Cranshaw Business Services (CBS) operates an information technology (IT) consulting firm out of two offices: Detroit andLos Angeles. Corporate services, such as legal, finance, and personnel, are centralized at the main office and the costs ofthese services are allocated to the two offices for the purposes of profitability assessment. The Detroit office is the originalunit of the company and is well established, having long-time clients from the automotive and other manufacturingindustries. The Los Angeles office is new with a smaller, much more varied, clientele. The costs of personnel services atCBS are currently allocated on the basis of the number of employees in each office. The annual costs of the personneldepartment total $550,000. Data for the fiscal year just ended show the following:Number of employeesNumber of new hiresNumber of employees departingDetroit340Required:91Los Angeles1602010Exercise 9-31 (Algo) Unitwide versus Department Allocation-Administrative (Service) Function (LO 9-2,3)a. Compute the cost allocated to each unit using the current allocation system.b. The manager of the Detroit office believes that Detroit gets little benefit from the personnel office other than the occasional hireand termination help. The manager asks the controller's office to estimate the amount of Personnel Department cost associatedwith routine personnel matters (benefits and so on) and those associated with hiring employees and assisting with departingemployees (transitions). The controller responds that if they separated the overhead costs on this basis, the cost of the PersonnelDepartment for routine matters is $280,000 and the cost of the Personnel Department for transitions (each hire and each departurecounts as one transition) is $270,000.Recompute the costs allocated to each unit using the separate rates for routine and transitional matters.

Allocated costs in accounting refer to the process of assigning or apportioning indirect costs to…

Answered: Cranshaw Business Services (CBS)…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter11: Strategic Cost Management

Section: Chapter Questions

Problem 9E

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For the following situations, identify whether the description is probably a centralized or decentralized organization. A. Seaside Furniture, a small builder of side tables managed solely by its sole proprietor B. Harbor Marketing, which wants Advertising Team Leaders to be able to respond quickly to needs of potential clients so Team Leaders have the authority to make decisions about advertising and pricing C. Coutures Creations, with a single owner who manages the production, accounting, engineering, sales, and other administrative functions D. British Navy E. McDonalds franchise #3101 in Canton. Ohio F. United States Army
Grate Care Company specializes in producing products for personal grooming. The company operates six divisions, including the Hair Products Division. Each division is treated as an investment center. Managers are evaluated and rewarded on the basis of ROI performance. Only those managers who produce the best ROIs are selected to receive bonuses and to fill higher-level managerial positions. Fred Olsen, manager of the Hair Products Division, has always been one of the top performers. For the past two years, Freds division has produced the largest ROI; last year, the division earned an operating income of 2.56 million and employed average operating assets valued at 16 million. Fred is pleased with his divisions performance and has been told that if the division does well this year, he will be in line for a headquarters position. For the coming year, Freds division has been promised new capital totaling 1.5 million. Any of the capital not invested by the division will be invested to earn the companys required rate of return (9 percent). After some careful investigation, the marketing and engineering staff recommended that the division invest in equipment that could be used to produce a crimping and waving iron, a product currently not produced by the division. The cost of the equipment was estimated at 1.2 million. The divisions marketing manager estimated operating earnings from the new line to be 156,000 per year. After receiving the proposal and reviewing the potential effects, Fred turned it down. He then wrote a memo to corporate headquarters, indicating that his division would not be able to employ the capital in any new projects within the next eight to 10 months. He did note, however, that he was confident that his marketing and engineering staff would have a project ready by the end of the year. At that time, he would like to have access to the capital. Required: 1. Explain why Fred Olsen turned down the proposal to add the capability of producing a crimping and waving iron. Provide computations to support your reasoning. 2. Compute the effect that the new product line would have on the profitability of the firm as a whole. Should the division have produced the crimping and waving iron? 3. Suppose that the firm used residual income as a measure of divisional performance. Do you think Freds decision might have been different? Why? 4. Explain why a firm like Grate Care might decide to use both residual income and return on investment as measures of performance. 5. Did Fred display ethical behavior when he turned down the investment? In discussing this issue, consider why he refused to allow the investment.
Identify the type of responsibility center (revenue center, cost center, profit center, or investment center) for each of the following situations. A. the legal department for Avon Manufacturing B. the Macys store in Mansfield, Ohio C. the food and beverage division of the Best Western D. the marketing department of the Hershey Company E. the Walmart #5030 on Central Avenue in Toledo, Ohio F. Apples Braeburn Capital Inc., where most of Apples billions of dollars are invested G. Zappos department store H. the mens clothing department in the Walmart #5030 in Toledo, Ohio
Cranshaw Business Services (CBS) operates an information technology (IT) consulting firm out of two offices: Detroit and Los Angeles. Corporate services, such as legal, finance, and personnel, are centralized at the main office and the costs of these services are allocated to the two offices for the purposes of profitability assessment. The Detroit office is the original unit of the company and is well established, having long-time clients from the automotive and other manufacturing industries. The Los Angeles office is new with a smaller, much more varied, clientele. The costs of personnel services at CBS are currently allocated on the basis of the number of employees in each office. The annual costs of the personnel department total $350,000. Data for the fiscal year just ended show the following: Detroit Los Angeles Number of employees 380 120 Number of new hires 7 20 Number of employees departing 3 10 Exercise 9-31 (Static) Unitwide versus Department…
Audio Visual Corporation (AVC) manufactures and sells visual display equipment. Headquartered in Boston, it has seven sales offices with nearby warehouses that carry its inventory of new equipment and replacement parts. AVC has a departmentalized manufacturing plant with assembly, maintenance, engineering, scheduling, and cost accounting departments as well as several component parts departments. When management decided to upgrade its AIS, they installed a mainframe at headquarters and local area networks at each sales office. The IS manager and four systems analysts were hired shortly before they integrated the new computer and the existing AIS. The other IS employees have been with the company for years. During its early years, AVC had a centralized decision-making organization. Top management formulated all plans and directed all operations. As the company expanded, decision making was decentralized, although data processing was highly centralized. Departments coordinated their…
UrLink Company is a newly formed company specializing in high-speed Internet service for home and business. The owner, Lenny Kirkland, had divided the company into two segments: Home Internet Service and Business Internet Service. Each segment is run by its own supervisor, while basic selling and administrative services are shared by both segments.Lenny has asked you to help him create a performance reporting system that will allow him to measure each segment’s performance in terms of its profitability. To that end, the following information has been collected on the Home Internet Service segment for the first quarter of 2017. Budgeted Actual Service revenue $24,800 $25,000 Allocated portion of: Building depreciation 10,300 10,300 Advertising 4,700 4,200 Billing 3,200 3,200 Property taxes 1,100 1,200 Material and supplies 1,400 1,300 Supervisory salaries 9,400 9,400 Insurance 4,300 3,200 Wages…
Xerox Corporation has been an innovator in its responsibility-accounting system. In one initiative, management changed the responsibility-centre orientation of its Logistics and Distribution Department from a cost centre to a profit The department manages the inventories and provides other logistical services to the company’s Business Systems Group. Formerly, the manager of the Logistics and Distribution Department was held accountable for adherence to an operating expense budget. Now the department “sells” its services to the company’s other segments, and the department’s manager is evaluated partially on the basis of the department’s profit. Xerox Corporation’s management feels that the change has been beneficial. The change has resulted in more innovative thinking in the development and has moved decision making down to lower levels in the company. Required: Comment on the new responsibility-centre designation for the Logistics and Distribution Department.
Cathy’s Classic Clothes is a retailer that sells to professional women in the northeast. The firm leases space for stores in upscale shopping centers, and the organizational structure consists of regions, districts, and stores. Each region consists of two or more districts; each district consists of three or more stores. Each store, district, and region has been established as a profit center. At all levels, the company uses a responsibility-accounting system focusing on information and knowledge rather than blame and control. Each year, managers, in consultation with their supervisors, establish financial and nonfinancial goals, and these goals are integrated into the budget. Actual performance is mea-sured each month.The New England Region consists of the Coastal District and the Inland District. The Coastal District includes the New Haven, Boston, and Portland stores. The Coastal District’s performance has not been up to expectations in the…
Code Incorporated has three divisions (Entertainment, Plastics, and Video Card), each of which is considered an investment center for performance evaluation purposes. The Entertainment Division manufactures video arcade equipment using products produced by the other two divisions, as follows: 1. The Entertainment Division purchases plastic components from the Plastics Division that are considered unique (i.e., they are made exclusively for the Entertainment Division). In addition, the Plastics Division makes less-complex plastic components that it sells externally, to other producers. 2. The Entertainment Division purchases, for each unit it produces, a video card from Code's Video Card Division, which also sells this video card externally (to other producers). The per-unit manufacturing costs associated with each of the above two items, as incurred by the Plastic Components Division and the Video Card Division, respectively, are: Plastic Components Video Cards Direct…
Xerox Corporation has been an innovator in its responsibility-accounting system. In one initiative, management changed the responsibility-center orientation of its Logistics and Distribution Department from a cost center to a profit center. The department manages the inventories and provides other logistical services to the company’s Business Systems Group. Formerly, the manager of the Logistics and Distribution Department was held accountable for adherence to an operating expense budget. Now the department “sells” its services to the company’s other segments, and the department’s manager is evaluated partially on the basis of the department’s profit. Xerox Corporation’s management feels that the change has been beneficial. The change has resulted in more innovative thinking in the department and has moved decision making down to lower levels in the company. Required: Comment on the new responsibility-center designation for the Logistics and Distribution Department.
Company B uses a responsibility reporting system to measure the performance of its three investment centers: Planes, Taxis, and Limos. Segment performance is measured using a system of responsibility reports and return on investment calculations. The allocation of resources within the company and the segment managers’ bonuses are based in part on the results shown in these reports.Recently, the company was the victim of a computer virus that deleted portions of the company’s accounting records. This was discovered when the current period’s responsibility reports were being prepared. The printout of the actual operating results appeared as follows. Planes Taxis Limos Service revenue $ ? $450,000 $ ? Variable costs 5,000,000 ? 320,000 Contribution margin ? 180,000 380,000 Controllable fixed costs 1,500,000 ? ? Controllable margin ? 70,000 176,000 Average operating assets 25,000,000 ? 1,600,000 Return on investment 12% 10% ? InstructionsDetermine the missing pieces…
Camila’s Classic Clothes is a retailer that sells to professional women in the northeast. The firm leases space for stores in upscale shopping centers, and the organizational structure consists of regions, districts, and stores. Each region consists of two or more districts; each district consists of three or more stores. Each store, district, and region has been established as a profit center. At all levels, the company uses a responsibility-accounting system focusing on information and knowledge rather than blame and control. Each year, managers, in consultation with their supervisors, establish financial and nonfinancial goals, and these goals are integrated into the budget. Actual performance is measured each month. The New England Region consists of the Coastal District and the Inland District. The Coastal District includes the New Haven, Boston, and Portland stores. The Coastal District’s performance has not been up to expectations in the past. For the month of May, the district…

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