Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 22
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. Uncontrollable costs are not within the manager’s control or influence.
5. Reports to higher-level managers are usually summarized in responsibility
6. In decentralized organizations decisions are made by unit managers rather than by
top management. Top management then evaluates unit manager performance.
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
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 22
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
12. A transfer price is an amount used to record transactions made between divisions
13.B A market-based transfer price is most likely to be used when a) the item being
transferred has a readily available substitute with a market price and b) the
transferor division is operating at full capacity.
14.C A joint cost is incurred to produce or purchase two or more different products at the
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. The cash conversion cycle is the number of days it takes a company to go from cash
18. Yes. Samsung can use cycle time and cycle efficiency to measure operating
performance for its manufacturing operations. For example, these measures could
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 22
QUICK STUDIES
Quick Study 22-1 (10 minutes)
1.
A
4.
C
2.
F
5.
D
3.
B
6.
E
Quick Study 22-2 (5 minutes)
1.
D
3.
B
Quick Study 22-3 (10 minutes)
Controllable costs for the service department would include:
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 22
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Quick Study 22-4 (10 minutes)
% of
Advertising to
Allocated
Sales
Total
allocate
amount
$220,000
27.5%
$100,000
$ 27,500
400,000
180,000
Quick Study 22-5 (10 minutes)
% of
Admin. Exp.
Allocated
Employees
Total
to allocate
amount
60.0%
$160,000
$ 96,000
Quick Study 22-6 (10 minutes)
% of
Maint. Exp.
Allocated
Sq. Feet
Total
to allocate
amount
22,000
55.0%
$200,000
$ 110,000
18,000
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Quick Study 22-7 (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
$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
Jewelry Dept. ……………………..
1,440
30%
$25,350
Totals …………………………..
4,800
$84,500
Second Floor
Sq. Feet
% of Total
Cost
Housewares Dept. ………………
2,016
42%
$19,110
1,824
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Quick Study 22-8 (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%
Dept. B contributes the highest dollar amount to overhead.
Dept. C generates the highest contribution percentage to overhead.
Quick Study 22-9 (10 minutes)
Income
Average Assets
Return on
Investment
The Cameras and camcorders division is the best-performing investment
center on the basis of return on investment (assets).
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Quick Study 22-10 (10 minutes)
Cameras &
camcorders
Phones &
communication
Computers &
accessories
Net income …………………………
$4,500,000
$1,500,000
$ 800,000
Less: Target net income
Quick Study 22-11 (15 minutes)
Investment center A:
Return on investment = Net income / Average invested assets
= $352,000 / $1,400,000 = 25%
Quick Study 22-11 (continued)
Investment center B:
Return on investment = Profit margin x Investment turnover
0.12 = Profit margin x 1.5
Thus,
Average invested assets = $10,400,000 / 1.5 = $6,933,333
Quick Study 22-12 (10 minutes)
Quick Study 22-13 (5 minutes)
1. C 5. I
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 22
Quick Study 22-14 (10 minutes)
The U.S. division exceeded the occupancy target for the current year. Both
the U.S. and International divisions improved on occupancy performance
during the current year.
Quick Study 22-15 (10 minutes)
Spartan Co.
Chen Co.
Days’ sales in accounts receivable…
32
45
Days’ sales in inventory.………………
20
Days’ payable outstanding………….
Quick Study 22-16B (10 minutes)
Without excess capacity, a market-based transfer price of $450 per
windshield should be used. The Assembly division should be indifferent to
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 22
Quick Study 22-17B (10 minutes)
If the Windshield division has excess capacity, a range of acceptable
Quick Study 22-18C (15 minutes)
Total joint cost = $325,000 + $50,000 = $375,000
Quick Study 22–19 (5 minutes)
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 22
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EXERCISES
Exercise 22-1 (15 minutes)
Responsibility Accounting Performance Report
Dept. Manager, Snowmobile Department
For the Year
Budgeted
Actual
Over (Under)
Amount
Amount
Budget
Controllable Costs
Raw materials …………………………..
$19,500
$19,420
$ (80)
Employee wages ………………………..
Exercise 22-2 (15 minutes)
Responsibility Accounting Performance Report
Dept. Manager, ATV Department
For the Year
Budgeted
Actual
Over (Under)
Amount
Amount
Budget
Controllable Costs
Raw materials …………………………..
$27,500
$28,820
$1,320
Employee wages ………………………..
12,500
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Exercise 22-3 (25 minutes)
COZY BOOKSTORE
Departmental Expense Allocation Spreadsheet
For Period Ended _______
Allocation of Expenses to Departments .
Alloca-
tion Base
Exp.
Account
Balance
Adver-
tising
Dept.
Purch-
asing
Dept.
Books
Dept.
Maga-
zines
Dept.
News-
papers
Dept.
Total dept. exp. ………………..
$698,000
$24,000
$34,000
$425,000
$ 90,000
$125,000
Computations for allocations of service dept. costs to operating departments
Advertising: $24,000
Sales
% of Total
Cost
Books Dept. ………………………….
$495,000
55%
$13,200
Magazines Dept. ……………………
22
Newspapers Dept. …………………
Purchasing: $34,000
Purchase Orders
Cost
Books Dept. ………………………….
516
43%
$14,620
Magazines Dept. ……………………
360
Newspapers Dept. …………………
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Exercise 22-4 (20 minutes)
Allocation of annual wages between the two departments
Hours Worked*
% of Total
Cost
Jewelry Dept. …………………………..
57
75%
$22,500
Totals …………………………………………
76
100%
$30,000
*Computation of hours worked in the two selling departments
Jewelry department
Selling …………………………………………………..
51
Arranging and stocking ………………………….
57 hours
Cosmetics department
Selling …………………………………………………..
12
Arranging and stocking ………………………….
Total hours …………………………..…………………..
Instructor note: This analysis ignores idle time because neither department
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 22
Exercise 22-5 (25 minutes)
1. Allocation of Indirect Expenses to Four Operating Departments
Supervision expenses
Department
Employees
% of Total
Cost
Materials …………………………..
18%
$14,850
Personnel …………………………..
Manufacturing ……………………
Packaging ………………………….
Utilities expenses
Department
Square Feet
% of Total
Cost
Materials …………………………..
25,000
25%
$12,500
Personnel …………………………..
Manufacturing ……………………
55,000
Packaging ………………………….
Totals …………………………..
100,000
$50,000
Insurance expenses
Department
Assets Value
% of Total
Cost
Materials …………………………..
$ 6,000
10%
$ 2,250
Personnel …………………………..
Manufacturing ……………………
37,800
Packaging ………………………….
Totals …………………………..
$60,000
$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
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Exercise 22-6 (20 minutes)
MARATHON RUNNING SHOP
Departmental Expense Allocation Spreadsheet
For Year Ended December 31, 2019
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
Administrative Dept. ….
$225,000
$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
Shoes …………………
7,140
Clothing ……………..
Advertising expense: $23,120
Ads Placed
% of Total
Cost
Shoes …………………
90
75%
$17,340
Clothing ……………..
Administrative expense: $31,400
Sales
% of Total
Cost
Shoes …………………
$273,000
78%
$24,492
Clothing ……………..
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Exercise 22-7 (20 minutes)
(1)
WHOLESALE GUITARS
Departmental Contribution Statements
For Year Ended December 31, 2019
Acoustic
Electric
Dept.
Dept.
Combined
Sales ………………………………….
$112,500
$105,500
$218,000
Cost of goods sold …………….
55,675
66,750
122,425
Gross profit ……………………….
56,825
38,750
95,575
Direct expenses
Supplies expense……………….
Departmental contributions to
overhead ………………………….
Indirect expenses
$ 27,345
$ 14,550
$ 41,895
(2) Based on departmental contribution to overhead, the Electric guitar
department should not be eliminated, as it contributes $14,550 to
covering indirect expenses.
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Exercise 22-8 (25 minutes)
1.
JANSEN COMPANY
Departmental Income Statement—Ski Department
For Year Ended December 31, 2019
Ski Dept.
Sales ………………………………………
$605,000
Cost of goods sold …………………
425,000
2.
JANSEN COMPANY
Departmental Contribution to Overhead—Ski Department
For Year Ended December 31, 2019
Ski Dept.
Sales ………………………………………
$605,000
Cost of goods sold …………………
425,000
3. Based on these performance reports, the Ski department should not be
eliminated. It generates a positive contribution to overhead.
1336
Exercise 22-9 (15 minutes)
1.
Location
Net income
Average assets
Return on
investment
$1,000,000
2. The recommendation is to pursue Location B because its return on
Exercise 22–10 (20 minutes)
(1)
Income
Average assets
Return on
investment
$2,880,000
$16,000,000
18%
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Exercise 22–10 (continued)
(2)
Investment Center
Electronics
Sporting goods
Net income ………………..
$2,880,000
$2,040,000
Target net income
(3) The Electronics department should accept the new opportunity because
it will generate residual income of 3% (15% – 12%) of the investment’s
invested assets.
Exercise 22-11 (15 minutes)
1.
Income
Sales
Profit margin
2.
Sales
Average assets
Investment
turnover
$40,000,000
$ 16,000,000
2.50
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 22
Exercise 22-12 (20 minutes)
(1)
Operating
income
Average assets*
Return on
investment
(2)
Operating
income
Sales
Profit margin
$349
$2,681
13.02%
(3)
Sales
Average assets*
Investment
turnover
$2,681
$2,628
1.02
Exercise 22-13 (10 minutes)
$ millions
Beverage
Cheese
Operating income ……..
$349
$634