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9.E: Responsibility Accounting and Decentralization (Exercises)

  • Page ID
    12143
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    Multiple Choice

    1. Which of the following is not a common goal of an organization?
      1. operational efficiency
      2. being acquired by another business
      3. achieving strategic goals
      4. measuring financial performance
    Answer:

    b

    1. Which of the following does not describe a management control system?
      1. establishes a company’s strategic goals
      2. implements a company’s strategic goals
      3. monitors a company’s strategic goals
      4. a system that only measures profitability
    2. In centralized organizations, primary decisions are made by ________.
      1. an individual at the top of the organization
      2. various managers throughout the organization
      3. outside consultants
      4. low-level management
    Answer:

    a

    1. A key advantage of a decentralized organization is ________.
      1. increased administrative costs
      2. quicker decisions and response time
      3. the ease of aligning segment and company goals
      4. duplication of efforts
    2. Strategic decisions occur ________.
      1. frequently and involve immediate decisions
      2. frequently and involve long-term decisions
      3. infrequently and involve long-term decisions
      4. infrequently and involve immediate decisions
    Answer:

    c

    1. Segments are uniquely identifiable components of the business and can be categorized by all of the following except________.
      1. products produced
      2. services provided
      3. geographical location
      4. number of employees
    2. Organizational charts ________.
      1. list the salaries of all employees
      2. outline the strategic goals of the organization
      3. show the structure of an organization
      4. help management measure financial performance
    Answer:

    c

    1. In a centralized organization, where are goals established?
      1. at the lower level of the organization and promoted upward
      2. outside the organization based on best practices in the industry
      3. by each segment of the organization
      4. at the highest level of the organization and promoted downward
    2. Managers in decentralized organizations make decisions relating to all of the following except ________.
      1. the company’s stock price
      2. equipment purchases
      3. personnel
      4. prices to charge customers
    Answer:

    a

    1. Which of the following is not a type of responsibility center?
      1. concentrated cost center
      2. investment center
      3. profit center
      4. cost center
    2. A system that establishes financial accountability for operating segments within an organization is called ________.
      1. a financial statement
      2. an internal control system
      3. responsibility accounting
      4. centralization
    Answer:

    c

    1. A responsibility center in which managers are held accountable for both revenues and expenses is called a ________.
      1. discretionary cost center
      2. revenue center
      3. cost center
      4. profit center
    2. A responsibility center structure that considers investments made by the operating segments by using a common cost of capital percentage is called ________.
      1. return on investment
      2. residual income
      3. a profit center
      4. a discretionary cost center
    Answer:

    b

    1. An important goal of a responsibility accounting framework is to help ensure which of the following?
      1. decision-making is made by the top executives.
      2. investments made by each segment are minimized.
      3. identification of operating segments that should be closed.
      4. segment and company financial goals are congruent.
    2. Costs that a company or manager can influence are called ________.
      1. discretionary costs
      2. fixed costs
      3. variable costs
      4. controllable costs
    Answer:

    d

    1. An example of an uncontrollable cost would include all of the following except ________.
      1. real estate taxes charged by the county in which the business operates
      2. per-gallon cost of fuel for the company’s delivery trucks
      3. hourly rate of pay for the company’s purchasing manager
      4. federal income tax rate paid by the company
    2. Internal costs that are charged to the segments of a business are called ________.
      1. controllable costs
      2. variable costs
      3. fixed costs
      4. allocated costs
    Answer:

    d

    1. A transfer pricing arrangement that uses the price that would be charged to an external customer is a ________.
      1. market-based approach
      2. negotiated approach
      3. cost approach
      4. decentralized approach
    2. A transfer pricing structure that considers the opportunity costs of selling to internal rather than external customers uses ________.
      1. the cost approach
      2. the general transfer pricing approach
      3. the market-based approach
      4. the opportunity cost approach
    Answer:

    b

    Questions

    1. What is a management control system? What are its components and how does the system help the business?
    Answer:

    A management control system allows management to establish, implement, and monitor the organization’s achievement of strategic goals. Once the goals are developed, goals must be communicated throughout the organization and activities of the organization should align to achieve the strategic goals. The control system must also provide feedback and allow for alterations, as necessary, to the organization’s strategic goals.

    1. Identify and describe the levels of management, including the various types of decisions managers at each level make.
    2. Discuss the difference between centralized and decentralized organizations. Does the size of the organization influence whether the organization has a centralized or decentralized structure? Explain.
    Answer:

    Centralized organizations reserve decision-making authority for top management. Decentralized organizations disperse decision-making throughout the organization. Companies of all sizes may exhibit tendencies for both centralized and decentralized decision-making. For example, while Apple might give its stores great latitude to meet customer needs, the company will reserve research and development activities for the highest levels of the organization.

    1. Identify a company where you recently shopped. Assume the company operates with a decentralized structure. Describe how customers might benefit from the decentralized structure.
    2. Discuss the difference between daily and strategic decisions. Think of a business and provide an example of a daily and strategic decision.
    Answer:

    Daily decisions are frequent and usually have a short-term impact. Strategic decisions are infrequent and usually have a long-term impact. Daily decisions impact the operational effectiveness and efficiency of the organization while strategic decisions address the long-term aspect of the business. For example, daily decisions for a grocery store might relate to signage, displays, and inventory levels to maintain. Strategic decisions for a grocery store might include whether or not to offer online ordering or leasing in-store space to other businesses such as a coffee shop, nail salon, or bank.

    1. Access PepsiCo’s 2017 annual report. Starting at the top of the document, use the find (Ctrl + F) or search feature in the browser to search the annual report for the word “segments” to determine how many operating segments PepsiCo has. What are the segments? How are the segments categorized?
    2. Another search of PepsiCo’s 2017 annual report reveals the company maintains a centralized management perspective on aspects of these items:
      • Commodities (items such as sugar and high fructose corn syrup that go into many of the beverages)
      • Research and development
      • Insurance and benefit program
      • Foreign currency transactions
      • Debt, investments, and other financing activities

    Explain why these activities would be centralized functions within PepsiCo as opposed to decentralized like many other activities.

    Answer:

    These activities represent a significant cost to the organization, require specialization, relate to strategic and quality goals, and allow for benefits related to buying power. Also, there is the possibility that without centralizing some of these costs, they might experience a significant cost overrun. For example, the company might want to finance capital improvements, and they often can do so less expensively, in terms of interest rates, by packaging bonds into one issue. Similar cost savings and improvements in operational efficiencies could probably be identified in the other examples listed.

    1. Define segments and describe how identifying segments within a business might help manage the business.
    2. Choose a company and describe how a specific issue, policy, or procedure (for example, granting merchandise returns, establishing sales prices) might look if the business is structured as a centralized business.
    Answer:

    Answers will vary. Sample answer: McDonald’s might have a policy that all stores must sell items at a price set by the company. The purpose of this is to prevent stores from competing with each other based on price and causing confusion or frustration with customers.

    1. Choose a company and explain how a specific issue, policy, or procedure (for example, granting merchandise returns, establishing sales prices) might look if the business is structured as a decentralized business.
    2. Assume you are the manager of a local Starbucks. What factors do you feel would be relevant to hiring workers (including pay), assuming Starbucks is a decentralized organization?
    Answer:

    Answers will vary. Responses should include factors relating to establishing a competitive pay rate based on the local economy, hiring experienced workers, investing in training, and other factors necessary to ensure the store’s success.

    1. Assume you are the manager of a local Starbucks. What factors do you feel would be relevant to hiring workers (including pay), assuming Starbucks is a centralized organization?
    2. Use Netflix’s 2017 annual report to answer the following questions. How many segments does Netflix have? What are the segments? The annual report also shows selected nonfinancial and financial information for each segment. Prepare a brief presentation listing the “Paid memberships at end of period,” “Revenues,” and “Contribution profit” (also calledoperating profit) for the three most recent years (2017, 2016, and 2015). In the presentation, include any observations you notice about the trends of each segment.
    Answer:

    Netflix has three segments: Domestic Streaming, International Streaming, and Domestic DVD. Responses should present the following information:

    Domestic Streaming 2017 2016 2015
    Paid memberships 54,750 47,905 43,401
    Revenues $6,153,025 $5,077,307 $4,180,339
    Contribution profit/(loss) $2,280,454 $1,838,686 $1,375,500
    International Streaming 2017 2016 2015
    Paid memberships 62,832 41,185 27,438
    Revenues $5,089,191 $3,211,095 $1,953,435
    Contribution profit/(loss) $226,589 ($308,521) ($333,386)
    Domestic DVD 2017 2016 2015
    Paid memberships 3,380 4,029 4,787
    Revenues $450,497 $542,267 $645,737
    Contribution profit/(loss) $249,972 $279,525 $321,829

    Responses may note that Domestic Streaming memberships, revenues, and contribution profit are all increasing. International streaming is experiencing significant increases in memberships and revenues, but the contribution loss continues (the loss decreased from 2016 to 2017). The Domestic DVD segment is experiencing declining memberships, revenues, and contribution profit.

    1. Reference the Kellogg Company’s 2017 annual report to answer the following question. In “Note 18: Reportable Segments,” you will find selected financial information for segments within Kellogg Company. Prepare a brief presentation listing each segment, along with the “Net Sales,” “Operating Profit,” and “Total Assets.” For Total Assets, you should ignore Corporate and Elimination entries, and you will need to combine the U.S. divisions into a North American total. Report this information for the three most recent years (2017, 2016, and 2015). In the presentation, include any observations you notice about the trends of each segment. You may want to use Microsoft Excel or another spreadsheet application for the numerical data. This information will be used in a subsequent question.
    2. Lavell started out mowing lawns in the neighborhood when he was \(13\) years old. He did such good work that, without advertising, his business grew steadily each year. After college, Lavell decided to continue the business as a full-time career. One of his concerns, however, is the number of hours he is putting in. Once school lets out, he finds himself working long hours nearly every day of the week. Although he has added workers, his business now handles mowing, trimming, and landscaping for residential, corporate, and nonprofit clients. He is considering adding managers but is not quite sure how to structure the organization. Lavell wants to focus on building the business rather than doing the daily work, so he knows a decentralized structure will be best. He has asked you to develop a potential organizational chart to help him envision the best way to organize the business. Describe the advantages to this approach as well as any concerns he should have.
    Answer:

    Answers will vary. Responses should include an organizational chart for a decentralized structure that includes three divisions: residential, corporate, and nonprofit. Under each of these divisions would be the mowing, trimming, and landscaping activities. Alternative responses may present three divisions: mowing, trimming, and landscaping activities with the client categories (residential, corporate, and nonprofit) below each. This is less desirable due to inefficiency. The advantage of this approach is the speed of decision-making and responding to clients. Lavell would need to ensure the quality of the services remains at a high standard.

    1. Describe the concept of responsibility accounting.
    2. Describe the concept of a cost center and, using a specific organization, give an example of how this might be used to achieve the strategic goals of the organization.
    Answer:

    Answers will vary. One example is the transportation division in a school system. The goal of the transportation division is to manage costs while maintaining safety in transporting students.

    1. Describe the concept of a profit center and, using a specific organization, give an example of how this might be used to achieve the strategic goals of the organization.
    2. Explain the benefits of a return on investment structure within an investment center framework. It may help to think of an example using an existing company.
    Answer:

    Answers will vary. The benefits of an ROI structure include consideration for the segment’s investment and evaluation of management’s ability to generate profitability. In addition, this framework incentivizes management to undertake value-added investments. A disadvantage is that the segment may prioritize the segment over company financial goals.

    1. Explain the benefits of a residual income structure within an investment center framework. It may help to think of an example using an existing company.
    2. Discuss the concept of controllable and uncontrollable costs and how they affect the evaluation of the responsibility center’s financial performance.
    Answer:

    Answers will vary. Managers can influence controllable costs but have little or no ability to influence uncontrollable costs. While it is common to include uncontrollable (including allocated) costs in the financial information of the responsibility center, managers should be evaluated only on controllable costs.

    1. Discuss the concept of transfer pricing.
    2. Discuss the advantages and disadvantages of a market-based transfer pricing approach.
    Answer:

    Answers will vary. An advantage of a market-based approach is that the company remains up-to-date on current cost levels. This allows the business to compare its current cost structure to the market and to identify areas where changes are necessary. A disadvantage is this approach is that it requires a significant investment of time and resources on the part of the business.

    1. Discuss the advantages and disadvantages of a cost-based transfer pricing approach.
    2. Discuss the advantages and disadvantages of a negotiated transfer pricing approach.
    Answer:

    Answers will vary. An advantage of a negotiated approach is that the responsibility center management must be actively involved in the process of establishing the transfer price. This approach may encourage managers to remain attentive to opportunities for cost improvements. A disadvantage would include the possibility of significant disagreements between responsibility center managers.

    Exercise Set A

    1. Assume you have been hired by Hilton Hotels and Resorts. As part of your new role in the accounting department, you have been tasked to set up a responsibility accounting structure for the company. As your first task, your supervisor has asked you to give an example of a cost center, profit center, and an investment center within the Hilton organization. Your supervisor is a little unsure of the difference between a profit center and investment center and would like you to explain the difference.
    2. Consider the national nonprofit organization the American Red Cross. Assume you are the regional director of the organization, and you just received the quarterly financial reports. Even though the organization is a nonprofit, assume it is set up as a profit center because it is helpful for the financial reports to show both donations and expenses by each region/location. One particular report shows there is one location in your region that is extremely over budget on nearly every expense item. From a management perspective, can you think of a reason(s) when going over budget might actually be a good thing? As the regional manager, how might you respond to the overages to help the particular location in the future?
    3. The following information is from Bluff Run Golf Courses. The company runs three courses and the July income statement for each course is shown.
    Bluff Run Golf Courses, Income Statement, Month Ending July 31, 2018 for the Blue Course, Black Course, and Gold Course, respectively: Revenues: Greens fees revenue $62,500, $89,000, $42,800; Outings revenue, $?, $6,000, $28,000; Total revenue, $73,500, $95,000, $70,800; Expenses: Landscaping $7,800, $14,200, $6,400; Wages, $43,900, $?, $32,600; Repairs and maintenance, $5,600, $2,600, $4,400; Fuel, $3,100, $3,000, $1,980; Utilities, $1,800, $3,000, $1,650; Total expenses, $62,200, $79,100, $47,030; Operating income $11,300, $15,900, $?.
    1. Find the missing value for outings revenue, wages, and operating income.
    2. Comment on the financial performance of each course.
    3. Identify a limitation of analyzing the information provided.

    You may want to consider using Microsoft Excel or another spreadsheet application for the numerical data. This information will be used in a subsequent question.

    1. The following information is from Dave’s Sporting Goods. Dave’s is a Midwest sporting goods store with three regional stores. The August income statement for all stores is shown.
    Dave’s Sporting Goods, Income Statement, Month Ending August 31, 2018 for Nebraska, Iowa, and Illinois, respectively: Sales, $22,000, $51,000, $36,000; Cost of goods sold, $10,000, $25,000, $19,000; Gross profit, $12,000 $26,000 $17,000; Expenses: Selling expenses, $1,000, $3,200, $2,100; Wages expense, $6,000, $9,000, $8,000; Costs allocated from corporate, $3,000, $15,000, $5,500; Total expenses, $10,000, $27,200, $15,600; Operating income (loss), $2,000, ($1,200), $1,400.
    1. Comment on the operating income results for each store.
    2. Now assume the costs allocated from corporate is an uncontrollable cost for each store. How does this change your assessment of each store?
    1. Assume you are the department B manager for Marley’s Manufacturing. Marley’s operates under a cost-based transfer structure. Assume you receive the majority of your raw materials from department A, which sells only to department B (they have no outside sales). After calculating the operating income in dollars and operating income in percentage, analyze the following financial information to determine costs that may need further investigation. (Hint: It may be helpful to perform a vertical analysis.)
    Marley’s Manufacturing, Income Statement, Month Ending August 31, 2018; Dept A and Dept. B, respectively: Sales, $22,000, $51,000; Cost of goods sold, $10,560, $26,520; Gross profit, $11.440, $24,480; Utility expenses, $1,000, $3,200; Wages expense, $5,500, $10,200; Costs allocated from corporate, $2,200, $15,000; Total expenses, $8,700, $28,400; Operating income/(loss) $, $?, $?; Operating income/(loss) %, ?, ?.
    1. As manager of department B in Marley’s Manufacturing, based on the costs you identified in exercise 5 for further research, how does this impact the financial performance of your department, and what might be some questions you want to ask or solutions you might propose to Marley’s management?
    2. Based on your research of the market in the previous exercises, you have determined the market price for the items your department purchase is \(15\%\) below what you are being charged by department A of Marley’s Manufacturing. How would you view this as a manager? What steps could you take to solve this discrepancy? What alternatives would you consider, assuming you had control over purchasing decisions?
    3. Using the information in the previous exercises about Marley's Manufacturing, determine the operating income for department B, assuming department A “sold” department B 1,000 units during the month and department A reduces the selling price to the market price.

    Exercise Set B

    1. Assume you have been hired by Cabela’s Sporting Goods. As part of your new role in the accounting department, you have been tasked to set up a responsibility accounting structure for the company. As your first task, your supervisor has asked you to give an example of a cost center, profit center, and an investment center within the Cabela’sorganization. Your supervisor is a little unsure of the difference between a profit center and investment center and would like you to explain the difference.
    2. Assume you are the regional manager for a hotel chain. You receive the quarterly financial reports and notice one particular hotel had drastically lower revenue and a corresponding high occupancy rate. Upon further investigation, you discover the manager for the hotel provided lodging for a neighboring town that was hit by a tornado. As the manager, how do you respond to this?
    3. The following information is from Dessert Dynasty. The company runs three stores and the December Income Statement for all stores is shown.
    Dessert Dynasty, Income Statement, Month December 31, 2018 for Store X, Store Y, and Store Z, respectively: Retail revenue, $17,976, $?, $37,380; Events revenue, $11,760, $4,620, $2,520; Total revenue, $29,736 $30,870 $39,900; Expenses: Ingredients, $3,528, $3,276, $?; Wages, $15,792, $18,438, $23,646; Baking supplies, $1,848, $2,352, $1,092; Fuel, $832, $1,302, $1,260 Utilities, $693, $756, $1,260; Total expenses, $22,693, $26,124, $33,222; Operating income, $?, $4,746, $6,678.
    1. Find the missing values for retail revenue, ingredients, and operating income.
    2. Comment on the financial performance of each store.
    3. Identify a limitation of analyzing the information provided.

    You may want to consider using Microsoft Excel or another spreadsheet application for the numerical data. This information will be used in a subsequent question.

    1. The following information is from Good Read Books. Good Read is a regional book store with three regional stores. The May income statement for all stores is shown.
    Good Reads Books, Income Statement, Month Ending May 31, 2018 for Store 1, Store 2, and Store 3, respectively: Sales, $52,920, $32,340, $74,970; Cost of goods sold, $27,930, $14,700, $36,750; Gross profit, $24,990 $17,640 $38,220; Expenses: Selling expenses, $3,087, $1,470, $4,704; Wages expense, $11,760, $8,820, $13,230; Costs allocated from corporate, $8,085, $4,410, $22,050; Total expenses, $22,932, $14,700, $39,984; Operating income (loss), $2,058, $2,940, ($1,764).
    1. Comment on the operating income results for each store.
    2. Now assume the costs allocated from corporate is an uncontrollable cost for each store. How does this change your assessment of each store?
    1. Assume you are the warehouse manager for Vinnie’s Vinyls, a multi-location business specializing in vinyl records. Vinnies’s operates under a cost-based transfer structure and the warehouse supplies all stores with the records. The stores can purchase records only from the warehouse, and the warehouse can only sell to Vinnie’s stores. The manager of the West store has some concerns relating to the store’s financial performance and has asked for your help analyzing transfer costs. After calculating the operating income in dollars and the operating income percent, analyze the following financial information to determine costs that may need further investigation. (Hint: it may be helpful to perform a vertical analysis.)
    Vinnie’s Vinyls, Income Statement, Month Ending March 31, 2018; Warehouse and West Store, respectively: Sales, $18,920, $43,860; Cost of goods sold, $9,082, $21,053; Gross profit, $9,838, $22,807; Selling expenses, $860, $2,752; Wages expense, $4,730, $15,351; Costs allocated from corporate, $2,838, $4,386; Total expenses, $8,428, $22,489; Operating income/(loss) $, $?, $?; Operating income/(loss) %, ?, ?.
    1. As manager of the warehouse for Vinnie’s Vinyls, based on this analysis and the items you identified for further research, what is your advice to the manager of the West store? What might be some questions you want to ask or solutions you might propose to Vinnie’s management?
    2. Discuss how, as warehouse manager for Vinnie’s Vinyls, you view the different rate of allocated costs the warehouse is being charged compared to the West store. Describe the implications of this. What steps could you take to solve this discrepancy? What alternatives would you consider, assuming management is willing to consider making changes in the rate?
    3. Determine the operating income for Vinnie’s Vinyls’ West store, assuming the warehouse allocation is reduced to 10% of sales for the warehouse and the difference will be charged to the West store. Management has determined that the warehouse takes fewer corporate resources and the allocation to the West store was lower than it should have been.

    Problem Set A

    1. Use the following information to answer the questions that follow.
    Bluff Run Golf Courses, Income Statement, Month Ending July 31, 2018 for Course A, Course B, and Course C, respectively: Revenues: Greens fees revenue, $62,500, $89,000, $42,800; Outings revenue, $?, $6,000, $28,000; Total revenue, $73,500, $95,000, $70,800; Expenses: Landscaping, $7,800, $14,200, $6,400; Wages, $43,900, $?, $32,600; Repairs and maintenance, $5,600, $2,600, $4,400; Fuel, $3,100, $3,000, $1,980; Utilities, $1,800, $3,000, $1,650; Total expenses, $62,200, $79,100, $47,030; Operating income $11,300, $15,900, $?; Operating income %, $?, $?, $?.
    1. Calculate the operating income percentage for each of the courses. Comment on how your analysis has changed for each course.
    2. Perform a vertical analysis for each course. Based on your analysis, what accounts would you want to investigate further? How might management utilize this information?
    3. Which method of analysis (using a dollar value or percentage) is most relevant and/or useful? Explain.
    1. Use Netflix’s 2017 annual report to answer the following questions.
      1. Using the revenue and contribution profit information, calculate the contribution profit (loss) percentage for each of the divisions. Comment on how your analysis has changed compared to your analysis of the dollar amounts for each division.
      2. Since companies typically do not publicly provide more than macro levels of asset values, let’s assume the following level of assets (investment):
    Assets (fictitious) for 2017, 2016, and 2015 respectively: Domestic streaming, $15,000,000, $14,000,000, $10,000,000; International streaming, $6,000,000, $4,000,000, $2,000,000; Domestic DVD, $1,500,000, $2,000,000, $3,000,000.

    Calculate the return on investment (ROI) for each division. Comment on the results.

    1. Assume that Netflix uses a cost of capital of \(7\%\). Calculate the residual income (RI) for each of the divisions. Comment on the results.
    1. The income statement comparison for Forklift Material Handling shows the income statement for the current and prior year.
    Forklift Material Handling, Income Statement Comparison for the current year and prior year, respectively (amounts in thousands): Sales, $33,750, $24,750; Cost of goods sold, $21,938, $16,830; Gross profit, $11,813, $7,920; Expenses: Wages, $8,775, $6,188; Utilities, $675, $250; Repairs, $169, $325; Selling, $506, $200; Total expenses, $10,125, $6,963; Operating income, $?, $?; Operating income %, $?, $?; Total assets (investment base) $4,500, $1,500; Return on investment, $?, $?; Residual income (8% cost of capital) $?, $?.
    1. Determine the operating income (loss) (dollars) for each year.
    2. Determine the operating income (percentage) for each year.
    3. The company made a strategic decision to invest in additional assets in the current year. These amounts are provided. Using the total assets amounts as the investment base, calculate the return on investment. Was the decision to invest additional assets in the company successful? Explain.
    4. Assuming an \(8\%\) cost of capital, calculate the residual income for each year. Explain how this compares to your findings in part c.
    1. Assume you are the leather department manager at the Famous Football Factory. The leather department is a cost center and you are reviewing the scrap costs for the previous year, shown here:
    Famous Football Factory Cost Center Data-Leather Division. For each month, respectively, starting with January: Leather scrap expense: $10,000, $10,100, $10,302, $10,405, $11,029, $11,801, $13,100, $14,278, $15,135, $11,351, $11,351, $11,465.
    1. Using Microsoft Excel or another spreadsheet application, create a line chart with markers showing the leather scrap expense. Describe your observations.
    2. Knowing that leather is susceptible to indoor temperature, you decide to talk with the maintenance manager and obtain the following information:
    For each month, respectively, starting with January: Average indoor temperature (degrees Fahrenheit): 70, 71, 70, 70, 71, 73, 74, 76, 74, 72, 71, 70; Air conditioning spare parts inventory: $3,500, $3,150, $2,898, $2,695, $2,426, $2,207, $2,031, $2,010, $2,010, $2,010, $2,010, $1,990; Number of air conditioning breakdowns: 0, 0, 0, 1, 2, 4, 4, 6, 5, 1, 0, 0.

    Using Microsoft Excel or another spreadsheet application, create individual line charts with markers showing the indoor temperature, spare parts inventory, and breakdowns. Describe your observations and actions you might consider.

    1. Financial information for BDS Enterprises for the year-ended December 31, \(20xx\), was gathered from an accounting intern, who has asked for your guidance on how to prepare an income statement format that will be distributed to management. Subtotals and totals are included in the information, but you will need to calculate the values.
      1. In the correct format, prepare the income statement using the following information:
      2. Calculate the profit margin, return on investment, and residual income. Assume an investment base of \(\$100,000\) and \(6\%\) cost of capital.
      3. Prepare a short response to accompany the income statement that explains why uncontrollable costs are included in the income statement.
    Pretax income $?, Gross profit $?, Allocated costs (uncontrollable) $2,035, Labor expense $41,580, Sales $189,000, Research and development (uncontrollable) $315, Depreciation expense $17,000, Net income/(loss) $?, Cost of goods sold $119,070, Selling expense $1,250, Total expenses $?, Marketing costs (uncontrollable) $790, Administrative expense $690, Income tax expense (21% of pretax income) $?, Other expenses $320.
    1. Using the information from BDS Enterprises, prepare the income statement to include all costs, but separate out uncontrollable costs. Insert subtotals where appropriate (include one for operating income) before the uncontrollable costs. Income tax expense should be based on all expenses (that is, it will be the same amount as in question 1). Calculate net income, profit margin, ROI, and RI, excluding uncontrollable expenses. Prepare a short response to accompany the income statement that explains why uncontrollable costs are separated in the income statement.
    2. Management of Great Springs Bottled Water Company has asked you, the controller, to develop a transfer pricing system for the company. The Transportation Department of the company sells all of its product to the Bottling Department of the company. Thus the Transportation Department’s sales become the Bottling Department’s cost of goods sold. In order to determine an optimal transfer pricing system, management would like you to demonstrate what an income statement would look like under a cost, market, and negotiated transfer pricing structure. These various transfer prices are listed as follows. Prepare an income statement for each of the transfer prices by filling in the missing numbers in the provided income statement based on each transfer price (thus four different income statements) and calculate the operating income/loss percentage. Prepare a brief summary of the results.
    Cost-basted $0.62, Market-based $0.74, Negotiated $0.70, Gallons transferred 278,000.
    Great Springs Bottled Water, Income Statement, Month Ending August 31,2018 for Transportation and Bottling, respectively: Sales, $?, $286,000; Cost of good sold, $89,627, $?; Gross profit, $?, $?; Fuel/utility expense, $15,000, $3,200; Wages expense, $43,090, $57,200; Costs allocated form corporate, $17,236, $15,000; Total expenses, $75,326, $75,400; Operating income/(loss) $, $?, $?; Operating income/(loss) %, ?, ?.
    1. The following revenue data were taken from the December 31, 2017, Coca-Cola annual report (10-K):
    Chart showing 2017 (in millions) for Europe, Middle East, Africa; Latin America; North America; Asia Pacific; and Bottle Investments; respectively: Outside sales, $7,332, $3,956, $8,651, $4,767, $10,524; Intersegment sales, $42, $73, $1,986, $409, $81; Total sales, $7,374, $4,029, $10,637, $5,176, $10,605. Chart showing 2016 (in millions) for Europe, Middle East, Africa; Latin America; North America; Asia Pacific; and Bottle Investments, respectively: Outside sales, $7,014 , $3,746, $6,437, $4,788, $19,751; Intersegment sales, $264, $73, $3,773, $506, $134; Total sales, $7,278, $3,819, $10,210, $5,294, $19,885.

    For each segment and each year, calculate intersegment sales (another name for transfer sales) as a percentage of total sales. Using Microsoft Excel or another spreadsheet application, create a clustered column graph to show the 2016 and 2017 percentages for each division. Comment on your observations of this data. How might a division sales manager use this data?

    Problem Set B

    1. Use the following information to answer the questions that follow.
    Dessert Dynasty, Income Statement, Month December 31, 2018 for Store X, Store Y, and Store Z, respectively: Retail revenue, $17,976, $?, $37,380; Events revenue, $11,760, $4,620, $2,520; Total revenue, $29,736 $30,870 $39,900; Expenses: Ingredients, $3,528, $3,276, $?; Wages, $15,792, $18,438, $23,646; Baking supplies, $1,848, $2,352, $1,092; Fuel, $832, $1,302, $1,260; Utilities, $693, $756, $1,260; Total expenses, $22,693, $26,124, $33,222; Operating income, $?, $4,746, $6,678; Operating income %, $?, $?, $?.
    1. Calculate the operating income percentage for each of the stores. Comment on how your analysis has changed for each store.
    2. Perform a vertical analysis for each store. Based on your analysis, what accounts would you want to investigate further? How might management utilize this information?
    3. Which method of analysis (using a dollar value or percentage) is most relevant and/or useful? Explain.
    1. Use Kellogg Company’s 2017 annual report to answer the following questions.
      1. Using the information for Kellogg, calculate the operating profit percentage for each of the divisions. Comment on how your analysis has changed compared to your analysis of the dollar amounts for each division.
      2. Using total assets as the investment, calculate the ROI for each division. In the total assets information you compile, you should ignore corporate and elimination entries amounts and you will also need to combine the U.S. divisions into a North American total. Comment on the results.
      3. Assume that Kellogg uses a cost of capital of \(10\%\). Calculate the RI for each of the divisions (you will need to condense the U.S. divisions into a North American total). Comment on the results.
    2. The income statement comparison for Rush Delivery Company shows the income statement for the current and prior year.
    Rush Delivery Company, Income Statement Comparison for the current year and prior year, respectively (amounts in thousands): Sales, $15,000, $11,000; Cost of goods sold, $9,750, $7,480; Gross profit, $5,250, $3,520; Expenses: Wages, $3,900, $3,080; Utilities, $300, $250; Repairs, $75, $325; Selling, $225, $200; Total expenses, $4,500, $3,855; Operating income/(loss), $?, $?; Operating income/(loss) %, ?, ?; Total assets (investment base) $4,500, $1,500; Return on investment, $?, $?; Residual income (8% cost of capital) $?, $?.
    1. Determine the operating income (loss) (dollars) for each year.
    2. Determine the operating income (percentage) for each year.
    3. The company made a strategic decision to invest in additional assets in the current year. These amounts are provided. Using the total assets amounts as the investment base, calculate the ROI. Was the decision to invest additional assets in the company successful? Explain.
    4. Assuming an \(8\%\) cost of capital, calculate the RI for each year. Explain how this compares to your findings in part C.
    1. Assume you are the manager for the semi-trucks division at the Speedy Delivery Company. The semi-truck division is a cost center and you are reviewing the driver overtime costs for the previous year, shown here:
    Cost Center Data – Semi-truck Division. Driver overtime by month: January $150,000, February $172,500, March $103,500, April $104,535, May $106,626, June $95,963, July $91,165, August $82,048, September $69,741, October $87,177, November $135,124, December $243,222.
    1. Microsoft Excel or another spreadsheet application, create a line chart with markers showing the driver overtime expense. Describe your observations.
    2. Knowing that safety is important in your industry and weather plays a significant role in the safety of drivers, you decide to talk with the safety manager and obtained the following information:
    Average snowfall (inches) by month: January 15, February 12, March 2, April 0, May 0, June 0, July 0, August 0, September 0, October 2, November 35, December 62. Non-company highway accidents by month: January 128, February 70, March 42, April 38, May 35, June 56, July 78, August 83, September 53, October 35, November 208, December 423.

    Using Microsoft Excel or another spreadsheet application, create individual line charts with markers showing the average snowfall and non-company highway accidents. Describe your observations and actions you might consider.

    1. Financial information for Lighthizer Trading Company for the fiscal year-ended September 30, \(20xx\), was collected. As part of a management training session, you have been asked to prepare an income statement format that will be used to distribute to management. Subtotals and totals are included in the information, but you will need to calculate the values.
      1. In the correct format, prepare the income statement using this information:
      2. Calculate the profit margin, return on investment, and residual income. Assume an investment base of \(\$42,000\) and \(8\%\) cost of capital.
      3. Prepare a short response to accompany the income statement that explains why uncontrollable costs are included in the income statement.
    Pretax income $?, Gross profit $?, Allocated costs (uncontrollable) $855, Labor expense $17,464, Sales $79,380, Research and development (uncontrollable) $132, Depreciation expense $7,140, Net income/(loss) $?, Cost of goods sold $50,009, Selling expense $525, Total expenses $?, Marketing costs (uncontrollable) $332, Administrative expense $290, Income tax expense (21% of pretax income) $?, Other expenses $134.
    1. Using the information for Lighthizer Trading Company, prepare the income statement to include all costs, but separate out uncontrollable costs. Insert subtotals where appropriate (include one for operating income) before the uncontrollable costs. Income tax expense should be based on all expenses (that is, it will be the same amount as in the previous exercise 5). Calculate net income, profit margin, ROI, and RI excluding uncontrollable expenses. Prepare a short response to accompany the income statement that explains why uncontrollable costs are separated in the income statement.
    2. Management of Green Peak Tea Company has asked you, the controller, to develop a transfer pricing system for the company. The Brewing Department of the company sells all of its product to the Bottling Department of the company. Thus the Brewing Department’s sales become the Bottling Department’s cost of goods sold. In order to determine an optimal transfer pricing system, management would like you to demonstrate what an income statement would look like under a cost, market, and negotiated transfer pricing structure. These various transfer prices are listed as follows. Prepare an income statement for each of the transfer prices by filling in the missing numbers in the provided income statement based on each transfer price (thus four different income statements) and calculate the operating income/loss percentage. Prepare a brief summary of the results.
    Cost-basted $1.32, Market-based $1.15, Negotiated $1.24, Gallons transferred 89,000.
    Green Peak Tea Company, Income Statement, Month Ended November 31, 2018 for Brewing and Bottling, respectively: Sales, ?, $207,000; Cost of good sold, $61,090, $?; Gross profit, $?, $?; Fuel/utilities expense, $6,000, $5,400; Wages expense, $22,180, $41,400; Costs allocated form corporate, $39,938, $28,000; Total expenses, $39,938, $74,800; Operating income/(loss) $, $?, $?; Operating income/(loss) %, ?, ?.
    1. The following revenue data were taken from the December 31, 2017, General Electric annual report (10-K):
    Chart for 2017 Power, Renewable Energy, Oil & Gas, Aviation, Health-care, Transportation, and Lighting, respectively: Outside sales, $34,598, $10,211, $16,584, $26,790, $19,098, $4,168, $1,956; Intersegment sales, $1,392, $69, $646, $585, $18, $10, $31; Total sales, $35,990, $10,280, $17,230, $27,375, $19,116, $4,178, $1,987. Chart for 2016 Power, Renewable Energy, Oil & Gas, Aviation, Health-care, Transportation, and Lighting, respectively: Outside sales, $35,465, $9,022, $12,515, $25,530, $18,276, $4,713, $4,795; Intersegment sales, $1,330, $11, $383, $730, $15, $1, $28; Total sales, $36,795, $9,033, $12,898, $26,260, $18,291, $4,714, $4,823.

    For each segment and each year, calculate intersegment sales (another name for transfer sales) as a percentage of total sales. Using Microsoft Excel or another spreadsheet application, create a clustered column graph to show the 2016 and 2017 percentages for each division. Comment on your observations of this data. How might a division sales manager use this data?

    Thought Provokers

    1. You have just been elected president of a brand-new service club on campus. The club is part of a national organization, but the organization charter gives the local organization a fair amount of flexibility in setting up the management of the club. As president, you can choose to make most of the decisions for the club and pass along your direction to the officers and members below you, or you can create specific committees, such as membership or academic, and allow each of the committees to make its own decisions and rules within the overall guidelines set out by the national charter. Consider the need to manage and evaluate the club and describe which form of organization would you set up for your club and why.
    2. Consider these two companies: Apple and ExxonMobil. Write a summary of your perception of each company’s financial position. Consider the levels of revenue, profitability, and any other financial measures you feel are relevant. After completing your summary, download Apple’s September 30, 2017 annual report (10-K) and download Exxon Mobil’s December 31, 2016 annual report (10-K) for more information. Gather the following information for each company:
    Table 9.E.1: Apple Data
    Apple 9/30/2017 9/24/2016 9/26/2015
    Net sales
    Income before provision for income taxes
    Net income
    Table 9.E.2: Exxon Mobile Data
    Exxon 2017 2016 2015
    Total revenues and other income
    Income before income taxes
    Net income attributable to ExxonMobil

    What observations do you have about the financial performance of each company? Calculate the net income \(\%\) (also called profit margin \(\%\)) of each company. What observations do you have? How do these results compare to your perception of these companies before reviewing the annual reports?

    Contributors and Attributions


    This page titled 9.E: Responsibility Accounting and Decentralization (Exercises) is shared under a CC BY-NC-SA license and was authored, remixed, and/or curated by OpenStax.

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