances exceeding $8,000.

The management would place more weight on the items having higher variance than on the items having lower variance. Thus Variance having a 31% result would be given more priority than the variance having only a 10% change.

The balanced scorecard is a performance evaluation report that consists of both financial performance and operational performance.

So the perspective of the balanced scorecard is based on these two performance types.

In the given case, the perspective of the balanced scorecard is Financial. This is so as the key performance indicators are – contribution margin, fixed expenses, Divisional segment margin, etc.

This performance measure is a lag indicator. The reason is that the fanatical performance reported tends to reveal the results of past action only and no indication has been generated for future performance.

The other three different perspectives are – Customer, Internal Business, and Learning & Growth.

The key performance indicator for each perspective is as follows –