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Rocky Mountain Airlines Inc. has two divisions organized as profit centers, the Passenger Division and the Cargo Division. The following divisional income statements were prepared:
The support department allocation rates for the support department costs were based on revenues. Because the revenues of the two divisions were the same, the support department allocations to each division were also the same.
The following additional information is available:
a.    Does the operating income (loss) for the two divisions accurately measure performance? Explain.
b.    Correct the divisional income statements, using appropriate support department cost drivers.
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Chapter 24 Solutions
Financial and Managerial Accounting - Workingpapers
- Corrections to service department charges Panda Airlines Inc. has two divisions organized as profit centers, the Passenger Division and the Cargo Division. The following divisional income statements were prepared The service department charge rate for the service department costs was based on revenues. The following additional information is available a.Does the operating income for the two divisions accurately measure performance? b.Using service charge rates for service department charges, correct the divisional income statements.arrow_forward3 Investment center analysis; ROI and residual income Romano Corporation has three operating divisions and requires a 12% return on all investments. Selected information is presented here: Division X Division Y Division Z Revenues $1,000,000 Operating income. Operating assets... Margin.... $ 120,000 $ 500,000 $100,000 $300,000 12% Turnover .. 1 turn 2 turns ROI..... Residual income . $25,000arrow_forwardDifferentiate between centralized and decentralized operations. Differentiate between a profit center and an investment center. Weyerhaeuser developed a system that assigns service department expenses to user divisions on the basis of actual services consumed by the division. Here are a number of Weyerhaeuser's activities in its central Financial Services Department: Payroll Accounts payable Accounts receivable Database administration—report preparation What is the major shortcoming of using income from operations as a performance measure for investment centers? In a decentralized company in which the divisions are organized as investment centers, how could a division be considered the least profitable even though it earned the largest amount of income from operations? How does using the return on investment facilitate comparability between divisions of decentralized companies?arrow_forward
- Management of XYZ Media has decided to allocate the costs of the paper's two service/support departments (administration and human resources) to the two revenue generating/producing departments (advertising and circulation.) Administration costs are to be allocated on the Pesos of Assets Employed. ; Human Resources costs are to be allocated on the basis of Number of Employees. The following costs and allocated bases are available. (Convert the fractions on the allocated bases into percentages rounded to the whole number).  Department - Administration: Direct Costs - P781,500 Number of Employees - 10 Pesos of Assets Employed - P387,100  Department - Human Resources: Direct Costs - P492,700 Number of Employees - 7 Pesos of Assets Employed - P291,700  Department - Advertising: Direct Costs - P957,800 Number of Employees - 12 Pesos of Assets Employed - P762,400  Department - Circulation: Direct Costs - P1,352,600 Number of Employees - 25 Pesos of Assets Employed - P1,870,300…arrow_forward1. Allocate the support departments' costs to the operating departmens using the direct method. 2. Rank the support departments based on the % of their services provided to other support departments. Use this ranking to allocate the support departments' costs to the operating departments based on the step-down method. 3. How could you have ranked teh support departments differently?arrow_forwardDifferentiate between a cost center, profit center, and investment center. What is the major shortcoming of using operating income as a performance measure for investment centers? Why should the factors under the control of the investment center manager (revenues, expenses, and invested assets) be considered in computing the return on investment? In a decentralized company in which the divisions are organized as investment centers, how could a division be considered the least profitable, even though it earned the largest amount of operating income? Does the concept of decentralization--top managers allowing middle and lower-level managers to make decisions--have application to God's plan for us? In other words, does God make decisions for us or does he allow us to make decisions in our own lives? Is this good or bad? How does using the return on investment facilitate comparability between divisions of decentralized companies?arrow_forward
- A-1. Evaluate the performance of the two divisions assuming BMI uses residual income. A-2. Which division had the better performance?arrow_forwardUsing the data for Lee Company from problem 24-2 above along with the following data,determine the divisional income from operations for the Division and the CommercialDivision:arrow_forwardCOMPUTING OPERATING INCOME The sales, cost of goods sold, and total operating expenses of departments A and B of Ash Company are as follows: Compute the departmental operating income for each department.arrow_forward
- Comprehensive support department allocations (Need answers for parts C, D, and E please. Thank you!) Management at C. Pier Press has decided to allocate costs of the paper’s two support departments (administration and human resources) to the two revenue-generating departments (advertising and circulation). Administration costs are to be allocated on the basis of dollars of assets employed; human resources costs are to be allocated on the basis of number of employees. The following costs and allocation bases are available: Department  Direct Costs Number of Employees Assets Employed Administration  $390,750 5 $193,550 Human resources  246,350 4 145,850 Advertising  478,900 6 381,200 Circulation  676,300 13 935,150 Totals  $1,792,300 28 $1,655,750  a. Using the direct method, allocate the support department costs to the revenue-generating departments.Note: Round percentages in your calculation to the nearest whole percent (for example, round 34.5% to 35%).Note:…arrow_forwardLauderdale Corporation is organized in three geographical divisions (regions) with managers responsible for revenues, costs, and assets in their respective regions. The firm is highly decentralized and managers are evaluated solely on divisional performance. Corporate overhead (all fixed) is allocated to the regions based on regional gross margin (regional revenue minus regional cost of sales). The following Information is from Lauderdale's first year of operations: Revenues Cost of sales Selling, General and Administrative (all fixed) Corporate overhead Region I $ 1,217,000 458,500 Region II $ 1,667,000 818,500 445,500 655,500 Region III $ 2,267,000 1,148,500 875,500 Total Corporation $ 5,151,000 2,425,500 1,976,500 466,000 Information on the division assets in the three regions of Lauderdale Corporation follows: Region I Region II Region III $ 717,000 647,000 1,313,000 Lauderdale Corporation has a cost of capital of 8.6 percent. The Individual regions are responsible for research and…arrow_forwardFill in the blanks in the schedule below for two separate investment centers A and B. Investment Center: Sales Income Average assets Profit margin Investment turnover Return on investment Investment Center A B Investment Turnover: Investment Center A B Return on investment: Investment Center A Use the information in the table above to compute each department's contribution to overhead (both in dollars and as a percent): (Round your final answers to 2 decimal places.) Profit Margin: B Numerator: Numerator: A Numerator: $? $ 584,600 $1,580,000 10% 7 28 B $ 12,200,000 Denominator: Denominator: $? $7 Denominator: 7% 1.3. 13% Profit Margin =Profit margin 10.00 % = Investment Turnover = Investment turnover 1.30 Return on investment = Return on investment. % 13.00 %arrow_forward
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