You firm has just been hired by Toes in the Water, Inc., a manufacturer of kayaks, to provide consulting services. Toes in the Water operates two divisions: Ocean and Lake. Each divisional vice president is held responsible for both profit andinvested capital. Each division consists of two branches: Sand and Clay. Each branch manager is responsible for generating revenue and controlling costs. The Ocean division's Sand branch has two departments, Zac and Brown. Bothdepartment managers are responsible for controlling costs.You asked a staff member to provide a list of the performance evaulation tools they would suggest using to evaluate the Sand and Clay branches. They provided the following list:budget versus actual report• segmented income statement• return on investmentDo you agree with the staff member's list? Why or why not?A. No. Return on investment should not be used because the branches are considered profit centers.B. Yes. All of the tools listed are valid performance evlaulation tools for the branches.C. No. Residual income should be used in conjunction with return on investment to evaluate the branches.D. No. None of the tools listed consider the company's target rate of return.O E. Yes. The tools listed are comprehensive and consider each branch's revenue, expenses, and assets.

Answered: er, Inc., a manufacturer of kayak…

er, Inc., a manufacturer of kayak ranches: Sand and Clay. Each lling costs. performance evaulation tools t or why not? used because the branches are mance evlaulation tools for the

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter10: Decentralization: Responsibility Accounting, Performance Evaluation, And Transfer Pricing

Section: Chapter Questions

Problem 31P

See similar textbooks

Similar questions

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.
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.
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…
Phoenix Inc., a cellular communication company, has multiple business units, organized as divisions. Each division’s management is compensated based on the division’s operating income. Division A currently purchases cellular equipment from outside markets and uses it to produce communication systems. Division B produces similar cellular equipment that it sells to outside customers—but not to division A at this time. Division A’s manager approaches division B’s manager with a proposal to buy the equipment from division B. If it produces the cellular equipment that division A desires, division B will incur variable manufacturing costs of $60 per unit. Relevant Information about Division B Sells 90,000 units of equipment to outside customers at $130 per unit Operating capacity is currently 80%; the division can operate at 100% Variable manufacturing costs are $70 per unit Variable marketing costs are $8 per unit Fixed manufacturing costs are $900,000 Income per Unit for Division A…
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…
Assume you work as an accountant in the merchandising division of a large public company thatmakes and sells athletic clothing. To encourage the merchandising division to earn as much profiton each individual sale as possible, the division manager’s pay is based, in part, on the division’sgross profit percentage. To encourage control over the division’s operating expenses, the manager’s pay also is based on the division’s net income.You are currently preparing the division’s financial statements. The division had a good year,with sales of $100,000, cost of goods sold of $50,000, sales returns and allowances of $6,000, salesdiscounts of $4,000, and salaries and wages expenses of $30,000. (Assume the division does notreport income taxes.) The division manager stresses that “ it would be in your personal interest ” toclassify sales returns and allowances and sales discounts as selling expenses rather than as contrarevenues on the division’s income statement. He justifies this “friendly…
Relco Industries recently purchased Arbeck, Inc., a manufacturer of electrical components that the construction industry uses. Roland Ford has been appointed as chief financial officer of Arbeck, and the president of Relco, Martha Sanderson, has asked him to prepare an organizational chart for his department at Arbeck. The chart that Ford has prepared is shown in the figure. Ford believes that the treasurer’s department should include the following employees: assistant treasurer, manager of accounts receivable and four subordinates, manager of investments and three subordinates, and manager of stockholder relations and two subordinates—a total of 13 employees besides the treasurer.The controller’s department should consist of an assistant controller, a manager of general accounting and four subordinates, a manager of fixed asset control and three subordinates, and a manager of cost accounting with four subordinates—a total of 15 employees besides the controller.When Ford presented his…
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…
Adrian Cursio & Associates is a consulting business that operates in a rented office in Melbourne CBD, offering taxation, superannuation and insurance advice. The office has a main reception area (servicing all departments) with the remaining floor space allocated to the three departments.The following information is provided for the three departments: Divisional costs includes professional staff wages to directly providing advice and conduct consulting to clients. The common cost made up of reception wages and rent is totalled at $165,000. If the common cost is allocated by income, what is the profit (or loss) made by the Insurance division? a. $37,784.82 b. $35,000 c. $355,000 d. $142,215.18
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…
You are the managerial accountant at Reliable Company and are part of the organization's budgeting committee. You have been assigned to support the marketing department and manage its master budget. The marketing department is responsible for the following: Managing the firm's marketing Hiring subcontractors Selling the consulting expertise to smaller outside firms The department's expenses are as follows: Salaries and benefits of $48,000/month Web site operations of $21,000/ month Online advertising expenses of $15,000/month Miscellaneous expenses of $3,500/month The sales forecast for its consulting services are as follows: April: $190,000 May: $200,000 June: $205,000 The department pays a sales commission of 5%, and this is paid in the following month. Subcontractor expenses are estimated at 45% of sales and are paid the month after they are billed. Consulting fees are collected 20% in the month of sale, 70% in the following month, and 10% in the second month following…