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le*rni*gi Example
Ohjeefives Exercises
&8.,,3 EE24-1 r; ii0
&8J.3 EE24-1 r, iir)’
08J.3 EE24-2 t; ir(
Chapter 24 Performance Evaluation for Decentralized Operations 1125
PE 24-1A Budgetary performance for cost center
Bahrke Company’s costs were over budget by $300,000. The company is divided into
West and East regions. The East Region’s costs were under budget by $60,000. Determine
the amount that the ‘Sfest Region’s costs were over or under budget.
PE 24-1B Budgetary performance for cost center
Vonn Motion Company’s costs were under budget by $175,000. The company is divided
into North and South regions. The North Region’s costs were over budget by $60,000.
Determine the amount that the South Region’s costs were over or under budget.
The centralized employee travel department of Ohno Company has expenses of $210,000.
The department has serviced a total of 3,000 travel reservations for the period. The North-
east Division has made 1,250 reservations during the period, and the Pacific Division has
made L,75O reselvations. How much should each division be charged for travel services?
SB”r.3 EE24-2 u litt PE 24-28 Service department charges
The centralized computer technology department of Kearney Company has expenses of
$170,000. The department has provided a total of 4,250 hours of service for the period.
The Retail Division has used 2,250 hours of computer technology service during the pe-
riod, and the Commercial Division has used 2,000 hours of computer technology service.
How much should each division be charged for computer technology department services?
s3.’.3 EE24-3 1t ii i, PE 24-3A lncome from operations for profit center
Using the data for Ohno Company from Practice Exercise 24-2A along with the data
provided below, determine the divisional income from operations for the Northeast and
Pacific divisions.
NortheastDivision Pacifi Cost of goods sold
Selling expenses
s82s,000 16s,000
s860,000 180,000
66″,.3 EE24-3 , it) t PE 24-38 lncome from operations for profit center RetailDivision CommercialDivision Cost of goods sold 51 ,3s0,000 224,000
s 1 ,380,000 250,000 1126 Chapter24
Learning ExamPle oBJ’ 4 EE24-4 rt i i] t
OBJ. ?
r’ a. k) 53,960
oBJ. 4 EE24-4 t) i i i ) PE 24-478 Profit margin, investment turnover, and Rol anc
sales of $3iO,OOO. Use the DuPont formula to compute the rate of return on investmer ::
and show (a) the profit margin, (b) the investment turnover, and (c) the rate of retur-
on investment. OBJ.4 EE24-5 l.titil Residual income assets of $500,000. The minimum accepiable rate of return on assets is !1o/o’ V/hat residual income for the division?
OEJ.4 EE24-5 r’iii] PE 24-58 Residual income :: the residual income for the division?
OB”!.5 EE24-6 tt iit’:l
oBJ.5 EE24-6 t) i | | PE 24-6A Transfer pricing chased from outside suppliers at #45 per unit’ These same materials are produced Roberts, Tucson oivlslon. the Tucson Division can produce the materials needed b1 –
the
Vancouver Division at avariable cost of $30 per unii. The division is currently producins
1.00,000 units and has capacity of 130,000 .r.titt. Th” two divisions have recently negoi:-
ated a transf’er price of 6,aA pL. unit for 25,OOO units. By how much will each division.:
income increase as a result of this transfer?
PE24-68 TransferPricing purchasec
from outside supplieis at $100 p”er unit’ These same materials are produced by the Division. The Racine Division ian produc. the materials needed by the Burlington sion at avariable cost of $70 per unit. The division is currently producing 169,000 urYL:
and has capacity of 200,000 .r.ritr. Th” tlvo divisions have recently negotiated a transte:
pd.” “f $Si as a result of this transfer? Performance Evaluation for Decentralized Operations
EX24-1 Budget Performance reports for cost centers air conditioners, are provided on the following page’
PE24-4A Profit margin, investment turnover, and RO I Celski Company has income from operations of $60,000, invested assets of $250,000, salesof$s00,000.UsetheDuPontformulatocomputetherateofreturnoninvestmen: (c) the rate of return
on investment. 1134 Chapter 24 Performance Evaluation for Decentralized Operations
GSJ.5
/ b. ss00,000 in the Components Division’s current sales’
a. How much would Goldmon Motors’ total income from operations increase?
tr. How much would the Truck Division’s income from operations increase?
c. How much would the Components Division’s income from operations increase? able transfer prices and whY?
*8J.2
w Budget performance report for a cost center
March 31,, 20’1.2, is as follows (in thousands):
Customer service salaries
lnsurance and ProPertY taxes
Distribution salaries
Marketing salaries
Engineer salaries
Warehouse wages
EquiPment dePreciation
Total
During March, the costs incurred in the International
08.!.3 Customer service salaries lnsurance and property taxes
Distribution salaries Equipment dePreciation
Total s 32s, 500
68,250
519,250
612,125
498,12s
348,800 400
?49t89 S 416,700 514,000
685,500
488,1 00
334,900
109,375
52,614,77s
5 720,000 1,560,000
4s6,150 943,s50
1 1 2,000
38s,000
152,000
240,000
Revenues- East
Revenues-West Operating Expenses-East
Operati ng Expenses-West
Operating Expenses-Central
Corporate Expenses-shareholder Relations
Corporate Expenses-Customer Support
Corporate ExPenses-Legal
General Corporate Offi cers’ Salaries
*VDN\T fi) e..p”.” a budget performance report for the director of the International Division ::r 2. For which costs might the director be expected to request supplemental reports?
Profit center responsibility reporting
ioa-rrso-r, p.oducts Inc. has three regional divisions organized as profit centers’ executiveofficer(CEO)evaluatesdivisionalperformance,usingincomefromoperatic’= Chapter 24 Performance Evaluation for Decentralized Operations I 135
The company operates three service departments: Shareholder Relations, Customer q?
og”l.4 -L,h ‘oatk’ Number of customer contacts
Number of hours billed East 4,375
950
1.. Prepare quafierly income statements showing income from operations for the three 4+’// hraentify the most successful division according to the profit rnargin. – Provide a recommendation to the CEO for a better method for evaluating the PR 24-3A Divisional income statements and rate of return on investment analysis Mutual Fund Electronic lnvestment 53,4s0,000 5,750,000
The management of Edward Baird Company lnstructions there were no service department charges. investment turnover, and rate of return on investment for each division. – If available funds permit the expansion of operations of only one division, PR 24-4A Effect of proposals on divisional performance Fee revenue
Operating expenses s2,800,000 s3,800,000 is evaluating each division as a basis for
OBJ.4
y’ 1.ROt,’t5.60/o
ts Sales Gross profit 52,400,000 5 737,000 t 1?{99 Assume that the Golf Division received no charges from service departments. The Chapter 25 Differential Analysis, Product Pricing, and Activity-Based Costing 1177
learning Example *s.t” r EE 2s-4 , PE 25-4A Replace equipment *E-1. 1 EE 2s-4 PE 25-4B Replace equipment csJ” t E= 2s-s PE 25-5A Process or sell oBi. 1 EE?s-s ,. I PE 25-58 Process or sell ^fi Product E can be sold for $102 per gallon. Prepare a differential analysis datedJune 9,2072, 6SJ,t EE25-6, ii PE 25-6A Accept business at special price *Bi, X EE 25-6 r, I r PE 25-68 Accept business at special price OBJ.2 EE25-f 1: itf i Product cost markup percentage of $60 per unit, of which $32 is product cost and $28 is selling and administrative ex- CBJ.2 ZE25-7 ; ji, :t PE25-78 Product Cost markup percentage TI
I 1178 Chapter 25
Learning Example OBJ,3 EE25-8 l ti,,;
Differential Analysis, Product Pricing, and Activity-Based Costing
Bottleneck profit of $55. Product A requires three testing hours, while Product B requires five testing hours- OBJ.3 EE25-8 tt it PE 25-88 Bottleneck profit oBJ.4 EE2s-9 it ii,ti PE 25-9A Activity-based costing Fabrication Assembly Setup lnspection 1,000 dlh
Bass boat 1,500
2,s00 dlh
1,500 dlh 50 setups 100 inspections Each product is budgeted for 25O units of production for the year. Determine (a) the oBJ.4 EE25-e 1t i ii i PE 25-98 Activity-based costing Cutting Sewing Setup lnspection
Jeans
Khakis
1,000 dlh 3,000 dlh
2,000 dlh
1,000
lpgg dlh
1,600 setups
400 2,000 setups
3,500 inspections
500 4,999 inspections
Each product is budgeted for 20,000 units of production for the year. Determine (a) the OBJ. 1
y’ a. Differential EX 25-1 Differential analysis for a lease or sell decision should lease (Alternative 1) or sell (Alternative 2) the machinery.
1: For problem PE 23-1A, what is the amount of (a) price variance?
a. $-8,950 (unfavorable)
2: For problem PE 23-1A, what is the amount of (b) quantity variance?
a. $14,700 (unfavorable)
3: For problem PE 23-1A, what is the amount of (c) Cost variances?
a. $6,750 (favorable)
4: For problem PE 23-2A, what is the amount of (a) rate variance?
a. $12,850 (unfavorable)
5: For problem PE 23-2A, what is the amount of (b) time variance?
a. $8,000 (unfavorable)
6: For problem PE 23-2A, what is the amount of (c) cost variance?
a. $-8,000 (unfavorable)
7: For problem PE 23-3A, what is the amount of the Variable Factory Overhead Controllable Variable?
a. $400 (favorable)
8: For problem PE 23-4A, what is the amount of the fixed factory overhead volume variance?
a. $-650 (favorable)
9: For problem PE 23-5A, the correct journal entry to record the standard direct materials used in production is:
a. (Debit) Work in Process $245,000; (Debit) Direct Materials Quantity Variance $125; (Credit) Materials 259,700
10: For problem PE 24-4A, what is the amount of (a) profit margin?
a. 7.5%
11: For problem PE 24-4A, what is the (b) the investment turnover?
a. 2.7
12: For problem PE 24-4A, what is the amount of (c) the rate of return on investment?
a. 22%
13: For problem PE 24-5A, what is the amount of residual income?
a. $20,000
14: For problem PR24-1A, what is the total amount over budget?
a. $160,575
15: For problem PR24-1A, what is the total amount under budget?
a. $30,250
16: For problem PR24-2A, what is the total income from operations for the East division?
a. $130,000
17: For problem PR24-2A, what is the total income from operations for the West division?
a. $172,000
18: For problem PR24-2A, what is the total income from operations for the Central division?
a. $394,000
19: For problem PE 25-7A, what is the amount of the markup percentage on product cost?
a. 150%
20: For problem PE25-8A, product A is most profitable.
a. True
21: For problem PE25-8A, the unit contribution margin per production bottleneck hour for product A is:
a. $10
22: For problem PE25-8A, the unit contribution margin per production bottleneck hour for product B is:
a. $10
23: The process of measuring and reporting operating data by areas of responsibility is termed responsibility accounting.
a. True
24: A decentralized business organization is one in which all major planning and operating decisions are made by top management.
a. True
25: A centralized business organization is one in which all major planning and operating decisions are made by top management.
a. True
422,O00
470,000
Using the data for Kearney Company from Practice Exercise 24-28 along with the data
provided below, determine the divisional income from operations for the Retail Division
and the Commercial Division.
Sales
Selling expenses
720,000
799,000
O&jerrives Exercises
Roark company has income from operations of $40,000, invested assets of $160,000′
fn–#orrtr-er Division of McPhie Company has income from operations of $75,000 an:
is thc
The Commercial Division of Morse Company has income from operations of $160’U’:
and assets of $700,000. The minimum acceptable rate of return on assets is 9%’ what
The materials used by the vancouver Division of Roberts company are currently Pu:-
t’1
The materials used by the Burlington Division of Wilson Company are currently
Racine
Divt-
p.. unit for 40,000 units. By how much will each division’s income increa-
partially completed budget performance repofis for Gehring company, a manufacturer o:
and
and show (a) the profit margin, (b) the investment turnover, and
EX24-21 Decision on transfer pricing
Based on Goldman Motors’ datain Exercise 24-20, assume that a transfer price o;5r-rl
has been established and that 25,OOO units of materials are transferred, with no reducr.n
j. * If the negotiated price approach is used, what would be the range of acc
M?Iilf,ec Company sells electronics over the Internet. The International Divisior- :’
organizedas a cost center. The budget for the International Division for the month en’!:
/ 1. lncome from
operations, central
Division, S390,000
Marketing salaries
Engineer salaries
Warehouse wages
‘109,
Division were as follows:
66,200
860,000
s11,700
Revenues-Centra I
-hstructions
\-/ the month of March.
The ci-:e
as a percent of revenues. The following quarterly income and expense accounts \r<":
provided from the trialbalance as of December 31,2O\2:
Support, and Legal. The Shareholder Relations Department conducts a variety of services
for shareholders of the company. The Customer Support Department is the company’s
point of contact for new service, complaints, and requests for repair. The department
believes that the number of customer contacts is an activity base for this work. The Legal
Department provides legal services for division management. The department believes
that the number of hours billed is an activity base for this work. The following additional
information has been gathered:
y’ 2. Mutual Fund
Division, ROl, 18o/o
i
\/ lnstructions
5,250 7,875
1,520 1,330
r 6 divisions. Use three column headings: East, ‘W’est, and Central.
\ r J.
O$\Y performance of the divisions. In your recommendation, identify the ma;’or weaknessI of the present method.
Edward Baird Company is a diversified investment company with three operating divi-
sions organized as investment centers. Condensed data taken frorn the records of the
three divisions for the year ended June 30, 2072, are as follows:
Division
Brokerage Banking
Division Division
2,415,OOO
planning a future expansion of operations.
1. Prepare condensed divisional income statements for tiie three divisions, assuming that
2. Using the DuPont formula for rate of return on investment, compute the profit margin,
j.
which of the divisions would you recommend for expansion, based on parts (1) and
(2)? Explain.
A condensed income statement for the Golf Division of Rewind Sports Inc. for the year
ended December 37, 2072, is as follows:
Invested assets
2,632,000 2,8s0,000
800,000 4,750,000
Cost of goods sold
Operating expenses
lncome from operations
I nvested assets
1,663,000
42s,000
52,000,000
president of Rewind Sports has indicated that the division’s rate of (eturn on a $2,000,000
O*j*cfives Exercises
A machine with a book value of $250,000 has an estimated six-year life. A proposal is
offered to sell the old machine for $216,000 and replace it with a new machine at a
cost of fi282,O00. The new machine has a six-year life with no residual value. The new
machine would reduce annual direct labor costs from $50,000 to $40,000. Prepare a dif-
ferential analysis dated February 18,2012, on whether to continue with the old machine
(Alternative 1) or replace the old machine (Alternative 2).
A machine with a book value of $75,000 has an estimated five-year life. A proposal is
offered to sell the old machine for $64,000 and replace it with a new machine at a cost
of $80,000. The new machine has a five-year life with no residual value. The new ma-
chine would reduce annual direct labor costs from $9,500 to $5,500. Prepare a differential
analysis dated April “J.1, 2072, on whether to continue with the old machine (Alternative L)
or replace the old machine (Alternative 2).
Product T is produced for $3.50 per pound. Product T can be sold without additional
processing for $4.15 per pound, or processed further into Product U at an additional cost
of $O.44 per pound. Product U can be sold for #4.50 per pound. Prepare a differential
analysis dated September 77,2012, on whether to seIl Product T (Alternative 1) or process
further into Product U (Alternative 2).
Product D is producedfor $52 per gallon. Product D can be sold without additional processing
for $80 per gallon, or processed further into Product E at
additional cost of $19 per gallon.
on whether to sell Product D (Altemative l.) or process further into Product E (Altemative 2).
Product R is normally sold for $45 per unit. A special price of $32 is offered for the export
market. The variable production cost is $25 per unit. An additional export tariff of 1,5%
of revenue must be paid for all export products. Assume there is sufficient capacity for
the special order. Prepare a differential analysis dated July 7, 20L2, on whether to reject
(Alternative 1) or accept (Alternative 2) the special order.
Product A is normally sold for $8.90 per unit. A special price of $6.60 is offered for the
export market. The variable production cost is $5.10 per unit. An additional export tariff
of 25o/o of revenue must be paid for all export products. Assume there is sufficient capacity
for the special order. Prepare a differential analysis dated January 22, 2012, on whether
to reject (Alternative 1) or accept (Alternative 2) the special order.
nt tighting Inc. produces and sells lighting fixtures. An entry light has a total cost
penses. In addition, the total cost of $60 is made up of $40 variable cost and $20 fixed
cost. The desired profit is $12 per unit. Determine the markup percentage on product cost.
Eden Garden Tools Inc. produces and sells home and garden tools and equipment. A
lawnmower has a total cost of $200 per unit, of which $140 is product cost and $60 is
selling and administrative expenses. In addition, the total cost of $200 is made up of
$150 variable cost and $50 fixed cost. The desired profit is $38 per unit. Determine the
markup percentage on product cost.
Abjectives Exercises
A has a unit contribution margin of $27. Product B has a unit contribution margin
Determine the most profitable product, assuming the testing is a constraint.
Product K has a unit contribution margin of $160. Product L has a unit contribution mar-
gin of $80. Product K requires eight furnace hours, while Product L requires five furnace
hours. Determine the most profitable product, assuming the furnace is a constraint.
Maritime Marine Company has total estimated factory overhead for the year of $900,000.
divided into four activities: fabrication, $33O,OOO; assembly, $180,000; setup, $140,000:
and inspection, $250,000. Maritime manufactures two types of boats: a speedboat and
a bass boat. The activity-base usage quantities for each product by each activity are as
follows:
Speedboat
1,000 90 400
?,59q dlh !19 setups I99 inspections
activity rates for each activity and (b) the factory overhead cost per unit for each producr
using activity-based costing.
Urban Styles Inc. has total estimated factory overhead for the year of $360,000, divided
into four activities: cutting, $120,000; sewing, $60,000; setup, $100,000; and inspection.
$80,000. Urban Styles manufactures two types of men’s pants: jeans and khakis. The
activity-based usage quantities for each product by each activity are as follows:
2,000
activity rates for each activity and (b) the factory overhead cost per unit for each product
using activity based costing.
revenue from selling,
-s9,000
Sure-Bilt Construction Company is considering selling excess machinery with a book
value of $280,000 (original cost of $400,000 less accumulated depreciation of $120,000)
for $276,000, less a 5o/obrokerage commission. Alternatively, the machinery can be leased
for a total of $285,000 for five years, after which it is expected to have no residual value.
During the period of the lease, Sure-Bilt Construction Company’s costs of repairs, insur-
ance, and properry tax expenses are expected to be #25,5OO.
a. Prepare a differential analysis, dated January 3, 2012, to determine whether Sure-Bilt
b. $7,950 (unfavorable)
c. $-7,950 (favorable)
d. $8,950 (favorable)
b. $15,700 (unfavorable)
c. $-14,700 (unfavorable)
d. $-15,700(unfavorable)
b. $7,500 (unfavorable)
c. $-6,750 (favorable)
d. $6,750 (unfavorable)
b. $11,850 (unfavorable)
c. $10,850 (favorable)
d. $-11,850 (favorable)
b. $10,800 (unfavorable)
c. $-8,000 (favorable)
d. $-10,000 (favorable)
b. $8,000 (unfavorable)
c. $19,850 (unfavorable)
d. $-19,850 (favorable)
b. $-300 (favorable)
c. $300 (unfavorable)
d. $-400 (favorable)
b. $650 (unfavorable)
c. $550 (unfavorable)
d. $-550 (favorable)
b. (Debit) Work in Process $245,000; (Debit) Direct Materials Quantity Variance $14,700; (Credit) Materials $259,700
c. (Debit) Work in Process $245,000; (Credit) Direct Materials Quantity Variance $14,700; (Credit) Materials $259,700
d. (Debit) Work in Process $3,750; (Credit) Materials $125; (Credit) Direct Materials Quantity Variance $3,625
b. 20%
c. 9.5%
d. 22%
b. 2.9
c. 3.2
d. 6.3
b. 20%
c. 10%
d. 24%
b. $22,000
c. $24,000
d. $26,000
b. $163,575
c. $164,575
d. $166,575
b. $31,250
c. $33,250
d. $37,250
b. $129,600
c. $133,000
d. $133,600
b. $177,300
c. $175,000
d. $177,200
b. $285,000
c. $390,000
d. $274,000
b. 100%
c. 85%
d. 125%
b. False
b. $9
c. $8
d. $7
b. $9
c. $11
d. $5
b. False
b. False
b. False
