1. In a centralized operation, all major planning and operating decisions are made by top management
.
In a decentralized operation, managers of separate divisions or units are delegated operating
responsibility. The division (unit) managers are responsible for planning and controlling the
operations of their divisions. Divisions are often structured around products, customers, or
regions.
2. The department manager of a profit center has responsibility for and authority over costs and
revenues, while the manager of an investment center has responsibility for and authority over
controlling investments in assets as well as costs and revenues.
3. Payroll: Number of checks issued. Accounts payable: Number of invoices paid. Accounts
receivable: Number of sales invoice payments collected. Database administration: Number of
reports generated.
4. The major shortcoming of using income from operations as a measure of investment center
p
erformance is that it ignores the amount of investment committed to each center. Because
investment center managers also control the amount of assets invested in their centers, they
should be held accountable for the use of invested assets.
5. A division of a decentralized company could be considered the least profitable, even though
it earned the largest amount of income from operations, when its rate of return on investment
is the lowest. In this situation, the division would be considered the least profitable per dollar
invested in the division because it generated less profit out of each dollar of assets invested.
6. By dividing income from operations by the amount of invested assets, each division is placed
on a comparable basis of income from operations per dollar invested.
7. The balanced scorecard attempts to identify the underlying nonfinancial drivers, or causes, of
financial performance related to innovation and learning, customer service, and internal processes.
In this way, the financial performance may be improved. For example, customer satisfaction is
often measured by the number of repeat customers. By increasing the number of repeat customers,
sales and income from operations can be increased.
8. The objective of transfer pricing is to encourage each division manager to work in the best
interests of the company. Thus, transfer prices should encourage managers to transfer goods
b
etween divisions if the overall company income can be increased.
9. When unused capacity exists in the supplying division, the negotiated price approach is
p
referred over the market price approach.
10. When using the negotiated price approach to transfer pricing, the transfer price should be less
than the market price but greater than the supplying division’s variable cost per unit.
CHAPTER 24
PERFORMANCE EVALUATION
DISCUSSION QUESTIONS
FOR DECENTRALIZED OPERATIONS
24-1
CHAPTER 24 Performance Evaluation for Decentralized Operations
PE 24–1A
PE 24–2A
Southeast Division Service Charge for Travel Department:
PE 24–2B
Retail Division Service Charge for Computer Technology Department:
PE 24–3A
Northeast Pacific
Division Division
Sales……………………………………………………
…
$1,155,000 $1,204,000
Cost of goods sold…………………………………… 590,800 658,000
PRACTICE EXERCISES
24-2
CHAPTER 24 Performance Evaluation for Decentralized Operations
PE 24–3B
Retail Commercial
Division Division
Sales…………………………………………………
$945,000 $966,000
Cost of goods sold………………………………
504,000 559,300
PE 24–4A
PE 24–4B
a. Profit Margin = $36,000 ÷ $720,000 = 5.0%
PE 24–5A
Income from operations………………………………………………………………
…
$90,000
PE 24–5B
Income from operations………………………………………………………………
…
$420,000
24-3
PE 24–6A
PE 24–6B
Increase in South (Supplying)
Division’s Income from Operations =(Transfer Price – Variable Cost per Unit)
× Units Transferred
Increase in Pembroke (Supplying)
Division’s Income from Operations =(Transfer Price – Variable Cost per Unit)
× Units Transferred
24-4
CHAPTER 24 Performance Evaluation for Decentralized Operations
Ex. 24–1
a. (a) $240,300 (g
)
(b) $243,840 (h
)
Schedules of supporting calculations (answers in italics; the solution requires
working from the department level, up to the plant level, then to the vice president
of production level):
Under
Budget
Eastern Region $ 933,750 $2,250
Under
Budget
Chip Fabrication (a) $243,840 (b) $3,540 (c)
BudgetPlant
$240,300
Department
Actual
Over
Over
SASKATOON COMPANY
Budget Performance Report—Manager, Western Region Plant
For the Month Ended June 30, 2016
Budget
Budget Actual
$745,320
Budget
$ 936,000
EXERCISES
SASKATOON COMPANY
Budget Performance Report—Vice President, Production
For the Month Ended June 30, 2016
$739,800
24-5
CHAPTER 24 Performance Evaluation for Decentralized Operations
Ex. 24–1 (Concluded)
Under
Budget
Factory wages
b. MEMO
To: Robin Mooney, Vice President of Production
The Western Region plant has experienced a budget overrun, while the Eastern
and Central Region plants have experienced a budget surplus. The budget of the
Western Region plant reveals that the Chip Fabrication Department causes the
majority of the budget overrun. The budget for the Chip Fabrication Department
indicates that the budget overrun was caused by a combination of budget
Ex. 24–2
Residential
Division
Net sales $743,780
Cost of goods sold 423,675
Gross profit $320,105
Division
$1,354,500
912,250
$ 442,250
For the Year Ended June 30, 2016
JERSEY COAST CONSTRUCTION COMPANY
Commercial
Divisional Income Statements
Cost
$ 59,940 $1,560
Budget
Budget Actual
$ 61,500
SASKATOON COMPANY
Budget Performance Report—Supervisor, Chip Fabrication
For the Month Ended June 30, 2016
Over
24-6
CHAPTER 24 Performance Evaluation for Decentralized Operations
Ex. 24–3
Expense Activity Bases
a. Legal Number of hours of legal service
b. Duplication services Number of pages copied
c. Electronic data processing Central processing unit (CPU) time, number of
printed pages, amount of memory usage
24-7
CHAPTER 24 Performance Evaluation for Decentralized Operations
Ex. 24–5
Government
a. Residential Commercial Contract Total
Number of payroll checks:
Weekly payroll × 52………
…
15,600 7,800 10,400
Service Activity Charge
b. Dept. Cost ÷ Base = Rate
Service department charge rates:
Government
Residential Commercial Contract Total
Service department charges:
1
16,500 checks × $2.00 per distribution
2
9,720 checks × $2.00 per distribution
3
11,480 checks × $2.00 per distribution
c. Residential’s service department charge is higher than the other two divisions
because Residential is a heavy user of service department services. Residential
3
21
24-8
CHAPTER 24 Performance Evaluation for Decentralized Operations
Ex. 24–6
$160,000
3,200 calls
b. October charges to the COMM sector:
Help desk charge:
(5,200 employees × 25% × 96% × 1.5) × $50/call = $93,600
Network center charge:
a. Help desk:
= $50 per call
24-9
CHAPTER 24 Performance Evaluation for Decentralized Operations
Ex. 24–7
Revenues $7,430,000 $6,184,000
Cost of goods sold 4,123,000 3,125,000
Gross profit $3,307,000 $3,059,000
Supporting calculations for controllable service department charges:
Note 1: Consumer Division ($516,000 ÷ 600 computers) × 375 computers = $322,500
YOZAMBA TECHNOLOGY
Divisional Income Statements
For the Year Ended December 31, 2016
Consumer Division Commercial Division
24-10
CHAPTER 24 Performance Evaluation for Decentralized Operations
Ex. 24–8
a. The reported income from operations does not accurately measure performance
because the service department charges are based on revenues. Revenues are
not associated with the profit center manager’s use of the service department
services. For example, the Reservations Department serves only the Passenger
b.
Revenues $3,025,000 $3,025,000
Operating expenses 2,450,000 2,736,000
Income from operations
before service department
Supporting calculations for controllable service department charges:
Training: Passenger Division, ($250,000 ÷ 500 personnel trained) × 350
personnel trained
WILD SUN AIRLINES INC.
Divisional Income Statements
For the Year Ended December 31, 2016
Passenger Division Cargo Division
24-11
CHAPTER 24 Performance Evaluation for Decentralized Operations
Ex. 24–9
Winter Summer
Sports Sports
Division Division
Sales $10,500,000 $13,600,000
Cost of goods sold 6,300,000 7,888,000
Income from operations before service
department charges $ 1,470,000 $ 2,597,600
Less service department charges:
Advertising expense (Note 1) $ 216,900 $ 265,100
Transportation expense (Note 2) 115,200 124,800
Supporting Schedule:
Note (1) Winter Sports Division: $216,900
Summer Sports Division: $265,100
Note (2) Winter Sports Division: (14,400 bills of lading × $8.00 per bill of lading)
Summer Sports Division: (15,600 bills of lading × $8.00 per bill of lading)
Winter Summer
Sports Sports
Division Division Total
Advertising expense…………………………
…
$216,900 $265,100 $ 482,000
Transportation rate per bill of lading……
…
$ 8.00 $ 8.00
…
Service Department Charges
XSPORT SPORTING GOODS CO.
Divisional Income Statements
For the Year Ended December 31, 2016
24-12
CHAPTER 24 Performance Evaluation for Decentralized Operations
Ex. 24–10
a. Retail Division: 26% ($343,200 ÷ $1,320,000)
Ex. 24–11
a. Retail Commercial Internet
Division Division Division
Income from operations………………………
…
$343,200 $320,000 $176,000
Minimum amount of income from
operations:
Ex. 24–12
a. 2.20 = 13.2% ÷ 6%
d. 3.00 = 15.0% ÷ 5%
24-13
CHAPTER 24 Performance Evaluation for Decentralized Operations
Ex. 24–13
Sales
Invested Assets
b. The profit margin would increase from 14% to 16%, the investment turnover
would remain unchanged, and the rate of return on investment would increase
from 28% to 32%, as shown below.
Sales
Invested Assets
a. Rate of Return
on Investment = Profit Margin × Investment Turnover
×
=
Rate of Return
on Investment Sales
Income from Operations
Rate of Return
on Investment = Profit Margin × Investment Turnover
Rate of Return
on Investment =Income from Operations ×
Sales
24-14
CHAPTER 24 Performance Evaluation for Decentralized Operations
Ex. 24–14
Revenues
Invested Assets
$2,220 $14,087
$14,087 $22,056
$661 $5,979
$5,979 $14,750
$1,112 $3,811
$3,811 $7,506
b. The four sectors are different from each other. Media Networks combines a good
at 15.8% with an average investment turnover. The combination produces a
respectable ROI of 10.1%. Studio Entertainment has a weak profit margin and a
× Parks and Resorts:
=
Rate of Return
on Investment
Studio Entertainment: ×
Consumer Products:
Revenues
Income from Operations
×
a. ×
24-15
CHAPTER 24 Performance Evaluation for Decentralized Operations
Ex. 24–15
a. 20.0% ($185,000 ÷ $925,000) g. $81,000 ($450,000 × 18%)
b. $138,750 ($925,000 × 15%) h. 13.0% ($58,500 ÷ $450,000)
Ex. 24–16
a. (a) $60,200 ($860,000 × 7%)
(b) $344,000 ($60,200 ÷ 17.5%)
b. North Division: $18,920 [$60,200 – ($344,000 × 12%)]
c. (1) The North Division has the highest return on investment (17.5%).
24-16
CHAPTER 24 Performance Evaluation for Decentralized Operations
Ex. 24–17
Revenues
Invested Assets
$105 $688
$688 $2,139
b.
Vacation
Ownership
Income from operations……………………………
…
$105
c. The Vacation Ownership (VO) segment has the weakest return on investment,
which is mainly the result of a weak investment turnover. The VO segment earns
profit margins that are higher than the profit margins in the Hotel Ownership (HO)
Revenues
$571
Ownership
Hotel
Income from Operations
a.
Vacation Ownership: ×
× =
Rate of Return
on Investment
24-17
CHAPTER 24 Performance Evaluation for Decentralized Operations
Ex. 24–18
Although there is some judgment in classifying each of these measures, the following
represents the author’s assessment with explanations:
Average card member spending Customer—demonstrates the usefulness of
the card to the customer.
Cards in force Customer—if customers did not value the
card, they would not have one.
24-18
CHAPTER 24 Performance Evaluation for Decentralized Operations
Ex. 24–19
This exercise is intended to spark discussion around using the balanced scorecard
in an emerging business. Some possible metrics are included below.
Innovation and Learning
Number of training hours
Employee turnover
Customer Service
Number of new customers
Retaining existing customers
Quality of food
Internal Processes
Order delivery time
Consistency of portion size
Financial
Number of meals served per shift (Note: Shift might be considered breakfast, lunch,
dinner, late night)
24-19
CHAPTER 24 Performance Evaluation for Decentralized Operations
Ex. 24–20
a. Increase in XPort Industries’ Market Variable Cost Unit
Income from Operations = Price – per Unit × Transferred
$3,000,000 =($210 –$160) × 60,000
Ex. 24–21
a. Increase in XPort Industries’ Market Variable Cost Units
Income from Operations = Price – per Unit × Transferred
b. Increase in the Instrument Division’s Market Transfer Units
Income from Operations = Price – Price × Transferred
c. Increase in the Components Division’s Transfer Variable Cost Units
Income from Operations = Price – per Unit × Transferred
d. Any transfer price will cause the total income of the company to increase, as long
as the supplier division capacity is used toward making materials for products that
are ultimately sold to the outside. However, transfer prices should be set between
variable cost and the market price in order to give the division managers proper
24-20