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9.6: Summary

  • Page ID
    5239
  • 9.1 Differentiate between Centralized and Decentralized Management

    • Management control systems allow managers to develop a reporting structure to help the organization meet its strategic goals.
    • In centralized organizations, primary decisions are made by the person or persons at the top of the organization.
    • Decentralized organizations delegate decision-making authority throughout the organization.
    • Daily decision-making involves frequent and immediate decisions.
    • Strategic decision-making involves infrequent and long-term decisions.

    9.2 Describe How Decision-Making Differs between Centralized and Decentralized Environments

    • Segments are uniquely identifiable components of the business that facilitate the effective and efficient operation of the business.
    • Organizational charts are used to graphically represent the authority structure of an organization.
    • The CEO of a centralized organization will establish the strategy and make decisions that will be implemented throughout the organization.
    • The CEO of a decentralized organization will establish strategic goals and empower managers to achieve the goals.

    9.3 Describe the Types of Responsibility Centers

    • A responsibility accounting structure helps management evaluate the financial performance of the segments in the organization.
    • Responsibility centers are segments within a responsibility accounting structure.
    • Five types of responsibility centers include cost centers, discretionary cost centers, revenue centers, profit centers, and investment centers.
    • Cost centers are responsibility centers that focus only on expenses.
    • Discretionary cost centers are responsibility centers that focus only on controllable expenses.
    • Revenue centers are responsibility centers that focus on revenues.
    • Profit centers are responsibility centers that focus on revenues and expenses.
    • Investment centers are responsibility centers that consider the investments made by the responsibility center.
    • Return on investment is a particular type of investment center structure that calculates a responsibility center’s profit percentage relative to the center’s investment.
    • Residual income is a particular type of investment center structure that evaluates investments using a common cost of capital rate amongst all responsibility centers.

    9.4 Describe the Effects of Various Decisions on Performance Evaluation of Responsibility Centers

    • Uncontrollable costs are costs that management or an organization has little or no ability to influence.
    • Controllable costs are costs that managers or an organization can influence.
    • Managers in a responsibility accounting structure should only be evaluated based on controllable costs.
    • Businesses with segments that provide goods to other segments within the business often use a transfer pricing structure to record the transaction.
    • The general transfer pricing model considers the opportunity costs involved in selling to internal rather than external customers. This method is difficult to implement and businesses often choose other methods.
    • The market price model uses market prices that would be used for external customers as the basis for internal transfers.
    • The cost approach uses the company’s cost to make the product as the basis for establishing the transfer price.
    • The negotiated model allows the selling and buying segments within the business to determine the transfer price.
    • Transfer price arrangements are more difficult in international businesses because of complexities related to taxes, duties, and currency fluctuations.

     

    Key Terms

     

    allocated costs
    costs that are generated by non–revenue generating portions of the business, such as corporate headquarters, that are assigned based on some formula to the revenue generating portions of the business
    centralization
    business structure in which one individual makes the important decisions and provides the primary strategic direction for the company
    controllable costs
    those that a company or manager can influence
    cost approach
    transfer pricing structure in which the transfer price may be based on total variable cost, full cost, or a cost-plus scenario, calculated by adding a markup to either variable cost or full cost
    cost center
    organizational segment in which a manager is held responsible only for costs
    decentralization
    business structure in which the decision-making is made at various levels of the organization
    discretionary cost center
    organizational segment in which a manager is held responsible only for controllable costs when there is not a well-defined relationship between the center’s costs and its services or products
    goal congruence
    integration of multiple goals, either within an organization or across multiple components or entities; congruence is achieved by aligning goals to achieve an anticipated mission
    investment center
    organizational segment in which a manager is accountable for profits (revenues minus expenses) and the invested capital used by the segment
    lower-level management
    level of management that provides basic supervision and oversight for the operations of the organization
    management control system
    structure within an organization that allows managers to establish, implement, and monitor progress toward the strategic goals of the organization
    market price approach
    transfer pricing structure in which the transfer price is based on the price the seller would use for an outside customer
    mid-level management
    level of management that receives direction from upper management and supervises and provides direction to lower-level management
    negotiated price approach
    transfer pricing structure in which the transfer price is based on negotiations between the buying segment and the selling segment
    organizational chart
    graphical representations illustrating the authority for decision-making and oversight throughout an organization
    profit center
    organizational segment in which a manager is responsible for and evaluted on both revenues and costs
    residual income (RI)
    amount of income a given division (or project) is expected to earn in excess of a firm’s minimum return goal
    responsibility accounting
    method of encouraging goal congruence by setting and communicating the financial performance measures by which managers will be evaluated
    responsibility centers
    segments in which supervisors or managers have responsibility for the performance of the center and the authority to make decisions that affect the center
    return on investment (ROI)
    measure of the percentage of income generated by profits that were invested in capital assets
    revenue center
    part of an organization in which management is evaluated based on the ability to generate revenues; the manager's primary control is only revenues
    segment
    portion of the business that management believes has sufficient similarities in product lines, geographic locations, or customers to warrant reporting that portion of the company as a distinct part of the entire company
    transfer pricing
    pricing structure used when one segment of a business “sells” goods to another segment of the same business
    uncontrollable costs
    those that an organization or manager has little or no ability to influence
    upper management
    level of management that consists of the board of directors and chief executives charged with providing strategic guidance for the organization

     

    Multiple Choice

     

    1

    LO 9.1Which 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
    2

    LO 9.1Which 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
    3

    LO 9.1In 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
    4

    LO 9.1A 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
    5

    LO 9.1Strategic 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
    6

    LO 9.2Segments 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
    7

    LO 9.2Organizational 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
    8

    LO 9.2In 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
    9

    LO 9.2Managers 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
    10

    LO 9.3Which of the following is not a type of responsibility center?

    1. concentrated cost center
    2. investment center
    3. profit center
    4. cost center
    11

    LO 9.3A 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
    12

    LO 9.3A 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
    13

    LO 9.3A 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
    14

    LO 9.3An 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.
    15

    LO 9.4Costs that a company or manager can influence are called ________.

    1. discretionary costs
    2. fixed costs
    3. variable costs
    4. controllable costs
    16

    LO 9.4An 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
    17

    LO 9.4Internal costs that are charged to the segments of a business are called ________.

    1. controllable costs
    2. variable costs
    3. fixed costs
    4. allocated costs
    18

    LO 9.4A 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
    19

    LO 9.4A 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

     

    Questions

     

    1

    LO 9.1What is a management control system? What are its components and how does the system help the business?

    2

    LO 9.1Identify and describe the levels of management, including the various types of decisions managers at each level make.

    3

    LO 9.1Discuss the difference between centralized and decentralized organizations. Does the size of the organization influence whether the organization has a centralized or decentralized structure? Explain.

    4

    LO 9.1Identify a company where you recently shopped. Assume the company operates with a decentralized structure. Describe how customers might benefit from the decentralized structure.

    5

    LO 9.1Discuss the difference between daily and strategic decisions. Think of a business and provide an example of a daily and strategic decision.

    6

    LO 9.1Access 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?

    7

    LO 9.1Another 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.

    8

    LO 9.2Define segments and describe how identifying segments within a business might help manage the business.

    9

    LO 9.2Choose 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.

    10

    LO 9.2Choose 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.

    11

    LO 9.2Assume 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?

    12

    LO 9.2Assume 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?

    13

    LO 9.2Use 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.

    14

    LO 9.2Reference 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.

    15

    LO 9.2Lavell 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.

    16

    LO 9.3Describe the concept of responsibility accounting.

    17

    LO 9.3Describe 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.

    18

    LO 9.3Describe 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.

    19

    LO 9.3Explain 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.

    20

    LO 9.3Explain the benefits of a residual income structure within an investment center framework. It may help to think of an example using an existing company.

    21

    LO 9.4Discuss the concept of controllable and uncontrollable costs and how they affect the evaluation of the responsibility center’s financial performance.

    22

    LO 9.4Discuss the concept of transfer pricing.

    23

    LO 9.4Discuss the advantages and disadvantages of a market-based transfer pricing approach.

    24

    LO 9.4Discuss the advantages and disadvantages of a cost-based transfer pricing approach.

    25

    LO 9.4Discuss the advantages and disadvantages of a negotiated transfer pricing approach.

     

    Exercise Set A

     

    EA1

    LO 9.3Assume 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 Hiltonorganization. Your supervisor is a little unsure of the difference between a profit center and investment center and would like you to explain the difference.

    EA2

    LO 9.3Consider 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?

    EA3

    LO 9.3The 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.

    EA4

    LO 9.3The 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?
    EA5

    LO 9.4Assume 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) %, ?, ?.
    EA6

    LO 9.4As manager of department B in Marley’s Manufacturing, based on the costs you identified in the previous exercise 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?

    EA7

    LO 9.4Based 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?

    EA8

    LO 9.4Using 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

     

    EB1

    LO 9.3Assume 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.

    EB2

    LO 9.3Assume 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?

    EB3

    LO 9.3The 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.

    EB4

    LO 9.3The 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?
    EB5

    LO 9.4Assume 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) %, ?, ?.
    EB6

    LO 9.4As 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?

    EB7

    LO 9.4Discuss 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?

    EB8

    LO 9.4Determine 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

     

    PA1

    LO 9.3Use 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.
    PA2

    LO 9.3Use 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.
    3. Assume that Netflix uses a cost of capital of 7%. Calculate the residual income (RI) for each of the divisions. Comment on the results.
    PA3

    LO 9.3The 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.
    PA4

    LO 9.3Assume 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.

    PA5

    LO 9.4Financial 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.
    PA6

    LO 9.4Using 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.

    PA7

    LO 9.4Management 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) %, ?, ?.
    PA8

    LO 9.4The 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

     

    PB1

    LO 9.3Use 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.
    PB2

    LO 9.3Use Kellogg’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.
    PB3

    LO 9.3The 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.
    PB4

    LO 9.3Assume 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.

    PB5

    LO 9.4Financial 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.
    PB6

    LO 9.4Using 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). 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.

    PB7

    LO 9.4Management 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) %, ?, ?.
    PB8

    LO 9.4The 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

     

    TP1

    LO 9.1You 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.

    TP2

    LO 9.3Consider 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:

    Apple Data

    Apple 9/30/2017 9/24/2016 9/26/2015
    Net sales      
    Income before provision for income taxes      
    Net income      

    Table9.2

    Exxon Mobile Data

    Exxon 2017 2016 2015
    Total revenues and other income      
    Income before income taxes      
    Net income attributable to ExxonMobil      

    Table9.3

    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?