(15-20 min.) P10-49B
Req. 1
Precious Bubbles, Inc.
Income Statement Performance Report
Year Ended March 31
Actual results at
actual prices
Flexible
budget
variance
Flexible budget
for actual
number of
output units
Volume
variance
Master
budget
Output units
70,000
0
70,000
5,000
65,000
Sales revenue
$ 221,600
8,100
F
$213,500
15,250
$198,250
Variable expenses:
Cost of goods sold
88,250
750
U
87,500
6,250
81,250
Sales commissions
13,250
2750
U
10,500
750
9,750
Utility expense
14,000
0
14,000
1,000
13,000
Fixed expenses:
Salary expense
32,300
2,300
U
30,000
0
30,000
Depreciation expense
20,000
0
20,000
0
20,000
Rent expense
9,650
350
F
10,000
0
10,000
Utility expense
5,000
0
5,000
0
5,000
Total expenses
$ 182,450
5,450
U
177,000
8,000
169,000
Operating income
$ 39,150
2,650
F
$ 36,500
7,250
$ 29,250
Req. 2
The favorable sales volume variance for operating income is much larger than the favorable flexible budget variance.
Managerial Accounting 4e Solutions Manual
(15-20 min.) P10-50B
Req. 1
Paint Stores
Consumer
Operating income
$ 490,000
$ 231,000
÷ Total assets
÷$1,400,000
÷$2,000,000
Return on investment
35.00%
11.55%
Req. 2
Paint Stores
Consumer
Operating income
$ 490,000
$ 231,000
÷ Sales
÷$3,920,000
÷$1,400,000
Sales margin
12.5%
16.5%
The Consumer Division is more profitable on each dollar of sales.
Req. 3
Paint Stores
Consumer
Sales
$3,920,000
$1,400,000
÷ Total assets
÷$1,400,000
÷$2,000,000
Capital turnover
2.8 times
0.70 times
The Paint Stores Division is more efficient in generating sales with its assets.
Req. 4
Paint Stores
Consumer
Sales margin
12.5%
16.50%
× Capital turnover
×2.8
×0.70
ROI
35.00%
11.55%
The Consumer Division’s profitability on each dollar of sales is higher than the Paint Stores Division’s profitability.
However, the Paint Stores Division’s efficiency is significantly higher than the Consumer Division’s efficiency. These
results cause the Paint Stores Division’s ROI to be higher than the Consumer Division’s ROI.
Req. 5
RI = Operating income − Minimum acceptable income
= Operating income − (Target rate of return × Total assets)
Paint Stores RI = $490,000 − ($1,400,000 × 23%) = $168,000
Consumer RI = $231,000 − ($2,000,000 × 23%) = $(229,000)
Only the Paint Stores Division is meeting management’s target rate of return. The Consumer Division should work on
improving its capital turnover rate. Improving the capital turnover rate may help the division achieve positive residual
income.
Req. 6
Most companies use the average asset balance since the income used in the ROI calculation is earned over the course
Chapter 10 Performance Evaluation
(continued) P10-50B
Req. 7
Risk level of the division’s business
assets.
Chapter 10 Performance Evaluation
(continued) P10-51B
Req. 4
(Millions of dollars)
Operating Profit
Total Assets
ROI
Home furnishings
$2,500
$8,000
31.25%
Office furniture
1,820
6,500
28%
Store displays
1,690
12,500
13.52%
Healthcare furnishings
480
750
64%
Home furnishings and Healthcare furnishings have the highest ROI. Both of these divisions had the highest sales
margins and capital turnover rates which accounts for their high ROI. Store Displays had the lowest ROI, in part driven
by the fact that it had the lowest sales margin of the four divisions.
Req. 5
Financial reporting is for the benefit of external users, not internal management. Therefore, not all company
information is disclosed in the financial statements. Residual income (RI) calculations involve management’s target rate
of return. Since this information is not presented, residual income cannot be calculated by an external user without
making an assumption about the rate.
$28
=
$20
+
$5
$3
Req. 3
The manager of the Small Components Division would prefer the $45 transfer price. The manager of the Computer
Division would prefer the $28 transfer price.
Req. 4
Full absorption cost
=
Variable
manufacturing cost
+
Fixed
manufacturing
overhead
–
Decrease in fixed manufacturing
overhead
$40
=
$28
+
$8
–
$4
If the company’s policy requires that all in-house transfers must be priced at total manufacturing cost plus 20%, the
transfer price would be $48 [$40 x ($40 x 20%)].
Managerial Accounting 4e Solutions Manual
(continued) P10-52B
Req. 5
If the company requires all in-house transfers must be priced at total variable manufacturing cost plus 25%, the
Chapter 10 Performance Evaluation
(15-20 min.) P10-53B
Req. 1
Water Sports–Subunit X
Actual
Flexible
Budget
Flexible
Budget
Percent
Variance
Variance*
(U or F)
Sales
$543,000
$500,000
$43,000
F
8.6%
F
Cost of goods sold
310,500
300,000
10,500
U
3.5%
U
Gross margin
232,500
200,000
32,500
F
16.25%
F
Operating expenses
78,450
75,000
3,450
U
4.6%
U
Operating income before service
department charges
154,050
125,000
29,050
F
23.24%
F
Service department charges
(allocated)
48,000
37,500
10,500
U
28%
U
Operating income
$106,050
$87,500
$18,550
F
21.2%
F
Req. 3
Service department charges
Req. 4
Managers should investigate favorable as well as unfavorable variances. Favorable variances may be due to
bookkeeping or budgeting errors. Management needs to evaluate large favorable as well as unfavorable variances to
Managerial Accounting 4e Solutions Manual
(continued) P10-53B
Copyright © 2015 Pearson Education, Inc.
10–45
(30-45 min.) A10-54
1. Describe at least four advantages of decentralization. Also describe at least two disadvantages to
decentralization.
Decentralization provides many potential benefits. It frees top management time. By delegating responsibility for
daily operations to segment managers, top management can concentrate on long-term strategic planning and
2. Compare and contrast a cost center, a revenue center, a profit center, and an investment center. List a specific
example of each type of responsibility center. How is the performance of managers evaluated in each type of
responsibility center?
In a cost center, managers are accountable for costs only. Manufacturing operations, such as the Campbell’s
Chicken Noodle Soup manufacturing plant, are cost centers. The plant manager controls costs by ensuring that the
3. Explain the potential problem that could arise from using ROI as the incentive measure for managers. What are
some specific actions a company might take to resolve this potential problem?
Managerial Accounting 4e Solutions Manual
slow, even incurring losses in the early stages, before generating profit. As a potential remedy, management can
4. Describe at least two specific actions that a company could take to improve its ROI.
The ROI formula can be expanded to sales margin multiplied by capital turnover. By improving either of these
5. Define residual income. How is it calculated? Describe the major weakness of residual income.
6. Compare and contrast a master budget and a flexible budget.
8. Define key performance indicator (KPI). What is the relationship between KPIs and a company’s objectives?
Select a company of any size with which you are familiar. List at least four examples of specific objectives that
9. List and describe the four perspectives found on a balanced scorecard. For each perspective, list at least two
examples of KPIs that might be used to measure performance on that perspective.
The financial perspective helps managers answer the question, “How do we look to shareholders?” Shareholders
are primarily concerned with the company’s profitability. Managers must continually attempt to increase profits
through: increasing revenue, controlling costs, or increasing productivity. The customer perspective helps
Chapter 10 Performance Evaluation
10. Contrast lag indicators with lead indicators. Provide an example of each type of indicator.
11. Some companies integrate sustainability measures into the traditional four perspectives in their balanced
12. Find an annual report for a publicly held company (go to the company’s website and look for “Investor
Relations” or a similar link.) How many sustainability initiatives can you find in the annual report? What internal
1. Locate the company’s annual report as outlined previously. Find the company’s segment information; it should
be in the “Notes to Consolidated Financial Statements” or other similarly named section. Look for the word
2. List the segments as reported in the annual report. Make a table listing each operating segment, its revenues,
income, and assets.
Managerial Accounting 4e Solutions Manual
4. Use the data you collected in Question 2 to calculate each segment’s capital turnover. Interpret your results.
Capital turnover = Sales/Total assets
5. Use the data you collected in Requirement 2 to calculate each segment’s ROI. Interpret your results.
ROI = Operating income/Total assets
7. The rules for how segments should be presented in the annual report are governed by external financial
accounting rules. The information you gathered for the previous requirements would be used by investors and
1. Regional territories
3. Brand lines
5. Business function
(30-45 min.) A10-56
Req. 1
The two product segments are: 1) Oral, Personal and Home Care, and 2) Pet Nutrition.
(Millions of dollars)
Operating Profit
Net Sales
Identifiable Assets
Oral, Personal and Home Care
$3,062.6
$13,182.4
$8,870.5
Pet Nutrition
541.8
2,147.5
1,025.1
(Millions of dollars)
Operating Profit
Identifiable Assets
ROI
Oral, Personal and Home Care
$3,062.6
$8,870.5
34.53%
Pet Nutrition
541.8
1,025.1
52.85%
(Millions of dollars)
Operating Profit
Net Sales
Sales Margin
Oral, Personal and Home Care
$3,062.6
$13,182.4
23.23%
Pet Nutrition
541.8
2,147.5
25.23%
Capital Turnover calculation:
(Millions of dollars)
Net Sales
Identifiable
Assets
Capital
Turnover
Oral, Personal and Home Care
$13,182.4
$8,870.5
1.49
Pet Nutrition
2,147.5
1,025.1
2.09
Managerial Accounting 4e Solutions Manual
A10-57
Ethics Mini-Case
1.
a. The ethical issues in this situation are:
his job.
2. By shifting the Small Engines division direct fixed costs to common fixed expenses, Grommet Company would
3. No, the corporation as a whole could be harmed by Collins’ actions, which would potentially also harm the
1. Go to Panasonic’s website and locate the information for investors. In its 2012 annual report, it describes each
of the segments listed in the excerpt given in the case description. For each segment, write a brief description of
what products and services are included in that segment.
Chapter 10 Performance Evaluation
(continued) A10-58
2. For each of the segments in the Panasonic Segment Performance Report included in the case, calculate a
profitability ratio for each year by using the following formula.
Profit (loss)/Sales
2012
2011
2010
AVC Networks
-.0396
.0121
.0098
Appliances
.0532
.0566
.0409
Systems & Communications
.0210
.0507
.0400
Eco Solutions
.0390
.0379
.0327
Automotive Systems
.0080
.0371
.0384
Industrial Devices
-.0120
.0418
.0357
Energy
-.0340
-.0239
0
Other
.0130
.0264
.0147
3. The plasma factory described in the case would have been a part of which segment? For that segment for the
years 2010 through 2012, answer the following questions:
a. Did Sales increase, decrease, or remain about the same?
b. Did profit (loss) increase, decrease, or remain about the same?
4. For each of the other segments for the years 2010 through 2012 answer the following questions.
a. Did Sales increase, decrease, or remain about the same?
b. Did profit (loss) increase, decrease, or remain about the same?
c. Did the profitability ratio (as calculated in question 2) increase, decrease, or remain about the same?
Managerial Accounting 4e Solutions Manual
Automotive Systems
a. Sales remained about the same
b. Profits decreased
5. Of the eight segments, which three segments appear to be the strongest based on the limited information you
6. Of the eight segments, which segments appear to be the weakest based on the limited information you have in
this case? Support your answer.