Ford agency
Responsibility Accounting Systems
Chapter 11
Managerial Accounting
Seventeenth edition
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Decentralization in Organizations: Benefits
Benefits of
Decentralization
Top management
freed to concentrate
on strategy.
Lower-level decisions
often based on
better information.
Lower level managers can respond quickly to customers.
Lower-level managers
gain experience in
decision-making.
Decision-making
authority leads to
job satisfaction.
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Decentralization in Organizations: Disadvantages
Disadvantages of
Decentralization
Lower-level managers
may make decisions
without seeing the
“big picture.”
May be a lack of
coordination among
autonomous
managers.
Lower-level manager’s
objectives may not
be those of the
organization.
May be difficult to
spread innovative ideas
in the organization.
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Responsibility Accounting
Managers are held responsible for those items—and only those items—that the manager can actually control to a significant extent.
A responsibility center is used for any part of an organization whose manager has control over and is accountable for cost, profit, or investments.
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Cost Center
A segment whose manager has control over costs, but not over revenues or investment funds.
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Profit Center
A segment whose manager has control over both costs and revenues,
but no control over investment funds.
Revenues
Sales
Interest
Other
Costs
Mfg. costs
Commissions
Salaries
Other
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Investment Center
A segment whose manager has control over costs, revenues, and investments in operating assets.
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Learning Objective 1
Compute return on investment (ROI) and show how changes in sales, expenses, and assets affect ROI.
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Return on Investment (ROI) Formula
ROI =
Net operating income
Average operating assets
Cash, accounts receivable, inventory,
plant and equipment, and other
productive assets.
Income before interest
and taxes (EBIT)
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Net Book Value versus Gross Cost
Most companies use the net book value of depreciable assets to calculate average operating assets.
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Understanding ROI
ROI =
Net operating income
Average operating assets
Margin =
Net operating income
Sales
Turnover =
Sales
Average operating assets
ROI =
Margin Turnover
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Increasing ROI: An Example
Regal Company reports the following:
Net operating income $ 30,000
Average operating assets $ 200,000
Sales $ 500,000
Operating expenses $ 470,000
ROI =
Margin Turnover
Net operating income
Sales
Sales
Average operating assets
×
ROI =
What is Regal Company’s ROI?
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Increasing ROI – An Example: Solution
$30,000
$500,000
×
$500,000
$200,000
ROI =
6% 2.5 = 15%
ROI =
ROI =
Margin Turnover
Net operating income
Sales
Sales
Average operating assets
×
ROI =
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Investing in Operating Assets to Increase Sales – An Example
Assume that Regal’s manager invests in a $30,000 piece of equipment that increases sales by $35,000, while increasing operating expenses by $15,000.
Let’s calculate the new ROI.
Regal Company reports the following:
Net operating income $ 50,000
Average operating assets $ 230,000
Sales $ 535,000
Operating expenses $ 485,000
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Investing in Operating Assets to Increase Sales – An Example: Solution
$50,000
$535,000
×
$535,000
$230,000
ROI =
9.35% 2.33 = 21.8%
ROI =
ROI increased from 15% to 21.8%.
ROI =
Margin Turnover
Net operating income
Sales
Sales
Average operating assets
×
ROI =
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Criticisms of ROI
In the absence of the balanced
scorecard, management may
not know how to increase ROI.
Managers often inherit many
committed costs over which
they have no control.
Managers evaluated on ROI
may reject profitable
investment opportunities.
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Learning Objective 2
Compute residual income and understand its strengths and weaknesses.
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Residual Income – Another Measure of Performance
Residual Income is net operating income above some minimum return on operating assets.
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Calculating Residual Income
(
)
This computation differs from ROI.
ROI measures net operating income earned relative to the investment in average operating assets.
Residual income measures net operating income earned less the minimum required return on average operating assets.
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Residual Income – An Example
The Retail Division of Zephyr, Inc. has average operating assets of $100,000 and is required to earn a return of 20% on these assets.
In the current period, the division earns $30,000.
Let’s calculate residual income.
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Residual Income – An Example: Solution
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Motivation and Residual Income
Residual income encourages managers to make profitable investments that would be rejected by managers using ROI.
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Quick Check 1
Redmond Awnings, a division of Wrap-up Corp., has a net operating income of $60,000 and average operating assets of $300,000. The required rate of return for the company is 15%. What is the division’s ROI?
a. 25%
b. 5%
c. 15%
d. 20%
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Quick Check 1a
Redmond Awnings, a division of Wrap-up Corp., has a net operating income of $60,000 and average operating assets of $300,000. The required rate of return for the company is 15%. What is the division’s ROI?
a. 25%
b. 5%
c. 15%
d. 20%
ROI = NOI/Average operating assets
= $60,000/$300,000 = 20%
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Quick Check 2
Redmond Awnings, a division of Wrap-up Corp., has a net operating income of $60,000 and average operating assets of $300,000. If the manager of the division is evaluated based on ROI, will she want to make an investment of $100,000 that would generate additional net operating income of $18,000 per year?
a. Yes
b. No
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Quick Check 2a
Redmond Awnings, a division of Wrap-up Corp., has a net operating income of $60,000 and average operating assets of $300,000. If the manager of the division is evaluated based on ROI, will she want to make an investment of $100,000 that would generate additional net operating income of $18,000 per year?
a. Yes
b. No
ROI = $78,000/$400,000 = 19.5%
This lowers the division’s ROI from 20.0% down to 19.5%.
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Quick Check 3
The company’s required rate of return is 15%. Would the company want the manager of the Redmond Awnings division to make an investment of $100,000 that would generate additional net operating income of $18,000 per year?
a. Yes
b. No
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Quick Check 3a
The company’s required rate of return is 15%. Would the company want the manager of the Redmond Awnings division to make an investment of $100,000 that would generate additional net operating income of $18,000 per year?
a. Yes
b. No
ROI = $18,000/$100,000 = 18%
The return on the investment exceeds the minimum required rate of return.
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Quick Check 4
Redmond Awnings, a division of Wrap-up Corp., has a net operating income of $60,000 and average operating assets of $300,000. The required rate of return for the company is 15%. What is the division’s residual income?
a. $240,000
b. $ 45,000
c. $ 15,000
d. $ 51,000
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Quick Check 4a
Redmond Awnings, a division of Wrap-up Corp., has a net operating income of $60,000 and average operating assets of $300,000. The required rate of return for the company is 15%. What is the division’s residual income?
a. $240,000
b. $ 45,000
c. $ 15,000
d. $ 51,000
Net operating income $60,000
Required return (15% of $300,000) (45,000)
Residual income $15,000
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Quick Check 5
If the manager of the Redmond Awnings division is evaluated based on residual income, will she want to make an investment of $100,000 that would generate additional net operating income of $18,000 per year?
a. Yes
b. No
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Quick Check 5a
If the manager of the Redmond Awnings division is evaluated based on residual income, will she want to make an investment of $100,000 that would generate additional net operating income of $18,000 per year?
a. Yes
b. No
Net operating income $78,000
Required return (15% of $400,000) (60,000)
Residual income $18,000
Yields an increase of $3,000 in the residual income.
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Learning Objective 3
Determine the range, if any, within which a negotiated transfer price should fall.
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Key Concepts/Definitions
A transfer price is the price charged when one segment of a company provides goods or services to another segment of the company.
The fundamental objective in setting transfer prices is to motivate managers to act in the best interests of the overall company.
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Three Primary Approaches
There are three primary approaches to setting transfer prices:
Negotiated transfer prices;
Set transfer prices at cost using either variable cost or full (absorption) cost; and
Transfers at market price.
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Negotiated Transfer Prices
A negotiated transfer price results from discussions between the selling and buying divisions.
Advantages of negotiated transfer prices:
They preserve the autonomy of the divisions, which is consistent with the spirit of decentralization.
The managers negotiating the transfer price are likely to have much better information about the potential costs and benefits of the transfer than others in the company.
Upper limit is determined by the buying division.
Lower limit is determined by the selling division.
Range of Acceptable Transfer Prices
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Grocery Storehouse – Part 1
Assume the information as shown with respect to West Coast Plantations and Grocery Mart (both companies are owned by Grocery Storehouse).
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Grocery Storehouse – Part 2
The selling division’s (West Coast Plantations) lowest acceptable transfer price is calculated as:
The buying division’s (Grocery Mart) highest acceptable transfer price is calculated as:
Let’s calculate the lowest and highest acceptable transfer prices under three scenarios.
If an outside supplier does not exist, the highest acceptable transfer price is calculated as:
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Grocery Storehouse – Part 3
If West Coast Plantations has sufficient idle capacity (3,000 crates) to satisfy Grocery Mart’s demands (1,000 crates), without sacrificing sales to other customers, then the lowest and highest possible transfer prices are computed as follows:
Selling division’s lowest possible transfer price:
Buying division’s highest possible transfer price:
Therefore, the range of acceptable transfer prices is $10 – $20.
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Grocery Storehouse – Part 4
If West Coast Plantations has no idle capacity (0 crates) and must sacrifice other customer orders (1,000 crates) to meet Grocery Mart’s demands (1,000 crates), then the lowest and highest possible transfer prices are computed as follows:
Selling division’s lowest possible transfer price:
Buying division’s highest possible transfer price:
Therefore, there is no range of acceptable transfer prices.
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Grocery Storehouse – Part 5
If West Coast Plantations has some idle capacity (500 crates) and must sacrifice other customer orders (500 crates) to meet Grocery Mart’s demands (1,000 crates), then the lowest and highest possible transfer prices are computed as follows:
Buying division’s highest possible transfer price:
Therefore, the range of acceptable transfer prices is $17.50 – $20.00.
Selling division’s lowest possible transfer price:
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Evaluation of Negotiated Transfer Prices
If a transfer within a company would result in higher overall profits for the company, there is always a range of transfer prices within which both the selling and buying divisions would have higher profits if they agree to the transfer.
If managers are pitted against each other rather than against their past performance or reasonable benchmarks, a noncooperative atmosphere is almost guaranteed.
Given the disputes that often accompany the negotiation process, most companies rely on some other means of setting transfer prices.
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Transfers at the Cost to the Selling Division
Many companies set transfer prices at either the variable cost or full (absorption) cost incurred by the selling division.
Drawbacks of this approach include:
Using full cost as a transfer price can lead to suboptimization.
The selling division will never show a profit on any internal transfer.
Cost-based transfer prices do not provide incentives to control costs.
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Transfers at Market Price
A market price (i.e., the price charged for an item on the open market) is often regarded as the best approach to the transfer pricing problem.
A market price approach works best when the product or service is sold in its present form to outside customers and the selling division has no idle capacity.
A market price approach does not work well when the selling division has idle capacity.
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Learning Objective 4
Charge operating departments for services provided by service departments.
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Operating vs. Service Departments
Operating Departments
Carry out central purposes of organization.
Service Departments
Do not directly engage in operating activities.
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Reasons for Charging Service Department Costs
To encourage operating departments to wisely use service department resources.
To provide operating departments with more complete cost data for making decisions.
To help measure the profitability of operating departments.
To create an incentive for service departments to operate efficiently.
Service department costs are charged to operating departments for a variety of reasons including:
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Charging Costs by Behavior – Part 1
Variable and fixed service department costs should be charged to operating departments
separately.
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Variable service department costs should be charged to consuming departments according to whatever activity
(or cost driver) causes the incurrence of the cost.
Charging Costs by Behavior – Part 2
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Charge fixed service department costs to consuming departments in predetermined lump-sum amounts that are based on the consuming department’s peak-period or long-run average servicing needs.
Are based on amounts of capacity each consuming department requires.
Should not vary from period to period.
Charging Costs by Behavior – Part 3
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Should Actual or Budgeted Costs Be Charged?
Budgeted variable and fixed service department costs should be charged to operating departments.
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Sipco has a maintenance department and two operating departments: Cutting and Assembly. Variable maintenance costs are budgeted at $0.60 per machine hour. Fixed maintenance costs are budgeted at $200,000 per year. Data relating to the current year are:
Allocate maintenance costs to the two operating departments.
Sipco – An Example
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Actual hours
Sipco – End of the Year – Part 1
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Percent of peak-period capacity.
Sipco – End of the Year – Part 2
Actual hours
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Quick Check 1
Foster City has an ambulance service that is used by the two public hospitals in the city. Variable ambulance costs are budgeted at $4.20 per mile. Fixed ambulance costs are budgeted at $120,000 per year. Data relating to the current year are:
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Quick Check 1a
How much ambulance service cost will be allocated to Mercy Hospital at the end of the year?
a. $121,200
b. $254,400
c. $139,500
d. $117,000
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Quick Check 1b
How much ambulance service cost will be allocated to Mercy Hospital at the end of the year?
a. $121,200
b. $254,400
c. $139,500
d. $117,000
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Allocating fixed costs using a variable allocation base that fluctuates period to period.
Pitfalls in Allocating Fixed Costs – Part 1
Fixed costs allocated to one department are heavily influenced by what happens in other departments.
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Using sales dollars as an allocation base.
Pitfalls in Allocating Fixed Costs – Part 2
Sales of one department influence the service department costs allocated to other departments.
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Autos R Us – An Example
Autos R Us has one service department and three sales departments, New Cars, Used Cars, and Car Parts. The service department costs total $80,000 for both years in the example. Contrary to good practice, Autos R Us allocates the service department costs based on sales.
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Autos R Us – First-year Allocation
$1,500,000 ÷ $3,000,000
50% of $80,000
In the next year, the manager of the New Cars department increases sales by $500,000. Sales in the other departments are unchanged. Let’s allocate the $80,000 service department cost for the second year given the sales increase.
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Autos R Us – Second-year Allocation
$2,000,000 ÷ $3,500,000
57% of $80,000
If you were the manager of the New Cars department, you would likely complain about the increased service department costs allocated to your department.
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End of Chapter 11
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Acquisition cost
Less: Accumulated depreciation
Net book value
Sheet1
| Pipe Products | ||||||||
| 9-Inch | 12-Inch | 18-Inch | Total | |||||
| Warehouse sq. ft. | 1,000 | 4,000 | 5,000 | 10,000 | ||||
| Lease price per sq. ft. | $ 4 | $ 4 | $ 4 | $ 4 | ||||
| Total lease cost | $ 4,000 | $ 16,000 | $ 20,000 | $ 40,000 | ||||
| Acquisition cost | ||||||||
| Less: Accumulated depreciation | ||||||||
| Net book value |
Sheet2
Sheet3
Residual
income
=
Net
operating
income
-
Average
operating
assets
Minimum
required rate of
return
Sheet1
| Pipe Products | |||||||||||||||||||
| 9-Inch | 12-Inch | 18-Inch | Total | ||||||||||||||||
| Warehouse sq. ft. | 1,000 | 4,000 | 5,000 | 10,000 | |||||||||||||||
| Lease price per sq. ft. | $ 4 | $ 4 | $ 4 | $ 4 | ´ | ||||||||||||||
| Total lease cost | $ 4,000 | $ 16,000 | $ 20,000 | $ 40,000 | |||||||||||||||
| Acquisition cost | |||||||||||||||||||
| Less: Accumulated depreciation | |||||||||||||||||||
| Net book value | |||||||||||||||||||
| Residual income | = | Net operating income | - | Average operating assets | ´ | Minimum required rate of return |
Sheet2
Sheet3
Operating assets100,000$
Required rate of return×20%
Minimum required return20,000$
Actual income30,000$
Minimum required return(20,000)
Residual income10,000$
Sheet1
| Operating assets | $ 100,000 | |||
| Required rate of return | × | 20% | ||
| Minimum required return | $ 20,000 |
Sheet1
| Actual income | $ 30,000 | |||
| Minimum required return | (20,000) | |||
| Residual income | $ 10,000 |
West Coast Plantations:
Naval orange harvest capactiy per month10,000 crates
Variable cost per crate of naval oranges10$ per crate
Fixed costs per month100,000$
Selling price of navel oranges on the outside
market25$ per crate
Grocery Mart:
Purchase price of current naval oranges20$ per crate
Monthly sales of naval oranges1,000 crates
Sheet1
| Pipe Products | |||||||||||||||||||
| 9-Inch | 12-Inch | 18-Inch | Total | ||||||||||||||||
| Warehouse sq. ft. | 1,000 | 4,000 | 5,000 | 10,000 | |||||||||||||||
| Lease price per sq. ft. | $ 4 | $ 4 | $ 4 | $ 4 | ´ | ||||||||||||||
| Total lease cost | $ 4,000 | $ 16,000 | $ 20,000 | $ 40,000 | |||||||||||||||
| Acquisition cost | |||||||||||||||||||
| Less: Accumulated depreciation | |||||||||||||||||||
| Net book value | |||||||||||||||||||
| Residual income | = | Net operating income | - | Average operating assets | ´ | Minimum required rate of return |
Sheet2
| West Coast Plantations: | ||||
| Naval orange harvest capactiy per month | 10,000 | crates | ||
| Variable cost per crate of naval oranges | $ 10 | per crate | ||
| Fixed costs per month | $ 100,000 | |||
| Selling price of navel oranges on the outside market | $ 25 | per crate | ||
| Grocery Mart: | ||||
| Purchase price of current naval oranges | $ 20 | per crate | ||
| Monthly sales of naval oranges | 1,000 | crates |
Sheet3
Variable costTotal contribution margin on lost sales
per unitNumber of units transferred
Transfer Price+
Transfer PriceCost of buying from outside supplier
Transfer PriceProfit to be earned per unit sold (not including the transfer price)
Sheet1
| Pipe Products | |||||||||||||||||||
| 9-Inch | 12-Inch | 18-Inch | Total | ||||||||||||||||
| Warehouse sq. ft. | 1,000 | 4,000 | 5,000 | 10,000 | |||||||||||||||
| Lease price per sq. ft. | $ 4 | $ 4 | $ 4 | $ 4 | ´ | ||||||||||||||
| Total lease cost | $ 4,000 | $ 16,000 | $ 20,000 | $ 40,000 | |||||||||||||||
| Acquisition cost | |||||||||||||||||||
| Less: Accumulated depreciation | |||||||||||||||||||
| Net book value | |||||||||||||||||||
| Residual income | = | Net operating income | - | Average operating assets | ´ | Minimum required rate of return |
Sheet2
| Imperial Beverages: | |||||||||||
| Ginger beer production capactiy per month | 10,000 | barrels | |||||||||
| Variable cost per barrel of ginger beer | £8 | per barrel | |||||||||
| Fixed costs per month | £70,000 | ||||||||||
| Selling price of Imperial Beverages ginger beer on the outside market | £20 | per barrel | |||||||||
| Pizza Maven: | |||||||||||
| Purchase price of regular brand of ginger beer | £18 | per barrel | |||||||||
| Monthly comsumption of ginger beer | 2,000 | barrels | |||||||||
| Transfer Price | ³ | Variable cost | + | Total contribution margin on lost sales | |||||||
| per unit | Number of units transferred |
Sheet3
Sheet1
| Pipe Products | |||||||||||||||||||
| 9-Inch | 12-Inch | 18-Inch | Total | ||||||||||||||||
| Warehouse sq. ft. | 1,000 | 4,000 | 5,000 | 10,000 | |||||||||||||||
| Lease price per sq. ft. | $ 4 | $ 4 | $ 4 | $ 4 | ´ | ||||||||||||||
| Total lease cost | $ 4,000 | $ 16,000 | $ 20,000 | $ 40,000 | |||||||||||||||
| Acquisition cost | |||||||||||||||||||
| Less: Accumulated depreciation | |||||||||||||||||||
| Net book value | |||||||||||||||||||
| Residual income | = | Net operating income | - | Average operating assets | ´ | Minimum required rate of return |
Sheet2
| Imperial Beverages: | |||||||||||||||
| Ginger beer production capactiy per month | 10,000 | barrels | |||||||||||||
| Variable cost per barrel of ginger beer | £8 | per barrel | |||||||||||||
| Fixed costs per month | £70,000 | ||||||||||||||
| Selling price of Imperial Beverages ginger beer on the outside market | £20 | per barrel | |||||||||||||
| Pizza Maven: | |||||||||||||||
| Purchase price of regular brand of ginger beer | £18 | per barrel | |||||||||||||
| Monthly comsumption of ginger beer | 2,000 | barrels | |||||||||||||
| Transfer Price | ³ | Variable cost | + | Total contribution margin on lost sales | Transfer Price | £ | Cost of buying from outside supplier | ||||||||
| per unit | Number of units transferred |
Sheet3
Sheet1
| Pipe Products | |||||||||||||||||||
| 9-Inch | 12-Inch | 18-Inch | Total | ||||||||||||||||
| Warehouse sq. ft. | 1,000 | 4,000 | 5,000 | 10,000 | |||||||||||||||
| Lease price per sq. ft. | $ 4 | $ 4 | $ 4 | $ 4 | ´ | ||||||||||||||
| Total lease cost | $ 4,000 | $ 16,000 | $ 20,000 | $ 40,000 | |||||||||||||||
| Acquisition cost | |||||||||||||||||||
| Less: Accumulated depreciation | |||||||||||||||||||
| Net book value | |||||||||||||||||||
| Residual income | = | Net operating income | - | Average operating assets | ´ | Minimum required rate of return |
Sheet2
| Imperial Beverages: | |||||||||||||||
| Ginger beer production capactiy per month | 10,000 | barrels | |||||||||||||
| Variable cost per barrel of ginger beer | £8 | per barrel | |||||||||||||
| Fixed costs per month | £70,000 | ||||||||||||||
| Selling price of Imperial Beverages ginger beer on the outside market | £20 | per barrel | |||||||||||||
| Pizza Maven: | |||||||||||||||
| Purchase price of regular brand of ginger beer | £18 | per barrel | |||||||||||||
| Monthly comsumption of ginger beer | 2,000 | barrels | |||||||||||||
| Transfer Price | ³ | Variable cost | + | Total contribution margin on lost sales | Transfer Price | £ | Cost of buying from outside supplier | ||||||||
| per unit | Number of units transferred | ||||||||||||||
| Transfer Price | £ | Profit to be earned per unit sold (not including the transfer price) |
Sheet3
-$
1,000
=10$ Transfer Price+10$
Transfer PriceCost of buying from outside supplier=20$
Sheet1
| Pipe Products | |||||||||||||||||||
| 9-Inch | 12-Inch | 18-Inch | Total | ||||||||||||||||
| Warehouse sq. ft. | 1,000 | 4,000 | 5,000 | 10,000 | |||||||||||||||
| Lease price per sq. ft. | $ 4 | $ 4 | $ 4 | $ 4 | ´ | ||||||||||||||
| Total lease cost | $ 4,000 | $ 16,000 | $ 20,000 | $ 40,000 | |||||||||||||||
| Acquisition cost | |||||||||||||||||||
| Less: Accumulated depreciation | |||||||||||||||||||
| Net book value | |||||||||||||||||||
| Residual income | = | Net operating income | - | Average operating assets | ´ | Minimum required rate of return |
Sheet2
| Imperial Beverages: | |||||||||||||||
| Ginger beer production capactiy per month | 10,000 | barrels | |||||||||||||
| Variable cost per barrel of ginger beer | £8 | per barrel | |||||||||||||
| Fixed costs per month | £70,000 | ||||||||||||||
| Selling price of Imperial Beverages ginger beer on the outside market | £20 | per barrel | |||||||||||||
| Pizza Maven: | |||||||||||||||
| Purchase price of regular brand of ginger beer | £18 | per barrel | |||||||||||||
| Monthly comsumption of ginger beer | 2,000 | barrels | |||||||||||||
| Transfer Price | ³ | Variable cost | + | Total contribution margin on lost sales | Transfer Price | £ | Cost of buying from outside supplier | ||||||||
| per unit | Number of units transferred | ||||||||||||||
| Transfer Price | £ | Profit to be earned per unit sold (not including the transfer price) | |||||||||||||
| Transfer Price | ³ | $ 10 | + | $ - 0 | = | $ 10 | |||||||||
| 1,000 |
Sheet3
Sheet1
| Pipe Products | |||||||||||||||||||
| 9-Inch | 12-Inch | 18-Inch | Total | ||||||||||||||||
| Warehouse sq. ft. | 1,000 | 4,000 | 5,000 | 10,000 | |||||||||||||||
| Lease price per sq. ft. | $ 4 | $ 4 | $ 4 | $ 4 | ´ | ||||||||||||||
| Total lease cost | $ 4,000 | $ 16,000 | $ 20,000 | $ 40,000 | |||||||||||||||
| Acquisition cost | |||||||||||||||||||
| Less: Accumulated depreciation | |||||||||||||||||||
| Net book value | |||||||||||||||||||
| Residual income | = | Net operating income | - | Average operating assets | ´ | Minimum required rate of return |
Sheet2
| Imperial Beverages: | |||||||||||||||||
| Ginger beer production capactiy per month | 10,000 | barrels | |||||||||||||||
| Variable cost per barrel of ginger beer | £8 | per barrel | |||||||||||||||
| Fixed costs per month | £70,000 | ||||||||||||||||
| Selling price of Imperial Beverages ginger beer on the outside market | £20 | per barrel | |||||||||||||||
| Pizza Maven: | |||||||||||||||||
| Purchase price of regular brand of ginger beer | £18 | per barrel | |||||||||||||||
| Monthly comsumption of ginger beer | 2,000 | barrels | |||||||||||||||
| Transfer Price | ³ | Variable cost | + | Total contribution margin on lost sales | Transfer Price | £ | Cost of buying from outside supplier | = | $ 20 | ||||||||
| per unit | Number of units transferred | ||||||||||||||||
| Transfer Price | £ | Profit to be earned per unit sold (not including the transfer price) | |||||||||||||||
| Transfer Price | ³ | £8 | + | £0 | = | £8 | |||||||||||
| 2,000 |
Sheet3
( $25 - $10) × 1,000
1,000
=25$ Transfer Price+10$
Transfer PriceCost of buying from outside supplier=20$
Sheet1
| Pipe Products | |||||||||||||||||||
| 9-Inch | 12-Inch | 18-Inch | Total | ||||||||||||||||
| Warehouse sq. ft. | 1,000 | 4,000 | 5,000 | 10,000 | |||||||||||||||
| Lease price per sq. ft. | $ 4 | $ 4 | $ 4 | $ 4 | ´ | ||||||||||||||
| Total lease cost | $ 4,000 | $ 16,000 | $ 20,000 | $ 40,000 | |||||||||||||||
| Acquisition cost | |||||||||||||||||||
| Less: Accumulated depreciation | |||||||||||||||||||
| Net book value | |||||||||||||||||||
| Residual income | = | Net operating income | - | Average operating assets | ´ | Minimum required rate of return |
Sheet2
| Imperial Beverages: | |||||||||||||||
| Ginger beer production capactiy per month | 10,000 | barrels | |||||||||||||
| Variable cost per barrel of ginger beer | £8 | per barrel | |||||||||||||
| Fixed costs per month | £70,000 | ||||||||||||||
| Selling price of Imperial Beverages ginger beer on the outside market | £20 | per barrel | |||||||||||||
| Pizza Maven: | |||||||||||||||
| Purchase price of regular brand of ginger beer | £18 | per barrel | |||||||||||||
| Monthly comsumption of ginger beer | 2,000 | barrels | |||||||||||||
| Transfer Price | ³ | Variable cost | + | Total contribution margin on lost sales | Transfer Price | £ | Cost of buying from outside supplier | ||||||||
| per unit | Number of units transferred | ||||||||||||||
| Transfer Price | £ | Profit to be earned per unit sold (not including the transfer price) | |||||||||||||
| Transfer Price | ³ | $ 10 | + | ( $25 - $10) × 1,000 | = | $ 25 | |||||||||
| 1,000 |
Sheet3
Sheet1
| Pipe Products | |||||||||||||||||||
| 9-Inch | 12-Inch | 18-Inch | Total | ||||||||||||||||
| Warehouse sq. ft. | 1,000 | 4,000 | 5,000 | 10,000 | |||||||||||||||
| Lease price per sq. ft. | $ 4 | $ 4 | $ 4 | $ 4 | ´ | ||||||||||||||
| Total lease cost | $ 4,000 | $ 16,000 | $ 20,000 | $ 40,000 | |||||||||||||||
| Acquisition cost | |||||||||||||||||||
| Less: Accumulated depreciation | |||||||||||||||||||
| Net book value | |||||||||||||||||||
| Residual income | = | Net operating income | - | Average operating assets | ´ | Minimum required rate of return |
Sheet2
| Imperial Beverages: | |||||||||||||||||
| Ginger beer production capactiy per month | 10,000 | barrels | |||||||||||||||
| Variable cost per barrel of ginger beer | £8 | per barrel | |||||||||||||||
| Fixed costs per month | £70,000 | ||||||||||||||||
| Selling price of Imperial Beverages ginger beer on the outside market | £20 | per barrel | |||||||||||||||
| Pizza Maven: | |||||||||||||||||
| Purchase price of regular brand of ginger beer | £18 | per barrel | |||||||||||||||
| Monthly comsumption of ginger beer | 2,000 | barrels | |||||||||||||||
| Transfer Price | ³ | Variable cost | + | Total contribution margin on lost sales | Transfer Price | £ | Cost of buying from outside supplier | = | $ 20 | ||||||||
| per unit | Number of units transferred | ||||||||||||||||
| Transfer Price | £ | Profit to be earned per unit sold (not including the transfer price) | |||||||||||||||
| Transfer Price | ³ | £8 | + | £0 | = | £8 | |||||||||||
| 2,000 |
Sheet3
Transfer PriceCost of buying from outside supplier=20$
( $25 - $10) × 500
1,000
=17.50$ Transfer Price+10$
Sheet1
| Pipe Products | |||||||||||||||||||
| 9-Inch | 12-Inch | 18-Inch | Total | ||||||||||||||||
| Warehouse sq. ft. | 1,000 | 4,000 | 5,000 | 10,000 | |||||||||||||||
| Lease price per sq. ft. | $ 4 | $ 4 | $ 4 | $ 4 | ´ | ||||||||||||||
| Total lease cost | $ 4,000 | $ 16,000 | $ 20,000 | $ 40,000 | |||||||||||||||
| Acquisition cost | |||||||||||||||||||
| Less: Accumulated depreciation | |||||||||||||||||||
| Net book value | |||||||||||||||||||
| Residual income | = | Net operating income | - | Average operating assets | ´ | Minimum required rate of return |
Sheet2
| Imperial Beverages: | |||||||||||||||||
| Ginger beer production capactiy per month | 10,000 | barrels | |||||||||||||||
| Variable cost per barrel of ginger beer | £8 | per barrel | |||||||||||||||
| Fixed costs per month | £70,000 | ||||||||||||||||
| Selling price of Imperial Beverages ginger beer on the outside market | £20 | per barrel | |||||||||||||||
| Pizza Maven: | |||||||||||||||||
| Purchase price of regular brand of ginger beer | £18 | per barrel | |||||||||||||||
| Monthly comsumption of ginger beer | 2,000 | barrels | |||||||||||||||
| Transfer Price | ³ | Variable cost | + | Total contribution margin on lost sales | Transfer Price | £ | Cost of buying from outside supplier | = | $ 20 | ||||||||
| per unit | Number of units transferred | ||||||||||||||||
| Transfer Price | £ | Profit to be earned per unit sold (not including the transfer price) | |||||||||||||||
| Transfer Price | ³ | £8 | + | £0 | = | £8 | |||||||||||
| 2,000 |
Sheet3
Sheet1
| Pipe Products | |||||||||||||||||||
| 9-Inch | 12-Inch | 18-Inch | Total | ||||||||||||||||
| Warehouse sq. ft. | 1,000 | 4,000 | 5,000 | 10,000 | |||||||||||||||
| Lease price per sq. ft. | $ 4 | $ 4 | $ 4 | $ 4 | ´ | ||||||||||||||
| Total lease cost | $ 4,000 | $ 16,000 | $ 20,000 | $ 40,000 | |||||||||||||||
| Acquisition cost | |||||||||||||||||||
| Less: Accumulated depreciation | |||||||||||||||||||
| Net book value | |||||||||||||||||||
| Residual income | = | Net operating income | - | Average operating assets | ´ | Minimum required rate of return |
Sheet2
| Imperial Beverages: | |||||||||||||||
| Ginger beer production capactiy per month | 10,000 | barrels | |||||||||||||
| Variable cost per barrel of ginger beer | £8 | per barrel | |||||||||||||
| Fixed costs per month | £70,000 | ||||||||||||||
| Selling price of Imperial Beverages ginger beer on the outside market | £20 | per barrel | |||||||||||||
| Pizza Maven: | |||||||||||||||
| Purchase price of regular brand of ginger beer | £18 | per barrel | |||||||||||||
| Monthly comsumption of ginger beer | 2,000 | barrels | |||||||||||||
| Transfer Price | ³ | Variable cost | + | Total contribution margin on lost sales | Transfer Price | £ | Cost of buying from outside supplier | ||||||||
| per unit | Number of units transferred | ||||||||||||||
| Transfer Price | £ | Profit to be earned per unit sold (not including the transfer price) | |||||||||||||
| Transfer Price | ³ | $ 10 | + | ( $25 - $10) × 500 | = | $ 17.50 | |||||||||
| 1,000 |
Sheet3
Percent of
Peak-Period
Operating CapacityHoursHours
DepartmentsRequiredPlannedUsed
Cutting60%75,000 80,000
Assembly40%50,000 40,000
Total hours100%125,000 120,000
Sheet1
| Percent of | ||||||||||
| Peak-Period | ||||||||||
| Operating | Capacity | Hours | Hours | |||||||
| Departments | Required | Planned | Used | |||||||
| Cutting | 60% | 75,000 | 80,000 | |||||||
| Assembly | 40% | 50,000 | 40,000 | |||||||
| Total hours | 100% | 125,000 | 120,000 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet7
Sheet8
Sheet9
Sheet10
Sheet11
Sheet12
Sheet13
Sheet14
Sheet15
Sheet16
CuttingAssembly
DepartmentDepartment
Variable cost allocation:
$0.60 × 80,000 hours48,000$
$0.60 × 40,000 hours24,000$
Fixed cost allocation:
Total allocated cost
Sheet1
| Operating | Hours of Capacity | |||||
| Departments | Required | Used | ||||
| Cutting | 90,000 | 80,000 | ||||
| Assembly | 60,000 | 40,000 | ||||
| Total hours | 150,000 | 120,000 |
Sheet2
| Cutting | Assembly | |||||
| Department | Department | |||||
| Variable cost allocation: | ||||||
| $0.60 × 80,000 hours | $ 48,000 | |||||
| $0.60 × 40,000 hours | $ 24,000 | |||||
| Fixed cost allocation: | ||||||
| Total allocated cost |
Sheet3
Sheet4
Sheet5
Sheet6
Sheet7
Sheet8
Sheet9
Sheet10
Sheet11
Sheet12
Sheet13
Sheet14
Sheet15
Sheet16
CuttingAssembly
DepartmentDepartment
Variable cost allocation:
$0.60 × 80,000 hours48,000$
$0.60 × 40,000 hours24,000$
Fixed cost allocation:
60% × $200,000120,000
40% × $200,00080,000
Total allocated cost168,000$ 104,000$
Sheet1
| Operating | Hours of Capacity | |||||
| Departments | Required | Used | ||||
| Cutting | 90,000 | 80,000 | ||||
| Assembly | 60,000 | 40,000 | ||||
| Total hours | 150,000 | 120,000 |
Sheet2
| Cutting | Assembly | |||||
| Department | Department | |||||
| Variable cost allocation: | ||||||
| $0.60 × 80,000 hours | $ 48,000 | |||||
| $0.60 × 40,000 hours | $ 24,000 | |||||
| Fixed cost allocation: | ||||||
| 60% × $200,000 | 120,000 | |||||
| 40% × $200,000 | 80,000 | |||||
| Total allocated cost | $ 168,000 | $ 104,000 |
Sheet3
Sheet4
Sheet5
Sheet6
Sheet7
Sheet8
Sheet9
Sheet10
Sheet11
Sheet12
Sheet13
Sheet14
Sheet15
Sheet16
Percent of
Peak-Period
CapacityMilesMiles
HospitalsRequiredPlannedUsed
Mercy45%15,000 16,000
Northside55%17,000 17,500
Total100%32,000 33,500
Sheet1
| Percent of | ||||||||||
| Peak-Period | ||||||||||
| Capacity | Miles | Miles | ||||||||
| Hospitals | Required | Planned | Used | |||||||
| Mercy | 45% | 15,000 | 16,000 | |||||||
| Northside | 55% | 17,000 | 17,500 | |||||||
| Total | 100% | 32,000 | 33,500 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet7
Sheet8
Sheet9
Sheet10
Sheet11
Sheet12
Sheet13
Sheet14
Sheet15
Sheet16
MercyNorthside
Variable cost allocation:
$4.20 × 16,000 miles67,200$
$4.20 × 17,500 miles73,500$
Fixed cost allocation
45% × $120,00054,000
55% × $120,00066,000
Total allocated cost121,200$ 139,500$
Sheet1
| Operating | Hours of Capacity | |||||
| Departments | Required | Used | ||||
| Cutting | 90,000 | 80,000 | ||||
| Assembly | 60,000 | 40,000 | ||||
| Total hours | 150,000 | 120,000 |
Sheet2
| Mercy | Northside | |||||
| Variable cost allocation: | ||||||
| $4.20 × 16,000 miles | $ 67,200 | |||||
| $4.20 × 17,500 miles | $ 73,500 | |||||
| Fixed cost allocation | ||||||
| 45% × $120,000 | 54,000 | |||||
| 55% × $120,000 | 66,000 | |||||
| Total allocated cost | $ 121,200 | $ 139,500 |
Sheet3
Sheet4
Sheet5
Sheet6
Sheet7
Sheet8
Sheet9
Sheet10
Sheet11
Sheet12
Sheet13
Sheet14
Sheet15
Sheet16
NewUsedPartsTotal
Sales by department1,500,000$ 900,000$ 600,000$ 3,000,000$
Percentage of total sales50%30%20%100%
Allocation of service
department costs40,000$ 24,000$ 16,000$ 80,000$
Departments
Sheet1
| Departments | |||||||||||
| New | Used | Parts | Total | ||||||||
| Sales by department | $ 1,500,000 | $ 900,000 | $ 600,000 | $ 3,000,000 | |||||||
| Percentage of total sales | 50% | 30% | 20% | 100% | |||||||
| Allocation of service | |||||||||||
| department costs | $ 40,000 | $ 24,000 | $ 16,000 | $ 80,000 |
Sheet2
Sheet3
NewUsedPartsTotal
Sales by department2,000,000$ 900,000$ 600,000$ 3,500,000$
Percentage of total sales57%26%17%100%
Allocation of service
department costs45,714$ 20,571$ 13,715$ 80,000$
Departments
Sheet1
| Departments | |||||||||||
| New | Used | Parts | Total | ||||||||
| Sales by department | $ 2,000,000 | $ 900,000 | $ 600,000 | $ 3,500,000 | |||||||
| Percentage of total sales | 57% | 26% | 17% | 100% | |||||||
| Allocation of service | |||||||||||
| department costs | $ 45,714 | $ 20,571 | $ 13,715 | $ 80,000 |