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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
2. Operating departments are directly involved in manufacturing or selling the
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
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)
7. Not usually; a cost center cannot usually be evaluated in terms of its profitability
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
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.
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
12A. A transfer price is an amount used to record transactions made between divisions
13B. A joint cost is incurred to produce or purchase two or more different products at the
14B. Two examples of products with joint costs are: (1) Steel – used for home appliances,
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
16. Controllable cost examples — labor of department, packaging supplies, office
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
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
20. Yes. Arctic Cat can use cycle time and cycle efficiency to measure operating
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.
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
Departmental contribution to overhead (as a percent of sales)*
Dept. A: $15,155 / $ 53,000 = 28.6%
Quick Study 22-5 (10 minutes)
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%
Quick Study 22-6 (10 minutes)
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)
Quick Study 22-7 (10 minutes)
Profit margin = $ 516,000 / $2,420,000 = 21.3%
Quick Study 22-8 (15 minutes)
Investment center A:
Return on investment = Net income / Average invested assets
= $352,000 / $1,400,000 = 25%
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%
Thus,
Quick Study 22-9 (5 minutes)
Financial & Managerial Accounting, 5th Edition
1250
Quick Study 22-10 (10 minutes)
Process Perspective Actual Occupancy Goal
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
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
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
Quick Study 22-15 (5 minutes)
Return on investment (assets) = €3,385 / €13,044
= 25.95% (rounded)
Quick Study 22-16 (10 minutes)
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
Quick Study 22-19 (15 minutes)
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
Financial & Managerial Accounting, 5th Edition
1254
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:
(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:
(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
should be treated as a controllable expense.
• Utilities Whether this expense is controllable depends on
Financial & Managerial Accounting, 5th Edition
1256
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
Exercise 22-4 (20 minutes)
MARATHON RUNNING SHOP
Departmental Expense Allocation Spreadsheet
For Year Ended December 31, 2013
Allocation of Expenses to Departments .
Alloca-
tion
Base
Expense
Account
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
