EXERCISE 10-18 (Continued)
(b)
MEMO
TO: Drs. Reese Dinkle and Anita Frizell
FROM: Student
The current reporting system has the following deficiencies:
1. It does not clearly show both budgeted goals and actual performance.
2. It does not indicate the contribution margin generated by the center,
fixed costs.
3. It does not report only those costs controllable by the manager of
All of these deficiencies have been addressed in the recommended responsibility
report attached. As can be seen from that report, the Preventive Services
center is profitable. The service revenues generated in this center are adequate
EXERCISE 10-19
Planes:
ROI = Controllable margin ÷ Average operating assets
13% = Controllable margin ÷ $25,000,000
Contribution margin = Controllable margin + Controllable fixed costs
Service revenue = Contribution margin + Variable costs
Taxis:
ROI
=
Controllable margin
÷
Average operating assets
10%
=
$80,000
÷
Average operating assets
Average operating assets
=
$80,000 ÷ 10%
=
$800,000
Controllable margin
=
Contribution margin
–
Controllable fixed costs
$80,000
=
$250,000
–
Controllable fixed costs
Controllable fixed costs
=
$250,000 – $80,000
=
$170,000
Contribution margin
=
Service revenue – Variable costs
$250,000
=
$500,000 – Variable costs
Variable costs
=
$500,000 – $250,000
=
$250,000
EXERCISE 10-19 (Continued)
Limos:
ROI = Controllable margin ÷ Average operating assets
= $240,000 ÷ $1,500,000
= 16%
Controllable margin
=
Contribution margin
–
Controllable fixed costs
$240,000
=
$480,000
–
Controllable fixed costs
Controllable fixed costs
=
$480,000 – $240,000
=
$240,000
Contribution margin
=
Service revenue
–
Variable costs
$480,000
=
Service revenue
–
$300,000
Sales
=
$480,000 + $300,000
$780,000
=
*EXERCISE 10-20
(a) North Division: ROI = $140,000 ÷ $1,000,000 = 14%
(b) North Division:
West Division:
South Division:
*EXERCISE 10-20 (Continued)
(c) 1. If ROI is used to measure performance, only the North Division
(with a 14% ROI) and the South Division (with a 14% ROI) would
2. If residual income is used to measure performance, all three divi–
*EXERCISE 10-21
(a)
ROI
=
Controllable margin
÷
Average operating assets
20%
=
$200,000
÷
Average operating assets
Average operating assets =
$1,000,000
(b)
Controllable margin
–
(Minimum rate of return X Average operating assets)
=
Residual income
$200,000
–
(Minimum rate of return X $1,000,000)
=
$100,000
$100,000
=
Minimum rate of return X $1,000,000
Minimum rate of return
=
10%
(c)
Controllable margin
–
(Minimum rate of return X Average operating assets)
=
Residual income
Controllable margin
–
(13% X $1,200,000)
=
$204,000
Controllable margin
=
$360,000
(d)
ROI
=
Controllable margin
÷
Average operating assets
30%
=
$360,000
÷
$1,200,000
SOLUTIONS TO PROBLEMS
PROBLEM 10-1A
(a) COOK COMPANY
Packaging Department
Monthly Manufacturing Overhead Flexible Budget
For the Year 2014
Activity level
Direct labor hours
Variable costs
Indirect labor ($.42)*
Indirect materials ($.30)
Repairs ($.18)
Utilities ($.24)
Lubricants ($.06)
Total variable costs ($1.20)
Fixed costs
Supervision**
Depreciation
Insurance
Rent
Property taxes
Total fixed costs
Total costs
27,000
$11,340
8,100
4,860
6,480
1,620
32,400
8,000
6,000
2,500
2,000
1,500
20,000
$52,400
30,000
$12,600
9,000
5,400
7,200
1,800
36,000
8,000
6,000
2,500
2,000
1,500
20,000
$56,000
33,000
$13,860
9,900
5,940
7,920
1,980
39,600
8,000
6,000
2,500
2,000
1,500
20,000
$59,600
36,000
$15,120
10,800
6,480
8,640
2,160
43,200
8,000
6,000
2,500
2,000
1,500
20,000
$63,200
PROBLEM 10-1A (Continued)
(b) COOK COMPANY
Packaging Department
Manufacturing Overhead Flexible Budget Report
For the Month Ended October 31, 2014
Difference
Direct labor hours (DLH)
Variable costs
Indirect labor
Indirect materials
Repairs
Utilities
Lubricants
Total variable costs
Fixed costs
Supervision
Depreciation
Insurance
Rent
Property taxes
Total fixed costs
Total costs
Budget at
27,000 DLH
$11,340
8,100
4,860
6,480
1,620
32,400
8,000
6,000
2,500
2,000
1,500
20,000
$52,400
Actual Costs
27,000 DLH
$12,432
7,680
4,800
6,840
1,920
33,672
8,000
6,000
2,460
2,000
1,500
19,960
$53,632
Favorable F
Unfavorable U
$1,092 U
420 F
60 F
360 U
300 U
1,272 U
0 U
0 U
40 F
0 U
0 U
40 F
$1,232 U
except for lubricants (19%).
PROBLEM 10-2A
(a) ZELMER COMPANY
Monthly Manufacturing Overhead Flexible Budget
Ironing Department
For the Year 2014
Activity level
Direct labor hours
Variable costs
Indirect labor ($.40)
Indirect materials ($.50)
Factory utilities ($.30)
Factory repairs ($.20)
Total variable costs ($1.40)
Fixed costs
Supervision
Depreciation
Insurance
Rent
Total fixed costs
Total costs
35,000
$14,000
17,500
10,500
7,000
49,000
4,000
1,500
1,000
2,500
9,000
$58,000
40,000
$16,000
20,000
12,000
8,000
56,000
4,000
1,500
1,000
2,500
9,000
$65,000
45,000
$18,000
22,500
13,500
9,000
63,000
4,000
1,500
1,000
2,500
9,000
$72,000
50,000
$20,000
25,000
15,000
10,000
70,000
4,000
1,500
1,000
2,500
9,000
$79,000
PROBLEM 10-2A (Continued)
(b) ZELMER COMPANY
Ironing Department
Manufacturing Overhead Flexible Budget Report
For the Month Ended June 30, 2014
Difference
Direct labor hours (DLH)
Variable costs
Indirect labor
Indirect materials
Factory utilities
Factory repairs
Total variable costs
Fixed costs
Supervision*
Depreciation
Insurance
Rent
Total fixed costs
Total costs
Budget at
41,000 DLH
$16,400 (1)
20,500 (2)
12,300 (3)
8,200 (4)
57,400
4,000
1,500
1,000
2,500
9,000
$66,400
Actual Costs
41,000 DLH
$18,040 (5)
19,680 (6)
13,120 (7)
10,250 (8)
61,090
4,000
1,500
1,000
2,500
9,000
$70,090
Favorable F
Unfavorable U
$1,640 U
820 F
820 U
2,050 U
3,690 U
0 U
0 U
0 U
0 U
0 U
$3,690 U
(1) 41,000 X $0.40 (2) 41,000 X $0.50 (3) 41,000 X $0.30 (4) 41,000 X $0.20
PROBLEM 10-2A (Continued)
(e)
$80
Total
Budgeted
Cost Line
Costs in (000)
70
60
50
Budgeted
Variable
Costs
40
30
20
10
Budgeted
Fixed Costs
5
10
15
20
25
30
35
40
45
50
Direct Labor Hours in (000)
PROBLEM 10-3A
(b) HILL COMPANY
Assembling Department
Flexible Budget Report
For the Month Ended August 31, 2014
Difference
Units
Variable costs*
Direct materials ($.80 X 58,000)
Direct labor ($.90 X 58,000)
Indirect materials ($.40 X 58,000)
Indirect labor ($.30 X 58,000)
Utilities ($.25 X 58,000)
Maintenance ($.10 X 58,000)
Total variable ($2.75 X 58,000)
Fixed costs
Rent
Supervision
Depreciation
Total fixed
Total costs
Budget at
58,000 Units
$ 46,400
52,200
23,200
17,400
14,500
5,800
159,500
12,000
17,000
6,000
35,000
$194,500
Actual Costs
58,000 Units
$ 47,000
51,200
24,200
17,500
14,900
6,200
161,000
12,000
17,000
6,000
35,000
$196,000
Favorable F
Unfavorable U
$ 600 U
1,000 F
1,000 U
100 U
400 U
400 U
1,500 U
0 U
0 U
0 U
0 U
$1,500 U