Marginal pricing and asessment of Managerial efficiency

Suppose a corporation has two divisions for it’s production line. Say an Auto assembly where the frame and engines are mated in A and body in B. Managerial accounting method is applied to marginal price this product and assess managerial performance.

Units from A    u (units to account for in B)

Units started not completed y

Units completed        z

Units to start              a

Cost Assignment units completed

Material cost   u x unit material cost

Labor cost       u x unit labor cost

Overhead        u x unit overhead cost

Total which is passed on to finished goods inventory.

Pro-forma Income statement

Units manufactured (assuming all to be sold from plan)

(-)Overhead cost

= Contribution margin

(-) variable cost

= Net Income

Performance Analysis

Material cost variance = (Actual cost – planned cost) actual units

Material unit(volume) variance = (Actual units – planned units)planned unit price for material

Labor cost variance =(Actual rate – planned rate) actual units

Labor volume variance =(Actual units – planned units)planned unit labor cost

Overhead spending variance =(Actual overhead – planned overhead) actual units – planned overhead.

These variances can be used to asses and plan managerial performance and incentives for bettering performance.

Caveat: This is just the gist of the performance analysis and each company has to design it for themselves according to their production process.

Modern Six sigma like processes in HR role culture has it’s origin in this type of  managerial practices in Existential cultures of management. Also it supports the basic definition of Management ie; to set target, motivate and control to achieve those targets.