Budgetary Planning and Responsibility Accounting
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Solution 196 (Cont.)
Ex. 197
The Real Estate Products Division of McKenzie Co. is operated as a profit center. Sales for the
division were budgeted for 2013 at $1,250,000. The only variable costs budgeted for the division
were cost of goods sold ($610,000) and selling and administrative ($80,000). Fixed costs were
budgeted at $130,000 for cost of goods sold, $120,000 for selling and administrative and $95,000
for noncontrollable fixed costs. Actual results for these items were:
Sales $1,175,000
Cost of goods sold
Variable 545,000
Fixed 140,000
Selling and administrative
Variable 82,000
Fixed 100,000
Noncontrollable fixed 105,000
Instructions
(a) Prepare a responsibility report for the Real Estate Products Division for 2013.
(b) Assume the division is an investment center, and average operating assets were
$1,200,000. Compute ROI.
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Solution 197 (Cont.)
Ex. 198
The Pacific Division of Henson Industries reported the following data for the current year.
Sales $4,000,000
Variable costs 2,600,000
Controllable fixed costs 800,000
Average operating assets 5,000,000
Top management is unhappy with the investment center’s return on investment (ROI). It asks the
manager of the Pacific Division to submit plans to improve ROI in the next year. The manager
believes it is feasible to consider the following independent courses of action.
1. Increase sales by $400,000 with no change in the contribution margin percentage.
2. Reduce variable costs by $120,000.
3. Reduce average operating assets by 4%
Instructions
(a) Compute the return on investment (ROI) for the current year.
(b) Using the ROI formula, compute the ROI under each of the proposed courses of action.
(Round to one decimal.)
Budgetary Planning and Responsibility Accounting
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Ex. 199
The Medford Burkett Company uses a responsibility reporting system to measure the
performance of its three investment centers: Planes, Taxis, and Limos. Segment performance is
measured using a system of responsibility reports and return on investment calculations. The
allocation of resources within the company and the segment managers’ bonuses are based in
part on the results shown in these reports.
Recently, the company was the victim of a computer virus that deleted portions of the company’s
accounting records. This was discovered when the current period’s responsibility reports were
being prepared. The printout of the actual operating results appeared as follows.
Planes Taxis Limos
Service revenue $ ? $450,000 $ ?
Variable costs 5,000,000 ? 320,000
Contribution margin ? 180,000 380,000
Controllable fixed costs 1,500,000 ? ?
Controllable margin ? 70,000 176,000
Average operating assets 25,000,000 ? 1,600,000
Return on investment 12% 10% ?
Instructions
Determine the missing pieces of information above.
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Solution 199 (Cont.)
Ex. 200
Perez Corp. reported the following:
Beginning of year operating assets $3,200,000
End of year operating assets 3,000,000
Contribution margin 1,000,000
Sales 5,000,000
Controllable fixed costs 643,000
Its required return is 10%.
Instructions
Compute the company’s ROI.
Budgetary Planning and Responsibility Accounting
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Solution 200 (3 min.)
Ex. 201
Lombard, Inc. has two investment centers and has developed the following information:
Department A Department B
Departmental controllable margin $120,000 ?
Average operating assets ? $400,000
Sales 800,000 250,000
ROI 10% 12%
Instructions
Answer the following questions about Department A and Department B.
1. What was the amount of Department A’s average operating assets? $____________.
2. What was the amount of Department B’s controllable margin? $____________.
3. If Department B is able to reduce its operating assets by $100,000, Department B’s new
ROI would be ____________.
4. If Department A is able to increase its controllable margin by $60,000 as a result of reducing
variable costs, Department A’s new ROI would be _________________.
Ex. 202
The Atlantic Division of Stark Productions Company reported the following results for 2013:
Sales $4,000,000
Variable costs 3,200,000
Controllable fixed costs 300,000
Average operating assets 2,500,000
Management is considering the following independent alternative courses of action in 2014 in
order to maximize the return on investment for the division.
1. Reduce controllable fixed costs by 10% with no change in sales or variable costs.
2. Reduce average operating assets by 10% with no change in controllable margin.
3. Increase sales $500,000 with no change in the contribution margin percentage.
Instructions
(a) Compute the return on investment for 2013.
(b) Compute the expected return on investment for each of the alternative courses of action.
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Solution 202 (15–20 min.)
Ex. 203
Data for the following subsidiaries of Olive Manufacturing, which are operated as investment
centers, are as follows:
Fleming Company Oak Company
Sales $3,000,000 $2,000,000
Controllable margin (1) (3)
Average operating assets (2) 4,000,000
Contribution margin 1,200,000 800,000
Controllable fixed costs 500,000 200,000
Return on Investment 10% (4)
Instructions
Compute the missing amounts using the ROI formula.
Budgetary Planning and Responsibility Accounting
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Ex. 204
The data for an investment center is given below.
1/1/12 12/31/12
Current assets $ 300,000 $ 700,000
Plant assets 3,000,000 4,000,000
Idle plant assets 250,000 330,000
Land held for future use 1,200,000 1,200,000
The controllable margin is $760,000.
Instructions
What is the return on investment for the center for 2013?
COMPLETION STATEMENTS
205. The use of budgets in controlling operations is known as ________________.
206. A major aspect of budgetary control is the use of budget reports that compare
_____________________ with _______________________.
207. In analyzing differences from planned objectives, management may take
___________________, or it could decide to modify ___________________.
208. The master budget is a __________________ budget which is based on operating at one
budgeted activity level.
209. A __________________ budget projects budget data for various levels of activity.
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210. Total ________________ costs will be the same on the master budget and on a flexible
budget which reflects the actual level of activity.
211. Under ___________________ accounting, the evaluation of a manager’s performance is
based on the costs and revenues directly under that manager’s control.
212. A cost is __________________ at a given level of managerial responsibility if a manager
has the authority to incur the cost in a given time period.
213. In general, costs ____________________ directly by the level of responsibility are
_______________, whereas costs that are ____________________ to the responsibility
level are __________________.
214. Responsibility centers may be classified into three types: (1)____________________,
(2)___________________ and, (3)____________________.
215. The primary basis for evaluating the performance of a manager of an investment center is
_________________.
216. Return on investment is calculated by dividing _________________________ by
________________________.
Answers to Completion Statements
Budgetary Planning and Responsibility Accounting
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MATCHING
217. Match the items below by entering the appropriate code letter in the space provided.
A. Budgetary control G. Responsibility reporting system
B. Static budget H. Return on Investment
C. Flexible budget I. Profit center
D. Responsibility accounting J. Investment center
E. Controllable costs K. Indirect fixed costs
F. Management by exception L. Direct fixed costs
____ 1. The review of budget reports by top management directed entirely or primarily to
differences between actual results and planned objectives.
____ 2. A part of management accounting that involves accumulating and reporting revenues
and costs on the basis of the individual manager who has the authority to make the
day–to-day decisions about the items.
____ 3. The preparation of reports for each level of responsibility shown in the company’s
organization chart.
____ 4. A projection of budget data at one level of activity.
____ 5. Costs that a manager has the authority to incur within a given period of time.
____ 6. The use of budgets to control operations.
____ 7. A projection of budget data for various levels of activity.
____ 8. A responsibility center that incurs costs, generates revenues, and has control over the
investment funds available for use.
____ 9. Costs that relate specifically to a responsibility center and are incurred for the sole
benefit of the center.
____ 10. A responsibility center that incurs costs and also generates revenues.
____ 11. Costs which are incurred for the benefit of more than one profit center.
____ 12. A measure of the profitability of an investment center computed by dividing
controllable margin (in dollars) by average operating assets.
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SHORT-ANSWER ESSAY QUESTIONS
S-A E 218
The master budget and flexible budgets are important aids to management in performing the
management functions of planning and control. Briefly describe how planning and control are
facilitated by preparing a master budget and flexible budgets. How are these two types of budgets
interrelated with planning and control?
S-A E 219
Brad Ventura is confused about how a flexible budget is prepared. Identify the steps for Brad.
S-A E 220
Managers are motivated to accomplish objectives if they feel that their efforts will be fairly
evaluated. Explain why an organization may use different bases for evaluating the performance of
managers of different types of responsibility centers.
Budgetary Planning and Responsibility Accounting
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Solution 220
S-A E 221
What is responsibility accounting? Explain the purpose of responsibility accounting.
S-A E 222 (Ethics)
Dixon Corporation evaluates its managers based on return on investment (ROI). Kathryn Bricker
and Lindsey Allan, managers of the electronics and housewares departments respectively, have
recently suffered from declining profits in their departments. Over lunch, they discuss the
problem, and how they could improve performance. Most of the discussion centers around ways
to increase sales. Near the end of the lunch period, however, Lindsey remarks that there are two
components to consider, and that they have considered only one. She wonders whether there is
some way to reduce investment, and by decreasing the denominator of the ROI fraction, to
improve the final result.
Back at work, Kathryn continues to mull over Lindsey‘s remarks. She decides to pursue the
matter further, and before the end of the quarter she has sold quite a bit of older equipment and
replaced it with equipment obtained with a short-term lease. Her performance, measured by ROI,
is markedly improved, although sales continue to be disappointing.
Required:
1. Who are the stakeholders in this situation?
2. Is Kathryn’s action ethical? Briefly explain.
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S-A E 222 (Cont.)
2. Kathryn’s action is probably not ethical. It appears that she has replaced equipment that had
been purchased only because such a move would improve her ROI. Of course, it is possible
that the leased equipment will allow her department to function better, resulting in a benefit for
the company. Any action to promote one’s own benefit at the expense of the company’s
welfare is unethical.
S-A E 223 (Communication)
Eiger Manufacturing manufactures circuit boards for computer-controlled appliances for the
home. The sales have been very volatile, sometimes stressing the plant’s capacity, and
sometimes depressingly slow. During a recent slow period, Nathan Jones, a production
supervisor, complained to Janet Smith, accounting manager, about the flexible budget.
“I try as hard as I can to meet the budget,” he says, “and then I find out that just meeting the
budget’s not good enough. Last month, when we sold 8,000 units, I was $10,000 under my
budget, and then you all blow me out of the water with your report that I actually was $5,000 over,
because sales were slow. I thought this responsibility accounting business was supposed to
mean we are held accountable just for things we can control. How do we control sales? At the
beginning of the year, you gave us all targets. Mine says that for an average month of 10,000 unit
sales, I should spend about $82,000. I spend less, and get an unfavorable budget report. What
gives?”
Required:
Write a short memo to respond to Mr. Jones.