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Exam 24: Performance Measurement and Responsibility Accounting

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Question 71

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No standard rule identifies the best basis of allocating expenses across departments.

A) True
B) False

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Question 72

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An example of a controllable cost is equipment depreciation expense.

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B) False

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Question 73

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Joint costs are costs incurred in producing or purchasing a single product.

Division A produces a part with the following characteristics: $\begin{array}{llr} \text { Capacity in units } &50,000\\ \text { Selling price per unit } &\$30\\ \text { Variable cost per unit } &\$18\\ \text { Fixed cost per unit} &\$3\\\end{array}$ Division B, another division in the company, would like to buy this part from Division A. Division B is presently purchasing the part from an outside source at $28 per unit. If Division A sells to Division B, $1 in variable costs can be avoided. Suppose Division A is currently operating at capacity and can sell all of the units it produces on the outside market for its usual selling price. From the point of view of Division A, any sales to Division B should be priced no lower than:

Define joint costs and explain how joint costs can be allocated.

Fallow Corporation has two separate profit centers. The following information is available for the most recent year: $\begin{array}{lrr}&\text { West Division}&\text { East Division}\\\text { Sales (net) } & \$ 200,000 & \$ 350,000 \\\text { Salary expense } & 26,000 & 40,000 \\\text { Cost of goods sold } & 80,000 & 175,000\end{array}$ The West Division occupies 5,000 square feet in the plant. The East Division occupies 3,000 square feet. Rent, which was $40,000 for the year, is an indirect expense and is allocated based on square footage. Compute operating income for the West Division.

Division X makes a part with the following characteristics: $\begin{array} { l r c } \text { Production capacity } && 25,000 \text { units } \\\text { Selling price to outside customers } & \$ & 18 \\\text { Variable cost per unit } & \$ & 11 \\\text { Fixed cost, total } & \$ & 100,000\end{array}$ Division Y of the same company would like to purchase 10,000 units each period from Division X. Division Y now purchases the part from an outside supplier at a price of $17 each. Suppose Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division X refuses to accept the $17 price internally and Division Y continues to buy from the outside supplier, the company as a whole will be:

Match the following terms with the appropriate definition

Plans that identify costs and expenses under each manager's control prior to the reporting period, typically based on the flexible budget approach, are called:

Describe the information found on a responsibility accounting performance report.

Dartford Company reported the following financial data for one of its divisions for the year; average investment center total assets of $3,500,000; investment center income $610,000; a target income of 12% of average invested assets. The residual income for the division is:

Within an organizational structure, the person most likely to be evaluated in terms of controllable costs would be:

Division M makes a part that it sells to customers outside of the company. Data concerning this part appear below: $\begin{array}{lrr}\text { Selling price to outside customers } & \$ & 75 \\\text { Variable cost per unit } & \$ & 50 \\\text { Total fixed costs } & \$ & 400,000 \\\text { Capacity in units } && 25,000\end{array}$ Division O of the same company would like to use the part manufactured by Division M in one of its products. Division O currently purchases a similar part made by an outside company for $70 per unit and would substitute the part made by Division M. Division O requires 5,000 units of the part each period. Division M can sell every unit it produces on the outside market. What should be the lowest acceptable transfer price from the perspective of Division O?

Brownley Company has two service departments and two operating (production) departments. The Payroll Department services all three of the other departments in proportion to the number of employees in each. The Maintenance Department costs are allocated to the two operating departments in proportion to the floor space used by each. Listed below are the operating data for the current period: -The total cost of operating the Milling Department for the current period is:

Use the Hamilton Company's investment center information below to calculate (a) return on total investment and (b) investment center residual income. $\begin{array}{llr} \text { Net Income } &\$315,000\\ \text { Average Invested Assets} &\$2,100,000\\ \text { Target Net Income } & \text {6\% of division assets } \end{array}$

What is a cost center and how is its performance evaluated?

Calculating return on investment for an investment center is defined by the following formula:

Explain the difference between direct and indirect expenses in accounting for departments.

What is the purpose of a responsibility accounting system?

What is the purpose of a departmental accounting system?