finman chapter 22 sm - departamento de...

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Solutions Manual, Chapter 22 1243

Chapter 22 Performance Measurement and Responsibility Accounting

QUESTIONS 1. Many companies are divided into departments when they become too large to be

effectively managed as single units. This division into departments is often needed so that the responsibilities for the activities of a unit do not overwhelm the manager’s ability to oversee and control them effectively. Also, departments can be organized to take advantage of the specialized skills of each manager.

2. Operating departments are directly involved in manufacturing or selling the products or services of a business. Service departments support operating departments through activities such as accounting, payroll, and legal services.

3. Controllable costs of a department are those that the department’s manager has the power to control, determine or at least strongly influence. The manager does not have the power to control, determine or influence the amounts of uncontrollable costs. The controllable/uncontrollable distinction must be drawn with regard to a specific manager because costs that are uncontrollable at one level of management may be controllable at the next higher level. Also, the distinction must be drawn within the context of a given time period because all costs tend to become controllable over the long run (at least by top management).

4. Controllable and uncontrollable costs must be identified with a particular manager and a definite time period.

5. Managers should be involved in preparing their responsibility accounting budgets to enlist their cooperation and to ensure that the budgets represent reasonable goals.

6. Two main goals in managerial accounting for departments are to measure the: (i) efficiency and effectiveness of each department, and (ii) performance of each department manager.

7. Not usually; a cost center cannot usually be evaluated in terms of its profitability because it does not produce revenues. A cost center is normally evaluated by its effective use and control of costs. (An exception is a transfer pricing system.)

8. Direct expenses of a department are expenses that are incurred for the sole benefit of that department—there is little doubt about which department should be charged with a direct expense. Indirect expenses are incurred for the joint benefit of more than one department. Indirect expenses are not easily traced to the activities of a single department and considerable doubt can exist about the most useful way to allocate an indirect expense to departments.


Financial & Managerial Accounting, 5th Edition 1244

9. a) Sales of the departments or the number of employees in each department.

b) Square feet of floor space, perhaps adjusted for its value. c) Square feet of floor space or cubic feet of space occupied. d) Number, size, and usage time of lights in each department. e) Square feet of floor space occupied. f) Sales in each selling department. g) Insured value of equipment in each department. h) Assessed value of equipment in each department.

10. A department’s contribution to overhead is measured by subtracting its direct expenses from its revenues.

11. The individual responsible for controlling the cost needs timely reports with specific cost information. This individual has the power to adjust cost levels to more efficient and/or effective levels.

12A. A transfer price is an amount used to record transactions made between divisions within the same company. A market-based transfer price is most likely to be used when a) the item being transferred has a readily available substitute with a market price and b) the transferor division is operating at full capacity.

13B. A joint cost is incurred to produce or purchase two or more different products at the same time. Joint costs are usually allocated to products in proportion to the sales values of the joint products, called value basis of allocation. Another, less common, method of joint cost allocation is called the physical basis of allocation.

14B. Two examples of products with joint costs are: (1) Steel – used for home appliances, refrigerators, washers, dryers; and (2) Milk – used for cheese, butter, and different grades of milk. Numerous other examples exist (e.g., lumber, crude oil, fruits, vegetables, cotton).

15. a) It is useful to know the amount of sales for each department as well as direct costs for each department. This information can help assess the effectiveness of Apple’s sales and production strategies (including such activities as target group selection, pricing, and advertising).

b) Treating a department of a store as a profit center allows management to more completely assess the success of different departments by looking at their profits as well as their costs.

16. Controllable cost examples — labor of department, packaging supplies, office equipment.

Uncontrollable cost examples — executive salaries allocation, insurance fees, and cost of each call due to customer location.

17. Cycle time is the time it takes a company to produce a product or service. Its components are process time, inspection time, move time, and wait time.

18. Value-added time provides value to a product or service from a customer’s perspective. Non-value added time provides no value to the customer. Value-added time includes processing time. Non-value-added time includes the activities of inspection time, move time, and wait time.



19. Cycle efficiency is the ratio of value-added time divided by total cycle time. The closer cycle efficiency is to 1, the more of a company’s time is spent on value-added activities. If the cycle efficiency is low or close to 0, the company will want to evaluate the production process to identify ways to reduce its non-value-added activities.

20. Yes. Arctic Cat can use cycle time and cycle efficiency to measure operating performance for its manufacturing operations. For example, these measures could be used when analyzing its production of snowmobiles.



QUICK STUDIES

Quick Study 22-1 (10 minutes) 1. A 5. F

2. C 6. B

3. G 7. E

4. D Quick Study 22-2 (10 minutes) Possible allocation bases for these indirect expenses and service department expenses include:

1. Proportion of total processing time for each factory department; or number of production run schedules prepared for each department as a percent of the total.

2. Relative number of employees; or proportion of total sales.

3. Proportion of total time in each department for maintenance; or proportion of the number of machines.

4. Proportion of floor space occupied by each department; relative number of lights; or proportion of total wattage in each department.

Quick Study 22-3 (5 minutes)

1. D 3. B 2. C 4. A



Quick Study 22-4 (15 minutes) Departmental contribution to overhead

Dept. A: $18,815 - $ 3,660 = $15,155

Dept. B: $76,300 - $37,060 = $39,240

Dept. C: $34,440 - $ 7,386 = $27,054

Departmental contribution to overhead (as a percent of sales)*

Dept. A: $15,155 / $ 53,000 = 28.6%

Dept. B: $39,240 / $180,000 = 21.8%

Dept. C: $27,054 / $ 84,000 = 32.2%

*Rounded to one decimal place

Dept. B contributes the highest dollar amount to overhead.

Dept. C generates the highest contribution percentage to overhead.


Investment Center

Net Income

Average Assets

Return on Investment (Assets)

Cameras and Camcorders ..................

$4,500,000 $20,000,000 22.5%

Phones and Communications ..........

1,500,000 12,500,000 12.0%

Computers and Accessories ..................

800,000 10,000,000 8.0%

Comments: The Cameras and Camcorders division is the superior investment center on the basis of the investment center return on investment (assets). The Computers and Accessories division yields the lowest return on investment and might be a candidate for reduction or elimination without future improvements in return.




Cameras & Camcorders

Phones & Communication

Computers & Accessories

Net income .............................. $4,500,000 $1,500,000 $ 800,000

Less: Target net income

$20,000,000 x 12% ...............

12,500,000 x 12% ...............

10,000,000 x 12% ...............

2,400,000

1,500,000

1,200,000

Residual income (loss) .......... $2,100,000 $ 0 $ (400,000)


Profit margin = $ 516,000 / $2,420,000 = 21.3%

Return on investment (assets) = $ 516,000 / $2,250,000 = 22.9%

Investment turnover = $2,420,000 / $2,250,000 = 1.08



Quick Study 22-8 (15 minutes) Investment center A: Return on investment = Net income / Average invested assets

= $352,000 / $1,400,000 = 25%

Profit margin = Net income / Sales 0.08 = $352,000 / Sales, thus Sales = $4,400,000

Investment turnover = Sales / Average invested assets = $4,400,000 / $1,400,000 = 3.14 Investment center B: Return on investment = Profit margin x Investment turnover

0.12 = Profit margin x 1.5 Thus, Profit margin = 0.12 / 1.5 = 0.08, or 8% Profit margin = Net income / Sales

0.08 = Net income / $10,400,000 Thus, Net income = $832,000 Investment turnover = Sales / Average invested assets

1.5 = $10,400,000 / Average invested assets Thus, Average invested assets = $10,400,000 / 1.5 = $6,933,333 Quick Study 22-9 (5 minutes) 1. C 5. F

2. I 6. I

3. F 7. P

4. I 8. C




Process Perspective Actual Occupancy Goal

East Coast 89% West Coast 92%

Note: The East Coast goal (upward) arrow should be red (shown black here) and the West Coast goal (downward) arrow should be green (shown gray here).

Quick Study 22-11A (10 minutes) Without excess capacity, a market-based transfer price of $450 per windshield should be used. The Assembly division should be indifferent to buying at the market price from the Windshield division or from an outside supplier. The Windshield division will not be willing to accept any transfer price less than the market price, since it can sell all of its production to outside customers at that price. Quick Study 22-12A (10 minutes) If the Windshield division has excess capacity, a range of acceptable transfer prices becomes possible. The Windshield division will not accept a transfer price below its variable manufacturing costs of $200 per windshield. The Assembly division will not pay more than the $450 market price. Thus, a transfer price within the range of $200 to $450 per windshield should be agreed upon, and the Assembly division should buy from the Windshield division. Quick Study 22-13B (15 minutes) Total joint cost = $325,000 + $50,000 = $375,000

Unit A market value (3,340 x $1.00) .............................. $3,340 Unit B market value (6,680 x $0.75) .............................. 5,010 Total market value ......................................................... $8,350 Unit B joint cost = $375,000 x ($5,010 / $8,350) = $225,000



Quick Study 22-14 (15 minutes) The first step is to allocate total rent expense between the two floors.

Amount Allocated

% of Total

Cost

First floor ...................... $130,000 65% $ 84,500 Second floor ................. 130,000 35 45,500 Totals ............................ 100% $130,000

The second step is to allocate these portions of total rent expense across the departments occupying the two floors

First Floor Sq. Feet % of Total Cost

Paint Dept. .............................. 1,440 30% $25,350

Engine Dept. ........................... 3,360 70 59,150

Totals ...................................... 4,800 100% $84,500

Second Floor Sq. Feet % of Total Cost

Window Dept. ......................... 2,016 42% $19,110

Electrical Dept. ....................... 960 20 9,100

Accessory Dept. ..................... 1,824 38 17,290

Totals ...................................... 4,800 100% $45,500


Average invested assets = (€12,988 + €13,099) / 2 = €13,044 (rounded)

Return on investment (assets) = €3,385 / €13,044 = 25.95% (rounded)




a. Process time .............................................................................. 15.0 minutes

Inspection time .......................................................................... 2.0 minutes

Move time ................................................................................... 6.4 minutes

Wait time .................................................................................... 36.6 minutes

Manufacturing cycle time ......................................................... 60.0 minutes

b. Manufacturing cycle efficiency (15.0 min./ 60.0 min.) ........... 0.25


Department

Sales

Percent

Advertising to be allocated

Allocated amount

Department 1 $220,000 27.5% $100,000 $ 27,500

Department 2 400,000 50.0% 100,000 50,000

Department 3 180,000 22.5% 100,000 22,500

Totals $800,000 100.0% $100,000


Department

Workers

Percent

Administration Expense to be

allocated

Allocated amount

Mixing 300 60% $160,000 $ 96,000

Bottling 200 40% 160,000 64,000

Totals 500 100% $160,000




Department

Square

feet

Percent

Maintenance Expense to be

allocated

Allocated amount

Mixing 22,000 55% $200,000 $110,000

Bottling 18,000 45% 200,000 90,000

Totals 40,000 100% $200,000



EXERCISES Exercise 22-1 (25 minutes)

1. Allocation of Indirect Expenses to Four Operating Departments

Supervision expenses

Department Employees % of Total Cost

Materials ................................. 27 18% $14,850 Personnel ................................ 9 6 4,950 Manufacturing ........................ 63 42 34,650 Packaging ............................... 51 34 28,050 Totals ...................................... 150 100% $82,500

Utilities expenses

Department Square Feet % of Total Cost

Materials ................................. 25,000 25% $12,500 Personnel ................................ 5,000 5 2,500 Manufacturing ........................ 55,000 55 27,500 Packaging ............................... 15,000 15 7,500 Totals ...................................... 100,000 100% $50,000

Insurance expenses

Department Assets Value % of Total Cost

Materials ................................. $ 6,000 10% $ 2,250 Personnel ................................ 1,200 2 450 Manufacturing ........................ 37,800 63 14,175 Packaging ............................... 15,000 25 5,625 Totals ...................................... $60,000 100% $22,500

2. Report of Indirect Expenses Assigned to Four Operating Departments

Supervision Utilities Insurance Total

Materials ................................. $14,850 $12,500 $ 2,250 $ 29,600

Personnel ................................ 4,950 2,500 450 $ 7,900

Manufacturing ........................ 34,650 27,500 14,175 $ 76,325

Packaging ............................... 28,050 7,500 5,625 $ 41,175

Totals ...................................... $82,500 $50,000 $22,500 $155,000



Exercise 22-2 (30 minutes) (1) Items included in performance report

The following items definitely should be included in the performance report for the auto service department manager because they are controlled or strongly influenced by the manager’s decisions and activities:

Sales of parts

Sales of services

Cost of parts sold

Supplies

Wages (hourly)

(2) Items excluded from performance report

The following items definitely should be excluded from the performance report because the department manager cannot control or strongly influence them:

Building depreciation

Income taxes allocated to the department

Interest on long-term debt

Manager’s salary

(3) Items that may or may not be included in performance report

The following items cannot be definitely included or definitely excluded from the performance report because they may or may not be completely under the manager’s control or strong influence:

Payroll taxes Some portion of this expense relates to the manager’s salary and is not controllable by the manager. The portion that relates to hourly wages should be treated as a controllable expense.

Utilities Whether this expense is controllable depends on the design of the auto dealership. If the auto service department is in a separate building or has separate utility meters, these expenses are subject to the manager’s control. Otherwise, the expense probably is not controllable by the manager of the auto service department.



Exercise 22-3 (20 minutes) (1)

WHOLESALE GUITARS Departmental Contribution Statements

For Year Ended December 31, 2013

Acoustic Electric Dept. Dept. Combined

Sales ........................................ $111,500 $105,500 $217,000

Cost of goods sold ................ 55,675 66,750 122,425

Gross profit ............................ 56,825 38,750 95,575

Direct expenses

Salaries expense .................... 17,300 13,500 30,800

Deprec. expense-Equip. ........ 10,150 9,000 18,650

Supplies expense................... 2,030 1,700 3,730

Total direct expenses ............ 29,480 24,200 53,680

Departmental contributions to

overhead

Indirect expenses

$ 27,345

$ 14,550

$ 41,895

Rent expense .......................... 12,055

Utilities expense..................... 5,595

Advertising expense .............. 14,325

Total indirect expenses ......... 31,975

Net income .............................. $ 9,920

(2) Based on departmental contribution to overhead, the electric guitar department should not be eliminated, as it contributes $14,550 to covering indirect expenses.



Exercise 22-4 (20 minutes)

MARATHON RUNNING SHOP Departmental Expense Allocation Spreadsheet


Allocation of Expenses to Departments . Alloca-

tion Base

ExpenseAccount Balance

Adver- tising Dept.

Admini- strative Dept.

Shoes Dept.

Clothing

Dept.

Direct expenses ............ $161,000 $18,000 $25,000 $103,000 $15,000

Indirect utilities expenses. ....................

Sq. feet

64,000

5,120

6,400

32,640

19,840

Total dept. exp. ............. 225,000 23,120 31,400 135,640 34,840

Service Dept. Expenses

Advertising Dept........... Ads (23,120) 17,340 5,780

Administrative Dept. .... Sales ______ (31,400) 24,492 6,908

Total exp. allocated to operating depts.. .... $225,000 $ 0 $ 0 $177,472 $47,528

Supporting expense allocation calculations Utilities expense: $64,000

Square Feet % of Total Cost

Advertising ............ 1,120 8% $ 5,120 Administrative ....... 1,400 10 6,400 Shoes ..................... 7,140 51 32,640 Clothing ................. 4,340 31 19,840 Total ....................... 14,000 100.0% $64,000

Advertising expense: $23,120

Ads Placed % of Total Cost

Shoes ..................... 90 75% $17,340 Clothing ................. 30 25 5,780 Total ....................... 120 100% $23,120

Administrative expense: $31,400

Sales % of Total Cost

Shoes ..................... $273,000 78% $24,492 Clothing ................. 77,000 22 6,908 Total ....................... $350,000 100% $31,400




COZY BOOKSTORE Departmental Expense Allocation Spreadsheet

For Period Ended _______

Allocation of Expenses to Departments .

Alloca- tion Base

Exp. Account Balance

Adver- tising Dept.

Purch- asing Dept.

Books Dept.

Maga-zines Dept.

News-papers Dept.

Total dept. exp. .................... $698,000 $24,000 $34,000 $425,000 $90,000 $125,000

Service Dept. Expenses

Advertising Dept. ................... Sales (24,000) 13,200 5,280 5,520

Purchasing Dept. ......................................

Purch. orders

______

(34,000)

14,620

10,200

9,180

Total expenses allocated to operating depts. ................

$698,000

$ 0

$ 0

$452,820

$105,480

$139,700

Computations for allocations of service dept. costs to operating departments

Advertising: $24,000

Sales % of Total Cost

Books Dept. ................................ $495,000 55% $13,200 Magazines Dept. ........................ 198,000 22 5,280 Newspapers Dept....................... 207,000 23 5,520 Totals .......................................... $900,000 100% $24,000

Purchasing: $34,000

Purchase Orders % of Total Cost

Books Dept. ................................ 516 43% $14,620 Magazines Dept. ........................ 360 30 10,200 Newspapers Dept....................... 324 27 9,180 Totals .......................................... 1,200 100% $34,000




Allocation of annual wages between the two departments

Hours Worked* % of Total Cost

Jewelry Dept ..................................... 57 75% $22,500

Hosiery Dept ..................................... 19 25 $ 7,500

Totals ................................................ 76 100% $30,000

*Computation of hours worked in the two selling departments

Jewelry department Selling ........................................................... 51 Arranging and stocking ............................... 6 57 hours Hosiery department Selling ........................................................... 12 Arranging and stocking ............................... 7 19 hours Total hours ....................................................... 76 hours

Instructor note: This analysis ignores idle time because neither department

receives any direct benefit from it. Accordingly, the total wages are allocated between the departments in proportion to the time worked in each.




1.

Location

Net Income

Average Assets


Location A ....................... $160,000 $1,000,000 16%

Location B ....................... $108,000 $ 600,000 18%

2. The recommendation is to pursue Location B because its return on

investment (assets) is 18%, compared to 16% at Location A. Moreover, given the normal return of 18% for this chain, only Location B meets this hurdle.

This exercise should caution students to think beyond financial numbers alone. Some students may discuss the need to look at the market growth potential of the two locations, or perhaps investigate opportunities to expand sales at existing locations, or even to pursue more lucrative specialized customers. Some may also suggest a risk analysis of the two locations.

Exercise 22-8 (20 minutes) (1)

Investment Center

Net Income

Average Assets


Electronics .................... $2,880,000 $16,000,000 18%

Sporting Goods ............ 2,040,000 12,000,000 17%

Comment: The Electronics division is the superior investment center on the basis of the investment center return on investment (assets).



Exercise 22-8 (continued) (2) Investment Center

Electronics

Sporting Goods

Net income .................... $2,880,000 $2,040,000

Target net income

$16,000,000 x 12% .....

12,000,000 x 12% ......

(1,920,000)

(1,440,000)

Residual income……. $ 960,000 $ 600,000

Comment: The Electronics division is the superior investment center on the basis of investment center residual income. (3) The Electronics division should accept the new opportunity, since it will generate residual income of 3% (15% - 12%) of the investment’s invested assets. Exercise 22-9 (15 minutes)

Investment Center Net Income Sales Profit Margin

Electronics .................... $2,880,000 $40,000,000 7.20%

Sporting Goods ............ 2,040,000 20,000,000 10.20%

Investment Center

Sales

Average Assets

Investment Turnover

Electronics .................... $40,000,000 $ 16,000,000 2.50

Sporting Goods ............ 20,000,000 12,000,000 1.67

Comments: The Sporting goods division generates the most net income per dollar of sales, as shown by its higher profit margin. The Electronics division however is more efficient at generating sales from invested assets, based on its higher investment turnover.



Exercise 22-10 (20 minutes) 1. F 8. P

2. C 9. C

3. C 10. I

4. C 11. P

5. I 12. P

6. F 13. F

7. F 14. F Exercise 22-11A (15 minutes) 1. If the Trailer division is currently operating at full capacity, its manager

will not accept a transfer price below the retail market price of $200 per

trailer. The Assembly division manager should be willing to accept this

price since she cannot purchase at a lower price from another company.

2. If the Trailer division is currently producing 20,000 trailers and the

Assembly division will order 15,000 more trailers, the Trailer division will

have excess capacity. In this case the range of acceptable transfer prices

will be from the $80 variable manufacturing cost through the $200 market

price per trailer. The Trailer division manager will not accept less than $80

per trailer and the Assembly division manager will not pay more than $200

per trailer.

3. The Trailer division would prefer a transfer price of $140 per trailer,

since it provides a $60 ($140 - $80) contribution margin per trailer. At a

transfer price of $80 the Trailer division reports a contribution margin of $0

per trailer. Conversely, the Assembly division manager prefers a transfer

price of $80, since it provides a contribution margin of $120 ($200 - $80) per

trailer. A transfer price of $140 provides only a $60 contribution margin

($200 - $140) per trailer to the Assembly division manager. The top

management of Baxter Bicycles is indifferent to any transfer price between

$80 and $200 per trailer, as long as the Assembly division buys trailers

from the Trailer division. Regardless of the transfer price used, Baxter

Bicycles generates a contribution margin of $120 ($200 retail selling price -

$80 variable manufacturing cost) per trailer.



Exercise 22-12B (20 minutes)

Preliminary calculations

Land cost .............................................................................. $4,000,000 Improvements ...................................................................... 3,500,000 Total cost of lots .................................................................. $7,500,000

Lots Quantity Price Total

Canyon ......................................... 450 $ 55,000 $24,750,000

Hilltop ........................................... 150 110,000 16,500,000

Total market value ...................... $41,250,000

Allocated cost—value basis of allocation: $7,500,000

Market % of Allocated Average Value Total Cost Lot Cost

Canyon section ............ $24,750,000 60% $4,500,000 $10,000

Hilltop section .............. 16,500,000 40% $3,000,000 $20,000

Totals ............................... $41,250,000 100% $7,500,000



Exercise 22-13B (25 minutes)

Preliminary calculations

Lobster cost (2,400 lbs. x $4.50) ............................ $10,800 Labor cost ............................................................... 1,800 Total cost of processed lobsters .......................... $12,600

Parts Quantity* Price Total

Lobster tails .......................... 1,248 lbs. $21 $26,208 Lobster flakes ....................... 528 lbs. 14 7,392 Total market value ................ $33,600

* Quantities are computed as: 52% x 2,400 lbs. = 1,248 lbs. 22% x 2,400 lbs. = 528 lbs.

Allocated cost—value basis allocation: $12,600

Market % of Allocated Cost Parts Value Total Cost per lb.

Lobster tails .................... $26,208 78.0% $9,828 $7.875

Lobster flakes ................. 7,392 22.0 2,772 5.250

Total ................................. $33,600 100.0% $12,600

(1) Cost of goods sold

Parts Quantity (given) Cost Total

Lobster tails ............................ 1,096 lbs. $7.875 $ 8,631

Lobster flakes......................... 324 lbs. 5.250 1,701

Total cost of goods sold ....... $10,332

(2) Cost of ending inventory

Parts Quantity Cost Total

Lobster tails ............................ 152 lbs.* $7.875 $ 1,197

Lobster flakes......................... 204 lbs.** 5.250 1,071

Total inventory cost ............... $ 2,268

* 1,248 lbs. – 1,096 lbs. sold = 152 lbs. ** 528 lbs. – 324 lbs. sold = 204 lbs.

Note: Cost of goods sold ($10,332) plus cost of ending inventory

($2,268) equals the total cost of $12,600.




(1) Profit margin = Income/Sales

Investment Center Income* Sales* Profit margin

Professional products .......... € 552 €2,717 20.32%

Consumer products .............. 1,765 9,530 18.52%

Luxury products.................... 791 4,507 17.55%

Active cosmetics................... 278 1,386 20.06%

*In € millions

The Professional products department has the highest profit margin.

(2) Investment turnover = Sales/Average invested assets

Investment Center

Sales*

Avg. assets*

Investment turnover

Professional products .......... €2,717 €2,570 1.06

Consumer products .............. 9,530 5,745 1.66

Luxury products.................... 4,507 3,855 1.17

Active cosmetics................... 1,386 824 1.68

*In € millions. Avg. assets = Beginning assets plus ending assets, divided by two. Note: Profit margin and investment turnover amounts are rounded to two decimal places.

The Active cosmetics department has the highest investment turnover.



PROBLEM SET A Problem 22-1A (60 minutes) Part 1 Average occupancy cost = $66,000 / 8,000 sq. ft. = $8.25 per sq. ft. These costs are assigned to the two departments as follows

Department Square Footage Rate Total

Linder’s Dept. ............... 1,000 $8.25 $ 8,250

Chiro’s Dept. ................. 1,800 8.25 $14,850

*A total of $23,100 ($8,250 + $14,850) in occupancy costs is allocated to these

departments. The company would follow a similar approach in allocating the remaining occupancy costs ($42,900, computed as $66,000 - $23,100) to its other departments (not shown in this problem).

Part 2 Market rates are used to allocate occupancy costs for depreciation, interest, and taxes. Heating, lighting, and maintenance costs are allocated to the departments on both floors at the average rate per square foot. These costs are separately assigned to each class as follows:

Total Costs

Value-Based Costs

Usage-Based Costs

Depreciation—Building ................... $18,000 $18,000

Interest—Building mortgage .......... 27,000 27,000

Taxes—Building and land ............... 9,000 9,000

Gas (heating) expense .................... 3,000 $ 3,000

Lighting expense ............................. 3,000 3,000

Maintenance expense ...................... 6,000 ______ 6,000

Total .................................................. $66,000 $54,000 $12,000



Problem 22-1A (Continued)

Value-based costs are allocated to departments in two steps

(i) Compute market value of each floor

Floor

Square Footage

Value per Sq. Ft.

Total

First floor ................................ 4,000 $30 $120,000 Second floor ........................... 4,000 20 80,000 Total market value ................. $200,000

(ii) Allocate $54,000 to each floor based on its percent of market value

Floor

Market Value

% of Total

Allocated Cost

Cost per Sq. Ft.

First floor ................................ $120,000 60% $32,400 $8.10 Second floor ........................... 80,000 40 21,600 5.40 Totals ...................................... $200,000 100% $54,000

Usage-based costs allocation rate = $12,000 / 8,000 sq. ft.

= $1.50 per sq. ft. We can then compute total allocation rates for the floors

Floor Value Usage Total

First floor ................................ $8.10 $1.50 $9.60 Second floor ........................... 5.40 1.50 $6.90

These rates are applied to allocate occupancy costs to departments

Department

Square Footage

Rate

Total

Linder’s Department ........................ 1,000 $9.60 $ 9,600

Chiro’s Department.......................... 1,800 6.90 $12,420

Part 3

A second-floor manager would prefer allocation based on market value. This is a reasonable and logical approach to allocation of occupancy costs. The current method implies all square footage has equal value. This is not logical for this type of occupancy. It also means the second-floor space would be allocated a larger portion of costs under the current method, but less using an allocation based on market value.



Problem 22-2A (70 minutes)

Williams Company

Forecasted Departmental Income Statements For Year Ended December 31, 2014

Clock Mirror Paintings Combined

Sales ............................................... $140,400 $59,400 $50,000 $249,800 (1)

Cost of goods sold ........................ 68,796 36,828 22,500 128,124 (2)

Gross profit .................................... 71,604 22,572 27,500 121,676

Direct expenses

Sales salaries ............................... 20,000 7,000 8,000 35,000

Advertising ................................... 1,200 500 800 2,500

Store supplies used ..................... 972 432 500 1,904 (3)

Depreciation of equipment ......... 1,500 300 200 2,000

Total direct expenses .................. 23,672 8,232 9,500 41,404

Allocated expenses

Rent expense ............................... 5,616 2,835 2,349 10,800 (4)

Utilities expense .......................... 2,080 1,048 872 4,000 (4)

Share of office dept. expenses ... 12,364 5,236 4,400 22,000 (5)

Total allocated expenses ............ 20,060 9,119 7,621 36,800

Total expenses ............................... 43,732 17,351 17,121 78,204

Net income ..................................... $ 27,872 $ 5,221 $10,379 $ 43,472

Supporting Computations—coded (1) through (5) in statement above Note 1 (Sales)

Clock Mirror Paintings

2013 sales ......................................... $130,000 $ 55,000 Growth rate (8% increase) ............... x 108% x 108% 2014 sales ......................................... $140,400 $ 59,400 $ 50,000

Note 2 (Cost of Goods Sold)


2013 cost of goods sold ................... $ 63,700 $ 34,100 $ 50,000 Growth rate (8% increase) ............... x 108% x 108% x 45%* 2014 cost of goods sold ................... $ 68,796 $ 36,828 $ 22,500

ALTERNATIVELY 2013 cost of goods sold ................... $ 63,700 $ 34,100 2013 sales ......................................... $130,000 $ 55,000 2013 cost as % of sales.................... 49.0% 62.0%

2014 sales ........................................ $140,400 $ 59,400 $ 50,000 2014 cost as % of sales ................... x 49.0% x 62.0% x 45%* 2014 cost of goods sold ................... $ 68,796 $ 36,828 $ 22,500

* The 45% cost of goods sold percent is computed as 100% minus the predicted 55% gross margin.



Problem 22-2A (Continued)

Note 3 (Store Supplies Used)


2013 store supplies used .................... $ 900 $ 400 Growth rate (8% increase) ................... x 108% x 108% 2014 store supplies ............................. $ 972 $ 432 $ 500

Note 4 (Rent and Utilities)


2013 rent ............................................... $ 7,020 $ 3,780 One-fifth from clock to paintings (1,404) $ 1,404 One-fourth from mirror to paintings

______

(945)

945

2014 allocation of $10,800 rent ............ $ 5,616 $ 2,835 $ 2,349 Percent of total * .................................. 52.0% 26.2%† 21.8%†

2014 allocation of $4,000 total utilities .......................................

$ 2,080

$ 1,048

$ 872

† Adjusted to eliminate rounding difference.

Note 5 (Office Department Expenses)


2014 sales ............................................. $140,400 $ 59,400 $ 50,000 Percent of total sales * ......................... 56.2% 23.8% 20.0%

2014 allocation of $22,000 total office department expenses($15,000 in 2013 plus $7,000 increase) ..........................

$ 12,364

$ 5,236

$ 4,400

* Instructor note: If students round to something other than one-tenth of a percent, their numbers will slightly vary.




Part 1

Responsibility Accounting Performance Report Dept. Manager, Camper Department

For the Year

Budgeted Actual Over (Under) Amount Amount Budget

Controllable Costs

Raw materials ................................... $195,000 $194,200 $ (800)

Employee wages .............................. 104,000 106,600 2,600

Supplies used ................................... 33,000 31,700 (1,300)

Depreciation—Equipment ............... 60,000 60,000 0

Totals ................................................ $392,000 $392,500 $ 500

b.

Responsibility Accounting Performance Report Dept. Manager, Trailer Department

For the Year


Controllable Costs

Raw materials .................................. $275,000 $273,200 $(1,800)

Employee wages ............................. 205,000 206,400 1,400

Supplies used .................................. 90,000 91,600 1,600

Depreciation—Equipment .............. 125,000 125,000 0

Totals ............................................... $695,000 $696,200 $ 1,200



Problem 22-3A (Continued) c.

Responsibility Accounting Performance Report Plant Manager, Indiana Plant

For the Year


Controllable Costs

Dept. manager salaries ................ $ 95,000 $ 97,500 $ 2,500

Utilities ........................................... 9,000 8,300 (700)

Building rent .................................. 15,000 14,000 (1,000)

Other office salaries ..................... 32,500 30,100 (2,400)

Other office costs ......................... 25,000 23,000 (2,000)

Camper department ...................... 392,000 392,500 500

Trailer department ........................ 695,000 696,200 1,200

Total ............................................... $1,263,500 $1,261,600 $ (1,900)

Part 2 The plant manager did a better job of controlling costs and meeting the

budget. She came in under budget for the plant even though she paid the

department managers more than budgeted and had to absorb the amounts

over budget in their departments. This is because she spent less than the

budget amount on utilities, building rent, other office salaries, and other

office costs. Each of the department managers came in over budget.



Problem 22-4AB (60 minutes)

Part 1

Allocations of joint costs on the basis of sales values

Tree pruning and care: $405,000

Grade

Sales Value

Percent of Total

Allocated Cost

No. 1 ............................... $450,000 48.0% $194,400

No. 2 ............................... 300,000 32.0 129,600

No. 3 ............................... 187,500 20.0 81,000

Total ............................... $937,500 100.0% $405,000

Picking, sorting, and grading: $202,500

Grade

Sales Value

Percent of Total

Allocated Cost

No. 1 ............................... $450,000 48.0% $ 97,200

No. 2 ............................... 300,000 32.0 64,800

No. 3 ............................... 187,500 20.0 40,500

Total ............................... $937,500 100.0% $202,500

Delivery: $30,000 to Grade Nos. 1 & 2

Grade

Sales Value

Percent of Total

Allocated Cost

No. 1 ............................... $450,000 60.0% $18,000

No. 2 ............................... 300,000 40.0 12,000

No. 3 [identified] .............. ________ _____ 37,500*

Total ............................... $750,000 100.0% $67,500

* If students did not round percents to one-tenth, their answers will vary slightly from those reported here.

**The No. 3 Grade delivery costs are given in the problem description.



Problem 22-4AB (Continued)

Part 2

GEORGIA ORCHARDS Income Statement


No. 1 No. 2 No. 3 Combined

Sales (by grade)

No. 1: 300,000 lbs. @ $1.50 ............ $450,000 No. 2: 300,000 lbs. @ $1.00 ............ $300,000 No. 3: 750,000 lbs. @ $0.25 ............ $187,500 Total sales ....................................... $937,500 Costs

Tree pruning and care .................... 194,400 129,600 81,000 405,000

Picking, sorting & grading ............. 97,200 64,800 40,500 202,500

Delivery ............................................ 18,000 12,000 37,500 67,500

Total costs ....................................... 309,600 206,400 159,000 675,000

Net income (loss) .............................. $140,400 $ 93,600 $ 28,500 $262,500

Part 3 Delivery costs include both crating and hauling costs. Georgia is able to identify the portion of the cost directly related to the No. 3 peaches, presumably because the No. 3s are going to a different destination than the No. 1 and No. 2 peaches. If the No. 1s and No. 2s are going to the same place, then the hauling portion of the delivery cost may truly be a joint cost, at least for the No. 1 and No. 2 peaches.

However, since the No. 1 and No. 2 peaches are different grades and are sold for different prices per pound, it seems safe to assume they are crated separately. If the cost of crating the No. 3 peaches can be traced as a direct cost, then it seems the crating costs for the No. 1s and No. 2s should also be identifiable as separate amounts. This means, perhaps, the crating portion of delivery costs is not a true joint cost.




Part 1

Process time .............................................................................. 6.0 days

Inspection time .......................................................................... 0.8 days

Move time ................................................................................... 3.2 days

Wait time .................................................................................... 5.0 days

Manufacturing cycle time ......................................................... 15.0 days

Part 2

Manufacturing cycle efficiency (6.0 days/ 15.0 days) ............ 0.40

This means that Oakwood is spending 40% of its time in value-added activities, and 60% of its time on non-value-added activities.

Part 3

To increase the manufacturing cycle efficiency to 0.75, Oakwood needs to reduce the total manufacturing cycle time to 8 days without changing the process time (6 days / 0.75 = 8 days). To do this, they must reduce the 9 days of non-value added time (0.8 + 3.2 + 5.0) down to 2 days or less. One way to do this might be to rearrange the manufacturing facility so that materials and work in process do not have to move as far, reducing the move time. In addition, better scheduling and planning may help Oakwood to reduce the wait time.




Part 1

Vortex Company Departmental Income Statements

Dept. A Dept. B Sales .............................................................................. $800,000 $450,000 Cost of goods sold ....................................................... 497,000 291,000 Gross margin ................................................................ 303,000 159,000 Direct expenses Salaries ..................................................................... 125,000 88,000 Insurance .................................................................. 20,000 10,000 Utilities ...................................................................... 24,000 14,000 Depreciation ............................................................. 21,000 12,000 Maintenance ............................................................. 7,000 5,000 Total direct expenses .............................................. 197,000 129,000 Departmental contribution to overhead ..................... 106,000 30,000 Allocated indirect expenses Salaries* ................................................................... 23,040 12,960 Insurance** ............................................................... 4,200 1,800 Depreciation*** ......................................................... 10,500 4,500 Office expenses**** ................................................. 30,000 20,000 Total allocated indirect expenses .......................... 67,740 39,260 Departmental net income ............................................ $ 38,260 $ (9,260)

* Salaries allocation: Sales % Amount Allocated

Department A $ 800,000 64% $36,000 $23,040

Department B 450,000 36% 36,000 12,960

Total $1,250,000 100% $36,000

** Insurance allocation: Sq. ft. % Amount Allocated

Department A 28,000 70% $6,000 $ 4,200

Department B 12,000 30% 6,000 1,800

Total 40,000 100% $ 6,000

*** Depreciation allocation: Sq. ft. % Amount Allocated

Department A 28,000 70% $15,000 $10,500

Department B 12,000 30% 15,000 4,500

Total 40,000 100% $15,000



P

Problem 22-6A (Concluded)

**** Office expense allocation: Employees % Amount Allocated

Department A 75 60% $50,000 $30,000

Department B 50 40% 50,000 20,000

Total 125 100% $50,000

Part 2 Although Department B has a negative departmental income, it is contributing $30,000 to overhead. If none of the indirect expenses can be reduced by eliminating Department B, then eliminating it would not be a good idea. Overall company income will be reduced by $30,000. It is possible that some of the indirect expenses can be eliminated along with Department B, but unless the company can eliminate at least $30,000 of the indirect expenses, Vortex is better off keeping Department B.



PROBLEM SET B Problem 22-1B (60 minutes) Part 1 Average occupancy cost = $465,000 / 20,000 sq. ft. = $23.25 per sq. ft. These costs are assigned to Style's department as follows

Department Square Footage

Rate Total

Style’s Dept. ................. 2,000 $23.25 $46,500

Part 2 Market rates are used to allocate occupancy costs for the building rent. Lighting and cleaning costs are allocated to the departments on all three floors at the average rate per square foot. Costs assigned to each class are:

Occupancy Costs

Total Costs

Value-Based Costs

Usage-Based Costs

Building rent ........................... $400,000 $400,000 Lighting expense ................... 25,000 $25,000 Cleaning expense .................. 40,000 _______ 40,000 Totals ...................................... $465,000 $400,000 $65,000

Value-based costs are allocated in two steps (i) Compute market value of each floor

Floor

Square Footage

Value per Sq. Ft.

Total

First floor ................................ 7,500 $40 $300,000 Second floor ........................... 7,500 20 150,000 Basement floor ....................... 5,000 10 50,000 Total market value ................. $500,000



Problem 22-1B (Continued) (ii) Allocate the $400,000 to each floor based on its percent of market value

Floor

Market Value

% of Total

Allocated Cost

Cost per Sq. Ft.

First floor ................................ $300,000 60% $240,000 $32.00

Second floor ........................... 150,000 30 120,000 16.00

Basement floor ....................... 50,000 10 40,000 8.00

Totals ...................................... $500,000 100% $400,000 Usage-based costs allocation rate = $65,000 / 20,000 sq. ft.

= $3.25 per sq. ft.

Total allocation rates for the departments on all three floors are

Floor Value Usage Total

First floor .............................. $32 $3.25 $35.25

Second floor ......................... 16 3.25 19.25

Basement floor .................... 8 3.25 11.25 These rates are applied to allocate occupancy costs to Style’s department

Department

Square Footage

Rate

Total

Style’s Department .................................... 2,000 $11.25 $22,500

Part 3 A basement manager would prefer the allocation based on market value. This is a reasonable and logical approach to allocation of occupancy costs. With a flat rate method, all square footage has equal value. This is not logical for this type of occupancy. Less cost would be allocated to the basement departments if the market value method were used.



Problem 22-2B (70 minutes)

BONANZA ENTERTAINMENT

Forecasted Departmental Income Statements For Year Ended December 31, 2014

Movies

Video Games

Compact Discs

Combined

Sales ............................................... $648,000 $216,000 $300,000 $1,164,000 (1)

Cost of goods sold ........................ 453,600 166,320 195,000 814,920 (2)

Gross profit .................................... 194,400 49,680 105,000 349,080

Direct expenses

Sales salaries ............................... 37,000 15,000 18,000 70,000

Advertising ................................... 12,500 6,000 10,000 28,500

Store supplies used ..................... 4,320 1,080 2,000 7,400 (3)

Depreciation of equipment ......... 4,500 3,000 1,200 8,700

Total direct expenses .................. 58,320 25,080 31,200 114,600

Allocated expenses

Rent expense ............................... 30,750 6,000 13,250 50,000 (4)

Utilities expense .......................... 5,535 1,080 2,385 9,000 (4)

Share of office dept. expenses ... 47,345 15,725 21,930 85,000 (5)

Total allocated expenses ............ 83,630 22,805 37,565 144,000

Total expenses ............................... 141,950 47,885 68,765 258,600

Net income ..................................... $ 52,450 $ 1,795 $ 36,235 $ 90,480

Supporting Computations—coded (1) through (5) in statement above Note 1 (Sales)

Movies

Video Games

Compact Discs

2013 sales ..................................... $600,000 $200,000 Growth rate (8% increase) .......... x 108% x 108% 2014 sales ..................................... $648,000 $216,000 $300,000

Note 2 (Cost of Goods Sold)

Movies

Video Games

Compact Discs

2013 cost of goods sold .............. $420,000 $154,000 2013 sales ..................................... $600,000 $200,000 2013 cost as % of sales ............... 70% 77%

2014 sales .................................... $648,000 $216,000 $300,000 2014 cost as % of sales .............. x 70% x 77% x 65%* 2014 cost of goods sold .............. $453,600 $166,320 $195,000

* The 65% cost of goods sold percent is computed as 100% minus the predicted 35% gross margin.



Problem 22-2B (Continued)

Note 3 (Store Supplies Used)

Movies

Video Games

Compact Discs

2013 store supplies used ........... $ 4,000 $ 1,000 Growth rate (8% increase) .......... x 108% x 108% 2014 store supplies .................... $ 4,320 $ 1,080 $ 2,000

Note 4 (Rent and Utilities)

Movies

Video Games

Compact Discs

2013 rent ...................................... $41,000 $ 9,000 One-fourth from movies to compact discs ............................

(10,250)

$10,250

One-third from video games to compact discs .......................

_______

(3,000)

3,000

2014 rent ...................................... $30,750 $ 6,000 $13,250 Percent of total ........................... 61.5% 12.0% 26.5%

2014 allocation of $9,000 total utilities ..............................

$ 5,535

$1,080

$ 2,385

Note 5 (Office Department Expenses)

Movies

Video Games

Compact Discs

2014 sales .................................... $648,000 $216,000 $300,000 Percent of total sales* ................ 55.7% 18.5%† 25.8%

2014 allocation of $85,000 total office department expenses($75,000 in 2013 plus $10,000 increase) ...............

$ 47,345

$ 15,725

$ 21,930 * Rounded to the nearest 0.1% * If students round to something other than one-tenth of a percent,

their numbers will slightly vary. † Adjusted to eliminate rounding difference.




Part 1

a.

Responsibility Accounting Performance Report Dept. Manager, Refrigerator Department

For the Month of April


Controllable Costs

Raw materials ................................ $400,000 $385,000 $(15,000)

Employee wages ........................... 170,000 174,700 4,700

Supplies used ................................ 15,000 14,000 (1,000)

Depreciation—Equipment ............ 53,000 53,000 0

Totals ............................................. $638,000 $626,700 $(11,300)

b.

Responsibility Accounting Performance Report Dept. Manager, Dishwasher Department



Controllable Costs

Raw materials ................................... $200,000 $202,000 $ 2,000

Employee wages .............................. 80,000 81,500 1,500

Supplies used ................................... 9,000 9,700 700

Depreciation—Equipment ............... 37,000 37,000 0

Totals ................................................ $326,000 $330,200 $4,200



Problem 22-3B (Continued) c.

Responsibility Accounting Performance Report Plant Manager, Chicago Plant



Controllable Costs

Dept. manager salaries ......... $ 104,000 $ 101,500 $ (2,500)

Utilities .................................... 48,000 55,200 7,200

Building rent ........................... 80,000 82,300 2,300

Other office salaries .............. 40,000 35,200 (4,800)

Other office costs .................. 21,000 29,800 8,800

Refrigerator department ........ 638,000 626,700 (11,300)

Dishwasher department ........ 326,000 330,200 4,200

Totals ...................................... $1,257,000 $1,260,900 $ 3,900

Part 2 The refrigerator department manager did a good job of controlling costs

and meeting the budget, spending $11,300 below budget. However, the

dishwasher department did not do such a good job, spending $4,200 above

the budgeted amount. The plant manager’s controllable costs would have

been under budget by $300 if the Dishwasher department manager’s actual

costs had been equal to budgeted costs.



Problem 22-4BB (60 minutes)

Part 1 Allocations of joint cost on the basis of sales values

Land preparation, seeding, and cultivating: $700,000

Grade

Sales Value

Percent of Total

Allocated Cost

No. 1 ............................... $ 900,000 62.5% $437,500

No. 2 ............................... 500,000 34.7 242,900

No. 3 ............................... 40,000 2.8 19,600

Total ............................... $1,440,000 100.0% $700,000

Harvesting, sorting, and grading: $40,000

Grade

Sales Value

Percent of Total

Allocated Cost

No. 1 ............................... $ 900,000 62.5% $ 25,000

No. 2 ............................... 500,000 34.7 13,880

No. 3 ............................... 40,000 2.8 1,120

Total ............................... $1,440,000 100.0% $ 40,000

Delivery: $17,000 to Grade Nos. 1 & 2

Grade

Sales Value

Percent of Total

AllocatedCost

No. 1 ............................... $ 900,000 64.3% $10,931

No. 2 ............................... 500,000 35.7 6,069

No. 3 [identified] .............. ___ _____ ____ 3,000*

Total ............................... $1,400,000 100.0% $20,000

* No. 3 Grade delivery costs are separately identified by the company.



Problem 22-4B (Continued)

Part 2

RITA AND RICK REDDING Income Statement


No. 1 No. 2 No. 3 Combined

Sales (by grade)

No. 1: 500,000 lbs. @ $1.80 .......... $900,000 No. 2: 400,000 lbs. @ $1.25 .......... $500,000 No. 3: 100,000 lbs. @ $0.40 .......... $40,000 Total sales ..................................... $1,440,000 Costs Land preparation, seeding, and cultivating ............................

437,500

242,900

19,600

700,000

Harvesting, sorting & grading ..... 25,000 13,880 1,120 40,000

Delivery .......................................... 10,931 6,069 3,000 20,000

Total costs ..................................... 473,431 262,849 23,720 760,000

Net income (loss) ............................ $426,569 $237,151 $16,280 $680,000

Part 3 Delivery costs include both crating and hauling costs. The Reddings are able to identify the portion of the cost directly related to the No. 3 tomatoes, presumably because the No. 3s are going to a different destination than the No. 1 and No. 2 tomatoes. If the No. 1s and No. 2s are going to the same place, then the hauling portion of the delivery cost may truly be a joint cost, at least for the No. 1 and No. 2 tomatoes.

However, since the No. 1 and No. 2 tomatoes are different grades and are sold for different prices per pound, it seems safe to assume they are crated separately. If the cost of crating the No. 3 tomatoes can be traced as a direct cost, then it seems the crating costs for the No. 1s and No. 2s should also be identifiable as separate amounts. This means, perhaps, the crating portion of delivery costs is not a true joint cost.




Part 1

Process time .............................................................................. 16.0 hours

Inspection time .......................................................................... 3.5 hours

Move time ................................................................................... 9.0 hours

Wait time .................................................................................... 21.5 hours

Manufacturing cycle time ......................................................... 50.0 hours

Part 2

Manufacturing cycle efficiency (16.0 hours/ 50.0 hours) ...... 0.32

This means that Best Ink is spending 32% of its time in value-added activities, and 68% of its time on non-value-added activities.

Part 3

To increase the manufacturing cycle efficiency to 0.80 Best Ink needs to

reduce the total manufacturing cycle time to 20 hours without changing the

process time (16 hours/ 0.80 = 20 hours). To do this, they must reduce the

34 hours of non-value added time (3.5 + 9.0 + 21.5) down to 4 hours or less.

One way to do this might be to rearrange the manufacturing facility so that

materials and work in process do not have to move as far, reducing the

move time. In addition, better scheduling and planning may help Best Ink

to reduce the wait time.




Part 1

Sadar Company Departmental Income Statements

Department Videos Music

Sales .............................................................................. $370,500 $279,500 Cost of goods sold ....................................................... 320,000 175,000 Gross margin ................................................................ 50,500 104,500 Direct expenses Salaries ..................................................................... 35,000 25,000 Maintenance ............................................................. 12,000 10,000 Utilities ...................................................................... 5,000 4,500 Insurance .................................................................. 4,200 3,700 Total direct expenses .............................................. 56,200 43,200 Departmental contribution to overhead ..................... (5,700) 61,300 Allocated indirect expenses Advertising* ............................................................. 8,550 6,450 Salaries** .................................................................. 16,200 10,800 Office expenses*** ................................................... 2,000 1,200 Total allocated indirect expenses .......................... 26,750 18,450 Departmental net income ............................................ $ (32,450) $ 42,850

* Advertising allocation: Sales % Amount Allocated

Videos $370,500 57% $15,000 $ 8,550

Music 279,500 43% 15,000 6,450

Total $650,000 100% $15,000

** Salaries allocation: Employees % Amount Allocated

Videos 3 60% $27,000 $16,200

Music 2 40% 27,000 10,800

Total 5 100% $27,000

*** Office expenses allocation: Sq. ft. % Amount Allocated

Videos 5,000 62.5% $3,200 $2,000

Music 3,000 37.5% 3,200 1,200

Total 8,000 100.0% $3,200



P

Problem 22-6B (Concluded)

Part 2 The video department has both a negative contribution to overhead and a negative departmental net income. It is not even covering its own direct costs, and is therefore not contributing anything to overhead. Before deciding whether to eliminate the video department, Sadar should consider whether any of the direct expenses can be reduced or if the revenues can be increased. Sadar should also consider whether eliminating videos would affect music sales. If expenses cannot be reduced or video sales cannot be increased, and music sales are not affected, Sadar should consider eliminating the video department.



SERIAL PROBLEM — SP 22 Serial Problem, Success Systems (20 minutes)

1. The balance scorecard is a system of performance measures that

requires managers to think of their company from four perspectives:

Customer, internal process, innovation and learning, and financial.

The customer perspective focuses on measuring what customers

think of their experiences with the company. The internal process

perspective focuses on determining which operations are critical to

meeting customer needs. The innovation and learning perspective

focuses on measures to improve the company. The financial

perspective focuses on measures relevant to owners of the company.

2. Below are some examples of balanced scorecard measures that

Adria could use. Other examples are possible:

Customer: Percentage of computer workstations returned, number of on-time workstation deliveries, number of on-time computer system installations, customer satisfaction survey ratings, number of new customers acquired.

Process: Number of defective workstations produced, materials and labor costs per workstation, number of days of production without an accident or injury, labor hours per computer system installation.

Learning: Number of training workshops attended, number of programming certifications earned by programmers, employee satisfaction survey ratings, employee turnover rate.

Financial: Departmental contribution to overhead, return on investment (assets), residual income, workstation sales revenue growth, and computer services revenue growth.



Reporting in Action — BTN 22-1 1. Polaris revenues by product line

($ thousands)

December 31, 2011

December 31, 2010

December 31, 2009

Total revenues ............................................. $2,656,949 $1,991,139 $1,565,887

Off-Road Vehicles* (69%) ........................... 1,833,296 1,373,886 1,080,462

Snowmobiles (11%) .................................... 292,264 219,025 172,248

On-Road Vehicles (5%) ............................... 132,847 99,557 78,294

Parts, Garments & Accessories (15%) ...... 398,542 298,671 234,883

* Revenue rounded up so product line total revenues sum to total revenues of $2,656,949.

2. Polaris can divide up the operating expenses into product line direct

and indirect expenses. Some of the direct expenses of a particular

product line might be cost of goods sold, the product line manager’s

salary, other product line workers’ salaries, product purchasing

department expense, any direct supplies, and other expenses that can

be directly traced to the particular product line. Indirect expenses that

would have to be allocated (and the basis for allocation) might be rent

or store occupancy expense (allocated based on square feet of space

used by that product line), utilities (also allocated based on square feet

of space), advertising (allocated based on revenues), general

administrative expenses (allocated based on revenues). Note that other

answers are possible.

3. Solution depends on the particular annual report information obtained.



Comparative Analysis — BTN 22-2 ($ in thousands)

1. Profit margin = Net income/Sales

Polaris = $227,575 / $2,656,949 = 8.6%

Arctic Cat = $ 13,007 / $ 464,651 = 2.8%

2. Investment turnover = Investment center sales

Investment center average assets Polaris = $2,656,949 = 2.32 ($1,061,647 + $1,228,024)/2

Arctic Cat = $464,651 = 1.79 ($246,084 + $272,906)/2

3. Polaris’s profit margin (8.6%) is higher than Arctic Cat’s (2.8%).

Therefore, for every dollar of sales, Polaris generates more profit.

Polaris’s investment turnover (2.32 times) is also higher than Arctic

Cat’s investment turnover (1.79 times). Based on investment

turnover, Polaris is more efficient than Arctic Cat in utilizing assets to

generate sales.



Ethics Challenge — BTN 22-3 1. There is an ethical concern in this situation. Pincus is taking actions

she would not otherwise take. She believes that “minor compromises” in her behavior do not significantly affect clients. However, the problem is serious because it can have potential long-term implications for clients. Moreover, a consequence of minor compromises on service quality can potentially lead to lawsuits for services unfulfilled. Pincus could lose her job and the company its reputation. This means the company, its clients, Pincus, and her staff all risk serious consequences with slight compromises in the level and quality of service—due to the behavioral implications of responsibility performance budgets.

2. Given that Pincus is aware of her behavior, its potential consequences,

and the source of what’s behind her behavior (in this case the focus by management on meeting the quarterly responsibility performance budget), she can approach her superiors (at least one or two she trusts) and explain the situation to them. Pincus must clearly point out the potential negative implications of this “induced behavior” in terms of the inadequate service provided to clients. One must remember the potential consequence of this ‘honest’ acceptance of unethical behavior by Pincus. Namely, such disclosure could cost her job.

Alternatively, she could stop her lower level and quality of service and explain to her superiors that it is impossible to both maintain good service and stay within the budget. Her compensation might decline, which could prompt her to seek employment with another company that values integrity and service, and rewards employees for it.

3. Senior Security (the employer) is ultimately responsible for any action

taken by its employees, including Pincus. Management must establish an ethical code of conduct to ensure that department managers do not engage in unethical behaviors that compromise the security of its clients. To facilitate the implementation of such a code of conduct, senior managers must periodically engage in honest dialogs with department managers to understand the pressures faced by these managers and the sources of these pressures. In the case of Senior Security, the responsibility performance system (and its associated reward system) is a primary source of ethical concerns—which may suggest some revision in the system to mitigate this trade-off.



Communicating in Practice — BTN 22-4

Sample solution

MEMORANDUM TO: Name, Store Manager FROM: Your Name, National Office Manager SUBJECT: New Performance Reporting DATE: Current Date All current and future periods’ performance reports for all managers include an allocation of home office expenses. These expenses will be assigned as a percent of store sales. The home office provides several services to all its stores. These include assistance with marketing, product selection, distribution, and volume discounts. These services can help make the local store more profitable than a store would be without these services. There are significant expenses associated with the home office services to its stores. These expenses are not recovered by the home office except through the revenues generated by the stores that it assists. This motivates the inclusion of home office expenses in the performance report of store managers for all current and future periods.

Taking It to the Net — BTN 22-5

Instructor note: The objective of this assignment is for students to be exposed to the different accounting and business applications with spreadsheets.

1. The tutorials identified and read by the students will vary. For example, one tutorial is titled “Return on Investment and Return on Equity Business Model.” A student can download an example of this and many other tutorials such as “Forecasting Techniques” and “Comparative Ratio Analysis.”

2. Student responses regarding the usefulness of spreadsheets will

depend on the tutorials accessed. For example, the tutorial “Return on Investment and Return on Equity Business Model” shows how a spreadsheet can be used to evaluate a company’s ROI and ROE. It points out that two distinct advantages of using a spreadsheet for these measures are the ease it provides in conducting financial analysis and the usefulness of information generated from “what if” financial analysis.



Teamwork in Action — BTN 22-6

Instructor note: Student answers will vary. The key is to look for clear organizational structure and sound thinking in designing performance reports.

1. The student must make decisions about geographic area, type of

business segment, and reporting structure. The objective is to have

them think about the many different ways a business can set up

responsibility centers.

For example, product line managers can report to a central manager for

each area and then product lines can be later combined (at a higher

level). Another example would have each line report to one level of

management by region, and the region report to top management.

Many other organizational designs are possible.

2. Having comparable responsibility accounting reports is necessary to

reliably compare performance within a company (and across different

companies). Differences in performance reports can substantially

reduce the ability of management to draw meaningful comparisons and

inferences.

For example, if one department’s report separates costs in terms of

variable and fixed categories instead of direct and indirect, comparing

this department’s report with that of another can be misleading and

confusing—which can yield inappropriate inferences.



Entrepreneurial Decision — BTN 22-7 1. Departmental income statements can be prepared for each department

once expenses have been allocated to it. The expenses will include both direct expenses of the department and that department’s share of the indirect costs. Each department of the company will also have revenues that can be traced to it. Management can then determine each department’s net income or loss.

2. If the indirect expenses are a large portion of total expenses, a

departmental income statement might not be the best measure of each department’s performance. While the department’s income or loss is useful, probably another approach will tell the managers more about each department’s individual performance. Each department’s contribution to overhead can be computed by deducting the department’s direct expenses (including cost of goods sold) from the department’s revenues. This provides a measure of how much each department is helping to cover the indirect expenses.

3. United By Blue could use ratings from customer satisfaction surveys,

the number of repeat customers, the percentage of orders returned, and the percentage of on-line customers successfully completing the checkout process as nonfinancial measures within a balanced scorecard. Other answers are possible (refer to Exhibit 22.21).

Hitting the Road — BTN 22-8 1. [Student answers will vary for part (1).] One suggested responsibility

accounting reporting framework is to have (1) concessions and (2) categories of movies such as comedies, dramas, and so forth. The movie departments would report to one manager in charge of all movies. This “movies” manager along with the concessions manager would report to top management.

2. One suggested proposal is

Expense Allocation Basis

Heat ............................... Square footage occupied

Rent ............................... Sales dollars Insurance ...................... Square footage occupied Maintenance ................. Time in process—with a standard time to clean a

theater after a show



Global Decision — BTN 22-9 1. Net sales percentage growth [non-percents in € thousands]

Segment Net sales % change from 2010 to 2011

Two-wheeler ..................................... (€1,025.3 - €988.1) / €988.1 = 3.8%

Commercial Vehicles ...................... (€491.1 - €497.3) / €497.3 = -1.2%

2. Percentage growth in net sales is higher in the Two-wheeler segment

(3.8% increase) than in the Commercial Vehicles segment (-1.2% decrease).

3. The Two-wheeler segment earned more gross margin (profit) in both

years (€454.6 million and €462.3 million) versus a lower amounts for the Commercial vehicles segment (€117.5 million and €131.6 million) in both years.

4. Piaggio’s management can use this information to help establish long-

term goals and strategies and for resource allocation decisions. An important factor in the valuation of any company is its ability to grow and expand its operations into new product lines profitably. The analysis here suggests that the company should continue to grow Two-wheeler product sales. This is because this segment is more profitable and its sales are growing at a faster rate. Note that variability (or risk) can discourage additional investment to grow this segment. One must also factor in economic and other risks in these types of product line expansions and cost allocation decisions.

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