Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
24-1
CHAPTER 24
PERFORMANCE MEASUREMENT AND
RESPONSIBILITY ACCOUNTING
Related Assignment Materials
Student Learning Objectives
Discussion
Questions
Quick
Studies*
Exercises*
Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Distinguish between direct and
indirect expenses and identify
bases for allocating indirect
expenses to departments
1,2,3,4,5,
6,7,8,9,11,
15,16
24-1, 24-2,
24-3
24-1, 24-8
C2. Appendix 24B—Explain transfer
12, 13
24-7, 24-16,
C3. Appendix 24C—Describe
allocation of joint costs across
products.
14
24-19
24-5
Analytical objectives:
A1. Analyze investment centers
using return on investment and
residual income.
24-10, 24-11,
24-12, 24-20
24-9, 24-10,
24-12, 24-13,
24-15
ES
using profit margin and
investment turnover
24-14, 24-15,
24-23
A2. Analyze investment centers
24-12, 24-13
24-11, 24-12,
24-2
A3. Analyze investment centers
using the balance scorecard
24-14, 24-15
24-16, 24-17,
SP
A4. Compute cycle time and cycle
efficiency, and explain their
importance to production
management.
17,18, 19,
20
24-16
24-18, 24-19,
Procedural objectives:
accounting report using
controllable costs.
P1. Prepare a responsibility
24-4
24-1, 24-2,
24-1
24-6, 24-8
P2. Allocate indirect expenses to
departments.
24-5, 24-6
24-7, 24-8
24-3, 24-4,
24-5, 24-6,
24-2
24-4, 24-5
P3. Prepare departmental income
10
24-9
24-7, 24-8,
24-3, 24-4
24-3, 24-7,
pricing and methods to set
transfer prices.
24-17, 24-18
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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*See additional information on next page that pertains to these quick studies, exercises and problems.
SP refers to the Serial Problem
ES refers to Excel Simulations
Additional Information on Related Assignment Material
Connect
Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all Exercises
and Problems Set A. Connect also provides algorithmic versions for Quick Study, Exercises and
Problems. It allows instructors to monitor, promote, and assess student learning. It can be used in
practice, homework, or exam mode.
Connect Insight
The Serial Problem (SP) for Success Systems continues in this chapter.
General Ledger
Assignable within Connect, General Ledger (GL) problems offer students the ability to see how transactions post
from the general journal all the way through the financial statements. Critical thinking and analysis components are
added to each GL problem to ensure understanding of the entire process. GL problems are auto-graded and provide
instant feedback to the student.
Excel Simulations
Synopsis of Chapter Revisions
NEW opener—Ministry of Supply and entrepreneurial assignment.
Reorganized chapter.
Revised discussion of performance evaluation and decentralization.
Revised discussion of Kraft Heinz responsibility centers.
Revised exhibit on responsibility accounting.
Revised discussion of responsibility accounting reports.
Added NTKs on responsibility accounting, cost allocations, and balanced scorecard.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
I. Responsibility Accounting
A. Performance Evaluation
2. In decentralized organizations, decisions are made by unit
managers rather than top management.
4. The methods of performance evaluation vary for cost centers,
profit centers and investment centers.
a. Cost center⎯incurs cost or expenses without directly
5. Basis for evaluating performance:
a. Cost center managers are evaluated on their success in
II. Controllable versus Uncontrollable Costs
A. Controllable Costs –
1. Those which a manager has the power to determine or at least
significantly affect the amount incurred.
B. Uncontrollable costs –
1. Are not within the manager’s control.
2. A manager’s performance is evaluated using responsibility
3. Distinguishing between controllable and uncontrollable costs
5. Good judgment is required when identifying controllable costs.
Notes
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
24-4
Chapter Outline
C. Responsibility Accounting Performance Report
1. Reports actual expenses that a manager is responsible for and
their budgeted amounts.
2. Responsibility Accounting Report
a. Provide relevant information for each management level.
b. At lower levels, managers have limited responsibilities and
therefore fewer controllable costs.
III. Profit Centers
A. The responsibility report focuses on how well each department
controlled costs and generated revenues.
B. The departmental income statement is a common way to report
profit center performance.
C. When computing department profits, two key accounting challenges
involve allocating expenses:
2. How to allocate service department expenses, such as payroll or
purchasing, that perform services that benefit several
departments.
D. Direct and Indirect Expenses
1. Direct Expenses are readily traced to a department.
2. Indirect Expenses are incurred for joint benefit of more than one
department; can’t be readily traced to just one department.
Notes
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
E. General Model – indirect and service department expenses are
allocated across departments benefiting from them. Allocated using a
cause-effect relation. Sometimes hard to identify.
1. Allocated Cost = Total Cost to Allocate x Percentage of
Allocation Base Used.
F. Allocating Indirect Expenses – allocation bases vary across
departments and organizations. Managers must use careful judgment
in developing allocation bases. Commonly used allocation bases:
1. Wages and salaries –allocated using relative amount of hours
worked in each department.
2. Rent and Utilities⎯allocated based on portion of floor space
4. Depreciation – allocated using hours of depreciable asset used.
G. Service Department expenses – provide support to an organization’s
operating departments. Common allocation bases:
1. Office, personnel, and payroll expenses – allocated based on
number of employees in each department.
3. Maintenance expenses – allocated based on square footage.
H. Departmental Income Statements
1. Departmental income is computed using the following formula:
Departmental income = Dept. sales – Dept. direct expenses –
Allocated indirect expenses – Allocated service dept. expenses.
2. Four Steps for allocating costs and preparing departmental
income statements:
a. Step one – accumulate revenues and direct and indirect
expenses by department. Involves collecting the necessary
Notes
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
c. Step three – allocate service department expenses to
operating departments using a departmental expense
allocation spreadsheet. After service department costs are
allocated, no expenses remain in the service departments.
I. Departmental Contribution to Overhead (see Exhibit 24.12)
1. Departmental income statements not always best for evaluating
3. Behavioral Aspects of Departmental Performance Reports –
a. Indirect expenses are typically uncontrollable, so a better way
to evaluate is using departmental contribution to overhead.
IV. Investment Center
A. Financial Performance Evaluation Measures include:
1. Return on investment, return on assets, computed as investment
center income / by investment center average invested assets.
2. Residual income – Expressed in dollars. Encourages division
3. Profit margin and investment turnover – split return on
investment into two measures – profit margin and investment
turnover.
Notes
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Chapter Outline
4. Nonfinancial Performance Evaluation Measures – using solely
5. Balanced Scorecard: system of performance measures,
including nonfinancial measures used to assess company and
division manager performance. Requires managers to think of
their company from four perspectives.
a. Customer: what do they think of us?
V. Decision Analysis Cycle Time and Cycle Efficiency
A. As lean manufacturing practices help companies move toward just
in time manufacturing it is important for companies to reduce the
time it takes to manufacture its products and improve efficiency.
1. Cycle time measures the time element which describes the time
it takes to produce a product or service.
Cycle time = Process + Inspection + Move + Wait
Time Time Time Time
a. Process time is considered value-added time – it is the only
activity in cycle time that adds value to the product from the
2. Cycle Efficiency measures production efficiency. It is the ratio
of value added time to total cycle time.
reduce the non-value added activities.
VI. Appendix 24A – Cost Allocations uses the general model of cost
allocation to show how the cost allocations in Exhibits 24.10 and 24.11
for A-1 Hardware. Rent expense, utilities expense, advertising expense
and insurance expense are allocated first. Then, the two service
department’s expenses are allocated to the three operating departments.
Notes
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Chapter Outline
VII. Appendix 24B – Transfer Pricing
The price used to record transfers between divisions in the same
company is called a transfer price. Can be used in cost, profit and
investment centers.
A. If there is no excess capacity, the internal supplier will not accept a
transfer price less than the market price. This is called market based
transfer pricing.
B. If there is excess capacity, the internal supplier should accept a price
between the costs to manufacturer the part and the market price.
This is called cost based transfer pricing.
C. Other issues to consider in determining transfer prices include:
1. Market price may not exist
2. Cost controls
III. Appendix 24C – Joint Costs
A. Joint Costs⎯the costs incurred to produce or purchase two or more
products at the same time; similar to indirect expense in that it’s
shared across more than one cost object.
1. Ignored when deciding to sell product as is or process further.
2. Allocated to different products produced from it when total cost
3. Allocation bases
a. Physical basis⎯allocates joint costs using physical
characteristics such as ratio of pounds, cubic feet or gallons
of each joint product to the total pounds, cubic feet or
Notes
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter 24 Alternate Demo Problem
Jack and Susan Roberts own a farm that produces potatoes. Based on a
review of the income statement shown below, Jack remarked that they
should have fed the No. 3 potatoes to the pigs; then they would have
avoided the loss from the sale of the those potatoes.
JACK AND SUSAN ROBERTS
Income from the Production and Sale of Potatoes
For Year Ended December 31, 20xx
Results by Grade
No. 1
No. 2
No. 3
Combined
Sales by grades:
Land preparation, seed,
planting,
Marketing @ $0.00415 per lb.
Total costs
Jack and Susan divided their costs among the grades on a per pound
basis, because their records do not show cost per grade. However, their
Required:
Costs:
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
Chapter 24 Alternate Demo Problem: Solution
JACK AND SUSAN ROBERTS
Income from the Production and Sale of Potatoes
For Year Ended December 31, 20xx
Results by Grade
No. 1
No. 2
No. 3
Combined
Revenue from sales:
$13,500
$20,000
$6,000
$39,500
Costs:
Land preparation, seed,
Marketing
Total costs
$1,910
COST ALLOCATIONS
No. 1: $13,500 / $39,500 x $11,850 =
$ 4,050
Land preparation, seed, planting, and
cultivating:
No. 1: $13,500 / $39,500 x $14,220 =
$ 4,860