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Exam 24: Performance Measurement and Responsibility Accounting

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Question 61

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Profit center managers are evaluated on their ability to generate revenues in excess of costs.

A) True
B) False

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Question 62

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City Park College allocates administrative costs to its teaching departments based on the number of students enrolled, while maintenance and utilities are allocated based on square feet of classrooms. Based on the information below, what is the total amount of expenses allocated to each department (rounded to the nearest dollar) if administrative costs for the college were $180,000, maintenance expenses were $70,000, and utilities were $85,000? $\begin{array}{lll}\text {Teaching}&&\text {Size of}\\\text {Department}&\text {Students}&\text {Classroom}\\\hline\text { Electronics } & 117 & 900 \text { sq. ft. } \\\text { Autom otive } & 156 & 750 \text { sq. ft. } \\\text { Computers } & 429 & 1,200 \mathrm{sq} . \mathrm{ft} \\\text { Plumbing } & 78 & 150 \mathrm{sq} . \mathrm{ft}\end{array}$

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Question 63

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Match the appropriate definition with the following terms: (a) A department or unit that incurs costs without directly generating revenues. (b) A department or unit that generates revenues and incurs costs, in which the manager is also responsible for investments made in operating assets. (c) Costs that are incurred for the joint benefit of more than one department and cannot be readily traced to only one department. (d) Costs readily traced to a specific department because they are incurred for the sole benefit of that department. (e) Costs incurred to produce or purchase two or more products at the same time. (f) Costs for which a manager has the power to determine or at least significantly affect. (g) A department that generates revenues and incurs costs. ________ (1) Direct expenses ________ (2) Profit center ________ (3) Controllable costs ________ (4) Indirect expenses ________ (5) Cost center ________ (6) Joint cost (7) Investment center

Responsibility accounting performance reports:

Data pertaining to a company's joint production for the current period follows: $\begin{array}{llr}& \text { L } & \text { M }\\ \text { Quantities produced } &200 Ibs&150Ibs\\ \text { Market value at split-off point } &\$8/Ib&\$16/Ib\end{array}$ Compute the cost to be allocated to Product M for this period's $660 of joint costs if the value basis is used.

CakeCo, Inc. has three operating departments. Information about these departments is listed below. Maintenance is service department at CakeCo that incurred $12,000 of costs during the period. If allocated maintenance cost is based on floor space occupied by each of the operating departments, compute the amount of maintenance cost allocated to the Baking Department. $\begin{array} { | l | r | r | r | } \hline & \text { Mixing } & \text { Baking } & \text { Packaging } \\\hline \text { Direct costs } & \$ 21,000 & \$ 15,000 & \$ 9,000 \\\hline \text { Sq ft of space } & 1,000 & 1,500 & 500 \\\hline\end{array}$

A company produces two joint products (called 301 and 302) in a single operation that uses one raw material called Fruge. Four hundred gallons of Fruge were purchased at a cost of $800 and were used to produce 150 gallons of Product 301, selling for $5 per gallon, and 75 gallons of Product 302, selling for $15 per gallon. How much of the $800 cost should be allocated to each product, assuming that the company allocates cost based on sales revenue?

The salaries of employees who spend all their time working in one department are:

Carter Company reported the following financial numbers for one of its divisions for the year; average total assets of $4,100,000; sales of $4,525,000; cost of goods sold of $2,550,000; and operating expenses of $1,372,000. Assume a target income of 10% of average invested assets. Compute residual income for the division:

Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below: $\begin{array}{lrr}\text { Selling price to outside customers } & \$ & 40 \\\text { Variable cost per unit } & \$ & 30 \\\text { Total fixed costs } & \$ &10,000 \\\text { Capacity in units } && 20,000\end{array}$ Division B of the same company would like to use the part manufactured by Division A in one of its products. Division B currently purchases a similar part made by an outside company for $38 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A has ample capacity to produce the units for Division B without any increase in fixed costs and without cutting into sales to outside customers. If Division A sells to Division B rather than to outside customers, the variable cost be unit would be $1 lower. What should be the lowest acceptable transfer price from the perspective of Division A?

How do companies decide what allocation bases to use to allocate indirect costs to departments?

Riu Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Repair Division has asked the Parts Division to provide it with 2,000 special parts each year. The special parts would require $17.00 per unit in variable production costs. The Repair Division has a bid from an outside supplier for the special parts at $28.00 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the B83 that it presently is producing. The B83 sells for $34.00 per unit, and requires $22.00 per unit in variable production costs. Packaging and shipping costs of the B83 are $4.00 per unit. Packaging and shipping costs for the new special part would be only $0.50 per unit. The Parts Division is now producing and selling 10,000 units of the B83 each year. Production and sales of the B83 would drop by 10% if the new special part is produced for the Repair Division. Required: a. What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 2,000 special parts per year from the Parts Division to the Repair Division? b. Is it in the best interests of Riu Corporation for this transfer to take place? Explain.

Departmental income statements are prepared for operating departments (profit centers) but not service departments (cost centers).

An example of a service department is the human resources department.

Canfield Technical School allocates administrative costs to its respective departments based on the number of students enrolled, while maintenance and utilities are allocated per square feet of the classrooms. Based on the information below, what is the total amount of administrative cost to the Accounting Department (rounded to the nearest dollar) if administrative costs for the school were $50,000, maintenance fees were $12,000, and utilities were $6,000? $\begin{array} { l c r l } \text { Department } & \text { Students } & & { \text { Classrooms } } \\\text { Electrical } & 120 & 10,000 & \text { sq. ft. } \\\text { Welding } & 70 & 12,000 & \text { sq. ft. } \\\text { Accounting } & 50 & 8,000 & \text { sq. ft. } \\\text { Carpentry } & 40 & 6,000 & \text { sq. ft. } \\\text { Total } & 280 & 36,000 & \text { sq. ft. }\end{array}$

Holo Company reported the following financial numbers for one of its divisions for the year; average total assets of $5,800,000; sales of $5,375,000; cost of goods sold of $3,225,000; and operating expenses of $1,147,000. Assume a target income of 15% of average invested assets. Compute residual income for the division:

A ________ helps control costs and expenses and evaluates managers' performance by assigning costs and expenses to the managers responsible for controlling them.

A company pays $15,000 per period to rent a small building that has 10,000 square feet of space. This cost is allocated to the company's three departments on the basis of the amount of the space occupied by each. Department One occupies 2,000 square feet of floor space, Department Two occupies 3,000 square feet of floor space, and Department Three occupies 5,000 square feet of floor space. If the rent is allocated based on the total square footage of the space, Department One should be charged rent expense for the period of:

Using the information below, compute the manufacturing cycle time: $\begin{array}{lrl}\text { Process time } & 6.0 & \text { hours } \\\text { Inspections time } & .5 & \text { hours } \\\text { Move time } & 6 & \text { hours } \\\text { Wait time } & .9 & \text { hours } \\\text { Warehouse storage time } & 72.0 & \text { hours }\end{array}$

Evaluation of the performance of an investment center involves only financial measures.