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Responsibility Accounting and Total Quality Management: Mcgraw-Hill/Irwin 2002 The Mcgraw-Hill Companies, Inc
Responsibility Accounting and Total Quality Management: Mcgraw-Hill/Irwin 2002 The Mcgraw-Hill Companies, Inc
12-2
12-3
McGraw-Hill/Irwin
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Managerial Accounting, 5/e
(a) Cost center: A responsibility center, the manager of which is accountable for the
subunit's costs. (An example is a production department in a manufacturing
firm.)
(b) Revenue center: A responsibility center, the manager of which is accountable for
the subunit's revenue. (An example is a sales district in a wholesaling firm.)
(c) Profit center: A responsibility center, the manager of which is accountable for the
subunit's profit. (An example is a particular restaurant in a fast-food chain.)
(d) Investment center: A responsibility center, the manager of which is accountable
for the subunit's profit and the capital invested to generate that profit. (An
example is a commuter airline division of an airline company.)
12-5
12-6
12-7
12-8
Attention to the following two factors may yield positive behavioral effects from a
responsibility-accounting system.
(a) When properly used, a responsibility-accounting system does not emphasize
blame. The emphasis should be on providing the individual who is in the best
position to explain a particular event or financial result with information to help in
understanding reasons behind the event or financial result.
McGraw-Hill/Irwin
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12-2
12-10 (a) Cost pool: A collection of costs to be assigned to a set of cost objects. (An
example of a cost pool is all costs related to material handling in a manufacturing
firm.)
(b) Cost object: A responsibility center, product, or service to which a cost is
assigned. (The various production departments in a manufacturing firm provide
examples of cost objects. For example, the material-handling cost pool may be
allocated across the various production departments that use material-handling
services.)
12-11 Cost allocation (or distribution): The process of assigning costs in a cost pool to the
appropriate cost objects. (An example of cost allocation would be the assignment of
the costs in the material-handling cost pool to the production departments that use
material-handling services. For example, the material-handling costs might be
allocated to production departments on the basis of the weight of the materials
handled for each department.)
12-12 An example of a common resource in an organization is a computer department. The
resource includes the computer itself, the software, and the computer specialists
who run the computer system and assist its users. The opportunity costs associated
with one person using the computer resource include the possibility that another
user will be precluded from or delayed in using the computer resource. Allocating
the cost of the computer services department to the users makes the users aware of
the opportunity cost of using the computer.
12-13 A computer system has a limited capacity at any one time. Allocating the cost of
using the service to the user makes the user aware that his or her use of the system
may preclude someone else from using it. Thus, the user is made aware of the
potential opportunity cost associated with his or her use.
McGraw-Hill/Irwin
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Managerial Accounting, 5/e
12-21 Customer profitability analysis refers to using the concepts of activity-based costing
to determine how serving particular customers causes activities to be performed and
costs to be incurred. Examples of activities that can be differentially demanded by
customers include order frequency, order size, special packaging or handling,
customized parts or engineering, and special machine setups. Such activities can
make some customers more profitable than others.
12-22 Four types of quality costs are as follows:
(a) Prevention costs: the costs of preventing defects.
(b) Appraisal costs: the costs of determining whether defects exist.
(c) Internal failure costs: the costs of repairing defects found prior to product sale.
(d) External failure costs: the costs incurred when defective products have been
sold.
12-23 Observable quality costs can be measured and reported, often on the basis of
information in the accounting records. For example, the cost of inspectors' salaries
is an observable quality cost. Hidden quality costs cannot easily be measured,
reported, or even estimated. For example, the opportunity cost associated with lost
sales after a defective product is sold is a hidden quality cost to the company.
12-24 A product's quality of design is how well it is conceived or designed for its intended
use. The product's quality of conformance refers to the extent to which a product
meets the specifications of its design.
12-25 A product's grade is the extent of its capability in performing its intended purpose,
viewed in relation to other products with the same functional use. An example in the
service industry is airline travel. Airplane seats may be coach class or first class; the
difference lies in seat size, comfort, and service. Either class will take you from Los
Angeles to Chicago, but not with the same degree of comfort.
12-26 "An ounce of prevention is worth a pound of cure" can be interpreted in terms of
resources expended on various categories of quality costs. A dollar spent on
prevention may save many dollars of appraisal, internal failure, or external failure
costs.
12-27 A cause and effect diagram shows by means of connected lines all the possible
causes of a particular type of defect in a product or service.
McGraw-Hill/Irwin
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Managerial Accounting, 5/e
SOLUTIONS TO EXERCISES
EXERCISE 12-28 (10 MINUTES)
The type of responsibility center most appropriate for each of the following organizational
subunits is indicated below.
(1) Movie theater: Cost center or profit center.
(2) Radio station: Profit center.
(3) Claims department: Cost center.
(4) Ticket sales division of an airline: Revenue center.
(5) Bottling plant: Cost center.
(6) Orange juice factory: Profit center.
(7) College of engineering at a university: Profit center.
(By designating the college of engineering as a profit center, this subunit is
encouraged to generate research grants and manage its operations most
effectively. The term "profit center" is used in a slightly different way here. No
subunit in a university really makes a profit. However, treating the college of
engineering like a profit center means that this subunit's management will have
considerable authority in managing the subunit's revenues and expenses.)
(8) European division of a multinational manufacturing company: Investment
center.
(9) Outpatient clinic in a profit-oriented hospital: Profit center.
(10) Mayor's office of a city: Cost center.
McGraw-Hill/Irwin
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12-6
Since the cost of idle time incurred in Department B was due to the breakdown of
improperly maintained machinery in Department A, the costs of the idle time
should be charged to Department A.
(2)
If the machinery had been properly maintained, it would be more appropriate not to
charge the cost due to idle time in Department B back to Department A. This cost
should be considered a normal cost of operating in a sequential production
environment. The managers of Department B should anticipate such normal
machine breakdowns and plan their production scheduling to accommodate such
events.
McGraw-Hill/Irwin
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Managerial Accounting, 5/e
Flexible Budget*
Year to
March
Date**
Actual Results*
Year to
March
Date**
Variance
Year to
March
Date**
$ 650
1,800
(1,065)
$ 1,385
$ 1,910
5,550
(3,233)
$ 4,227
$ 658
1,794
(1,069)
$ 1,383
$ 1,923
5,534
(3,242)
$ 4,215
$8F
6U
4 U
$2 U
$ 13F
16 U
9 U
$12 U
Kitchen
Kitchen staff wages................
Food........................................
Paper products.......................
Variable overhead...................
Fixed overhead.......................
Total expense..........................
$ (85)
(690)
(125)
(75)
(90)
$(1,065)
$ (253)
(2,110)
(375)
(225)
(270)
$ (3,233)
$ (86)
(690)
(122)
(78)
(93)
$(1,069)
$ (255)
(2,111)
(370)
(232)
(274)
$ (3,242)
$1 U
3F
3U
3 U
$4 U
$ 2U
1U
5F
7U
4U
$ 9U
*Numbers without parentheses denote profit; numbers with parentheses denote expenses.
**Year-to-date column equals year-to-date column for February in Exhibit 12-4 in the text plus March amount.
For example, $1,910 equals $1,260 plus $650.
McGraw-Hill/Irwin
12-8
Allocation of costs:
Division
Admissions
(enrollment)
$36,000
(1,000/2,500)
$28,800
(800/2,500)
$25,200
(700/2,500)
$90,000
Registrar
(credit hours)
$56,250
(30,000/80,000)
$52,500
(28,000/80,000)
$41,250
(22,000/80,000)
$150,000
Computer Services
(courses requiring
computer)
$64,000
(12/60)
$128,000
(24/60)
$128,000
(24/60)
$320,000
The Admissions Department costs are allocated on the basis of enrollment. The more
students enrolled in a division, the more admissions there are to process.
The Registrar's costs are allocated on the basis of credit hours. The greater the
number of credit hours, the more course registrations there are to process.
The Computer Services Department's costs are allocated on the basis of the
number of courses requiring computer work. The greater the number of computerintensive courses, the greater will be the demands placed on the Computer Services
Department.
2.
The number of courses would probably be a better allocation base for the Registrar's
costs. Costs in this department are driven by processing course registrations, not
credit hours. A four-credit course does not require any more registration effort than a
three-credit course.
The estimated amount of computer time required would probably be a better
allocation base for the Computer Services Department. Two different courses
requiring computer work could place vastly different demands on the Computer
Services Department.
Service revenue.......................
Variable expenses...................
Segment contribution margin
Less: Fixed expenses
controllable by segment
manager.................................
Profit margin controllable by
segment manager.................
Less: Fixed expenses,
traceable to segment, but
controllable by others..........
Profit margin traceable to
segment.................................
Less: Common fixed expenses
Income before taxes................
Less: Income tax expense......
Net income...............................
Countywide
Cable
Services
$2,200,000
450,000
$1,750,000
Segments of Company
Metro
$1,000,000
200,000
$ 800,000
Suburban
$ 800,000
150,000
$ 650,000
Outlying
$ 400,000
100,000
$ 300,000
870,000
400,000
320,000
150,000
$880,000
$ 400,000
$330,000
$ 150,000
520,000
230,000
200,000
90,000
$360,000
$ 170,000
$130,000
$ 60,000
95,000
$265,000
145,000
$ 120,000
appraisal cost
2.
3.
4.
prevention cost
McGraw-Hill/Irwin
Inc.
12-10
Percentage
of
Total
$21,000
$21,000
22.2
$12,000
30,000
$42,000
12.7
31.7
$ 9,000
6,100
$15,100
9.5
6.5
$16,500
$16,500
$94,600
17.4
_____
100.00
McGraw-Hill/Irwin
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Managerial Accounting, 5/e
Cost of lost flight bookings when potential passengers are unable to get through to
the airline's reservations service.
Cost of lost flight bookings when passengers react to cancelled or late flights.
McGraw-Hill/Irwin
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12-12
SOLUTIONS TO PROBLEMS
PROBLEM 12-39 (30 MINUTES)
A wide range of possible responses is possible for this problem. The organization chart and
companion chart showing responsibility accounting designations should be similar to the
charts given for Aloha Hotels and Resorts in Exhibits 12-1 and 12-2, respectively. The letter
to stockholders should specify the responsibilities of the managers shown in the charts.
Refer to the discussion of Exhibits 12-1 and 12-2 in the text. The charts in Exhibits 12-1 and
12-2 are repeated here for convenience.
McGraw-Hill/Irwin
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Managerial Accounting, 5/e
Oahu Division
Maui Division
Seven hotels
on the
Island
of Maui
Grounds and
Maintenance
Department
Housekeeping
and Custodial
Department
Two other
hotels on
the Island
of Oahu
Recreational
Services
Department
Banquets and
Catering
McGraw-Hill/Irwin
Inc.
12-14
Waikiki
Sands
Hotel
(Honolulu)
Hospitality
Department
Restaurants
Food and
Beverage
Department
Kitchen
MANAGER
President of Aloha
Hotels and Resorts, Inc.
Investment
Center
Vice President of
Oahu Division
Investment
Center
General Manager of
Waikiki Sands Hotel
Profit
Center
Director of Food
and Beverage Department
Profit
Center
Cost
Center
Head Chef
McGraw-Hill/Irwin
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Managerial Accounting, 5/e
McGraw-Hill/Irwin
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12-16
Company
Maui Division..............
Oahu Division.............
Total Profit...................
Oahu Division
Waimea Beach Resort
Diamond Head Lodge
Waikiki Sands Hotel...
Total Profit...................
Waikiki Sands Hotel
Grounds & Maintenance
Housekeeping &
Custodial
Recreational Services
Hospitality...................
Food and Beverage....
Total Profit...................
Food and Beverage Dept.
Banquets & Catering
Restaurants.................
Kitchen........................
Total profit...................
Kitchen
Kitchen staff wages....
Food.............................
Paper products...........
Variable overhead.......
Fixed overhead...........
Total expenses............
Flexible Budget*
Year
to
February
Date
$30,660
$64,567
$18,400
$38,620
12,260
25,947
$30,660
$64,567
Actual Results*
Year
to
February
Date
$30,716
$ 64,570
$18,470
$ 38,630
12,246
25,940
$30,716
$ 64,570
$6,050
2,100
4,110
$12,260
$12,700
4,500
8,747
$25,947
$6,060
2,050
4,136
$12,246
$ (45)
$(90)
(40)
40
2,800
1,355
$ 4,110
Variance
February
$56 F
$70 F
14 U
$56 F
Year
to
Date
$3 F
$10 F
7 U
$3 F
$ 12,740
4,430
8,770
$ 25,940
$10 F
50 U
26 F
$14 U
$40 F
70 U
23 F
$7 U
$(44)
$(90)
$1 F
--
(90)
85
6,000
2,842
$8,747
(41)
41
2,840
1,340
$4,136
(90)
88
6,030
2,832
$ 8,770
1U
1F
40 F
15 U
$26 F
-$3 F
30 F
10 U
$23 F
$ 600
1,785
(1,030)
$ 1,355
$ 1,260
3,750
(2,168)
$ 2,842
$605
1,760
(1,025)
$1,340
$ 1,265
3,740
(2,173)
$2,832
$5 F
25 U
5 F
$15 U
$5 F
10 U
5 U
$10 U
$ (80)
(675)
(120)
(70)
(85)
$(1,030)
$ (168)
(1,420)
(250)
(150)
(180)
$(2,168)
$ (78)
(678)
(115)
(71)
(83)
$(1,025)
$ (169)
(1,421)
(248)
(154)
(181)
$(2,173)
$2 F
3U
5F
1U
2 F
$5 F
$1 U
1U
2F
4U
1 U
$5 U
* Numbers without parentheses denote profit; numbers with parentheses denote expenses.
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
Today
To:
From:
I.M. Student
McGraw-Hill/Irwin
Inc.
12-18
Performance Report for August: Selected Subunits of Rocky Mountain General Hospital
Flexible Budget
Year
to
August
Date
$582,700 $4,661,600
Actual Results
Year
to
August
Date
$581,150 $4,658,300
Variance*
Year
to
August
Date
$1,550 F $3,300 F
$210,000 $1,680,000
140,000 1,120,000
182,700 1,461,600
50,000 400,000
$582,700 $4,661,600
$204,000 $1,670,900
141,000 1,115,800
182,650 1,465,600
53,500 406,000
$581,150 $4,658,300
$6,000 F
1,000 U
50 F
3,500 U
$1,550 F
$9,100 F
4,200 F
4,000 U
6,000 U
$3,300 F
$70,000
$560,000
$75,000
580,000
$5,000 U
$20,000 U
18,000
71,700
10,000
144,000
573,600
80,000
18,100
71,950
11,600
144,000
578,600
86,000
100 U
250 U
1,600 U
-5,000 U
6,000 U
6,000 77,000
$182,650 $1,465,600
7,000 F
$ 50 F
27,000 F
$4,000 U
$60,000
$7,500 $ 60,000
265,600 35,050 050
272,600
248,000
29,400 246,000
$573,600
$71,950 $ 578,600
-$1,850 U
1,600 F
$ 250 U
-$7,000 U
2,000 F
$5,000 U
$1,000 U
6,000 U
$7,000 U
13,000 104,000
$182,700 $1,461,600
$ 7,500
33,200
31,000
$71,700
$17,000
16,200
$33,200
$136,000
129,600
$265,600
$18,500 $ 137,000
16,550 135,600
$35,050 $ 272,600
$1,500 U
350 U
$1,850 U
$8,000
4,500
1,000
400
1,100
1,200
$16,200
$64,000
36,000
8,000
3,200
8,800
9,600
$129,600
$9,000 $ 72,000
4,400
36,200
1,050
8,100
100 1,100
1,100 8,600
900 9,600
$16,550 $135,600
$1,000 U $8,000 U
100 F
200 U
50 U
100 U
300 F
2,100 F
-200 F
300 F --
$350 U $6,000 U
2.
Arrows are included on the performance report to show the cost relationships.
McGraw-Hill/Irwin
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Managerial Accounting, 5/e
A variety of responses are reasonable for this question. Since the data given in the
problem do not include the individual variances over several months, it is not possible
to condition the investigation on trends. The largest variances in the performance
report are the most likely to warrant an investigation. The following variances for
August would likely catch the attention of the hospital administrator:
General Medicine Division...........................................................................
Administrative Division...............................................................................
Nursing Department.....................................................................................
Maintenance Department.............................................................................
Food servers' wages....................................................................................
$6,000
3,500
5,000
7,000
1,000
F
U
U
F
U
The $1,000 variance for food servers' wages is smaller than some of the variances
not listed above. However, it is a relatively large variance for only one cost item in the
subunit. In contrast, the $1,600 variance for the kitchen is for an entire subunit of the
hospital.
McGraw-Hill/Irwin
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12-20
Division
General Medicine..........
Surgical..........................
Medical Support............
Administrative...............
Total...............................
Allocation
Base
15,000 sq. ft.
8,000 sq. ft.
9,000 sq. ft.
8,000 sq. ft.
40,000 sq. ft.
Percentage
of Total
37.5%
20.0%
22.5%
20.0%
100.0%
Costs
Distributed
$ 71,250
38,000
42,750
38,000
$190,000
Utilities
cu. ft.
cu. ft.
cu. ft.
cu. ft.
cu. ft.
33.75%
25.00%
22.50%
18.75%
100.00%
$ 8,100
6,000
5,400
4,500
$ 24,000
General
administration
General Medicine.......
30
Surgical..........................
20
Medical Support............
20
Administrative............... 30
Total............................... 100
empl.
empl.
empl.
empl.
empl.
30.00%
20.00%
20.00%
30.00%
100.00%
$ 66,000
44,000
44,000
66,000
$220,000
Community
outreach
General Medicine..........$2,000,000
Surgical.......................... 1,250,000
Medical Support............ 750,000
Administrative...............
Total...............................$4,000,000
50.00%
31.25%
18.75%
100.00%
$ 20,000
12,500
7,500
$ 40,000
2.
An alternative allocation base for community outreach costs is the number of hours
spent by each division's personnel in community outreach activities. This base would
be more reflective of the actual contribution of each division to the program.
3.
The reason for allocating utility costs to the divisions is so that each division's cost
reflects the total cost of running the division. Since none of the divisions can operate
without electricity, heat, water, and so forth, these costs should be reflected in
divisional cost reports. By allocating such costs, division managers are made aware
of these costs and are able to reflect the costs when pricing services and seeking
third-party reimbursements, such as those from insurance companies.
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Managerial Accounting, 5/e
Sales revenue.
Variable operating expenses:
Cost of goods sold
Sales commissions
Total...
Segment contribution margin.
Less: Fixed expenses controllable by
segment manager:
Local advertising
Sales manager salary
Total...
Profit margin controllable by segment
manager
Less: Fixed expenses traceable to
segment, but controllable by
others:
Local property taxes..
Store manager salaries.
Other..
Total...
Segment profit margin..
Less: Common fixed expenses.
Net income...
Show-Off,
Inc.
Las
Vegas
Reno
Sacramento
$1,332,000
$444,000
$451,000
$437,000
$ 705,000
79,920
$ 784,920
$ 547,080
$203,500
26,640
$230,140
$213,860
$225,500
27,060
$252,560
$198,440
$276,000
26,220
$302,220
$134,780
81,000
32,000
$ 113,000
$ 11,000
---$ 11,000
$ 22,000
---$ 22,000
$ 48,000
32,000
$ 80,000
$ 434,080
$202,860
$176,440
$ 54,780
$ 4,500
31,000
5,800
$ 41,300
$161,560
$ 2,000
39,000
4,600
$ 45,600
$130,840
$ 6,000
38,000
17,800
$ 61,800
$ (7,020)
12,500
108,000
28,200
$ 148,700
$ 285,380
192,300
$ 93,080
Calculations:
Sales revenue: Las Vegas, 37,000 units x $12.00; Reno, 41,000 units x
$11.00; Sacramento, 46,000 units x $9.50
Cost of goods sold: Las Vegas, 37,000 units x $5.50; Reno, 41,000
units x $5.50; Sacramento, 46,000 units x $6.00
Sales commissions: Las Vegas, $444,000 x 6%; Reno, $451,000 x 6%;
Sacramento, $437,000 x 6%
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12-22
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McGraw-Hill/Irwin
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12-24
No. 172
% of Sales
$4,800,000
% of Sales
$5,500,000
$ 240,000
35,000
$ 275,000
$
$
5.73%
15,000
53,200
$ 300,000
50,000
$ 350,000
6.36%
.31%
$
25,000
.45%
40,000
.73%
4,000
15,000
$ 19,000
$ 434,000
.35%
7.89%
1.11%
67,200
$
29,500
$ 96,700
$ 439,900
2.01%
9.16%
No. 165
% of Total
Prevention.. $275,000
Appraisal ...
15,000
Internal failure .
53,200
External failure.
96,700
Total . $439,900
62.51%
3.41%
12.09%
21.98%
No. 172
% of Total
$350,000
25,000
40,000
19,000
$434,000
80.65%
5.76%
9.22%
4.38%
4. Yes, the company is investing its quality expenditures differently for the two
machines. Advanced is spending more up-front on no. 172 with respect to prevention
and appraisalover 86% of the total quality expenditures. (This figure is approximately
66% for no. 165.) The net result is lower internal and external failure costs and, perhaps
more important, lower total quality costs as a percentage of sales (7.89% for no. 172 and
9.16% for no. 165).
This problem illustrates the essence of total quality management systems when
compared with conventional quality control procedures. Overall costs are lower with
TQM when compared against systems that focus on after-the-fact detection and
rework.
5. Prevention, appraisal, internal failure, and external failure costs are observable in the
sense that such amounts can be measured and reported. When inferior products make
it to the marketplace, customer dissatisfaction will often increase, resulting in lost sales
of the defective product and perhaps other goods as well. The cost of these lost sales
is an opportunity costa hidden cost that is very difficult to measure.
McGraw-Hill/Irwin
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Managerial Accounting, 5/e
Buckeye
Department
Stores, Inc.
$39,400
Cleveland
Division
$21,000
Columbus
Division
$18,400
Scioto
Store
$2,400
Downtown
Store
$11,000
$23,000
3,050
380
590
465
$27,485
$11,915
$12,000
1,600
200
300
250
$14,350
$6,650
$11,000
1,450
180
290
215
$13,135
$5,265
$3,000
400
50
80
60
$3,590
$1,410
$2,000
300
40
60
35
$2,435
$ (35)
$6,000
750
90
150
120
$7,110
$3,890
$560
405
780
355
350
$2,450
$ 290
210*
450
200
210
$1,360
$ 270
195
330
155
140
$1,090
$80
40
70
40
30
$ 260
$ 50
30
60
25
30
$195
$140
75
200
90
80
$ 585
_____
$50
$9,465
$5,290
$4,175
$1,150
$(230)
$3,305
(50)
$ 930
305
1,750
$2,985
$6,480
120
$6,360
1,950
$4,410
$ 470
170
1,000
$1,640
$3,650
$ 460
135
750
$1,345
$2,830
$ 120
35
150
$305
$845
$90
20
100
$210
$(440)
$ 250
80
400
$ 730
$2,575
$100
$100
$(150)
*$210 = $160 listed in table + $50 not allocated. $1,000 = $900 listed in table + $100 not allocated.
McGraw-Hill/Irwin
12-26
Not Allocated
50
The segmented income statement would help the president of Buckeye Department
Stores gain insight into which division and which individual stores are performing well
or having difficulty. Such information serves to direct management's attention to areas
where its expertise is needed.
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Managerial Accounting, 5/e
McGraw-Hill/Irwin
Inc.
12-28
Today
To:
From:
I. M. Student
Cost-efficient production: The firm must meet the market price, which implies
producing in a cost-efficient manner.
2.
High product quality: Stated by the company president as necessary for success.
3.
On-time delivery: Also noted by the company president as critical to the firm's success.
Note that the product price is not a critical success factor, since it is largely beyond the
company's control. The price is determined by the market.
A responsibility-accounting system in which the plants are profit centers is consistent
with achieving high performance on the firm's critical success factors. The plant managers
are in the best position to influence production cost control, product quality, and on-time
delivery.
The sales districts should be revenue centers, in which the sales district managers are
accountable for meeting sales projections.
Suppose the plants are cost centers and the sales districts are revenue centers. When
a rush order comes in, the plant manager's incentive is to reject it because rush orders tend
to increase production costs (due to increased setups, interrupted production, etc.). The
sales district manager's incentive is to push rush orders, because accepting a rush order
results in a satisfied customer and increased future business. Thus, there is a built-in
conflict between the plant managers and the sales district managers.
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From an analysis of the cost-of-quality report, the program appears to have been
successful, because of the following:
Total quality cost has declined from 23.4 to 13.1 percent of total production costs.
External failure costs, those costs signaling customer dissatisfaction, have
declined from 8 percent of total production cost to 2.3 percent. These declines in
warranty repairs and customer returns should translate into increased sales in the
future.
Internal failure costs have been reduced from 4.6 to 2.3 percent of production
costs, and the overall cost of scrap and rework has gone down by 45.7 percent
($188,000 $102,000)/$188,000.
McGraw-Hill/Irwin
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12-30
Quality costs have shifted to the area of prevention, where problems are solved
before the customer becomes involved. Maintenance, training, and design reviews
have increased from 5.8 percent of total production cost to 6 percent and from 24.9
percent of total quality cost to 45.7 percent. The $30,000 increase is more than
offset by decreases in other quality costs.
3.
Tony Reese's current reaction to the quality improvement program is more favorable
because he is seeing the benefits of having the quality problems investigated and
solved before they reach the production floor. Because of improved designs, quality
training, and additional preproduction inspections, scrap and rework costs have
declined. Production personnel do not have to spend an inordinate amount of time on
customer service, because they are now making the product right the first time.
Throughput has increased and throughput time has decreased. Work is now moving
much faster through the department.
4.
Assume that sales and market share will continue to decline and then calculate the
revenue and income lost.
Assume that the company will have to compete on price rather than on quality and
calculate the impact of having to lower product prices.
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
SOLUTIONS TO CASES
CASE 12-50 (45 MINUTES)
1.
Sales ..................................................................
Less: Cost of goods sold...................................
Gross margin......................................................
Operating expenses:
Variable selling........................................
Variable administrative...........................
Other direct expenses:.......................................
Store maintenance..................................
Advertising..............................................
Rent and other costs..............................
District general administrative
expenses (allocated)...............................
Regional general and administrative
expenses (allocated)...............................
Total expenses....................................................
Net Income..........................................................
McGraw-Hill/Irwin
Inc.
12-32
New Haven
Store
Boston
Store
$1,500,000
633,750
$ 866,250
$600,000
252,000
$348,000
$525,000
220,500
$304,500
$ 90,000
37,500
$ 36,000
15,000
$ 31,500
13,125
12,600
75,000
150,000
7,500
50,000
60,000
600
5,000
45,000
180,000
72,000
63,000
165,000
$ 710,100
$ 156,150
55,000
$295,500
$ 52,500
55,000
$213,225
$ 91,275
Sales.........................................
Cost of goods sold..................
Variable selling.........................
Variable administrative............
Maintenance.............................
Advertising...............................
Rent...........................................
District expenses.....................
Coastal District
Boston Store
Given
Given
$1,500,000 x .06
$1,500,000 x .025
$7,500 + $600
+ $4,500
$1,500,000 x .40
$600,000 x .42
$600,000 x .06
$600,000 x .025
Given
$1,500,000 x .35
$525,000 x .42
$525,000 x .06
$525,000 x .025
Given
Given
($75,000)(2/3)
Given
$150,000 x .40
Given
$180,000 x .40
$50,000 x .10
at New Haven
$150,000 x .30
for Coastal District
$180,000 x .35
2.
The Portland store's net income for May is $12,375 ($156,150 - $52,500 - $91,275).
1.
Because the bonus is based on sales over $570,000, the manager has concentrated on
maximizing sales and has paid little attention to controllable costs. As a result, the
store's net income is less than 9 percent of sales and only 34 percent (rounded) of total
net income.
In an effort to maximize sales, the New Haven store spent 10 times as much as the
Boston store on advertising but generated only $75,000 more in sales. Thus the
advertising must not have been very effective and should be better controlled.
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Managerial Accounting, 5/e
The assistant controller's actions violate several standards of ethical conduct for
management accountants, including the following:
Competence
Prepare complete and clear reports and recommendations after appropriate analysis of
relevant and reliable information.
Integrity:
Communicate unfavorable as well as favorable information and professional judgements
of opinions.
Refrain from engaging in any activity that would discredit the profession.
Objectivity:
Communicate information fairly and objectively.
Disclose fully all relevant information that could reasonably be expected to influence
and intended user's understanding of the reports, comments, and recommendations
presented.
McGraw-Hill/Irwin
Inc.
12-34
Asia
Unallocated
Total
Sales in units
Furniture....................
Sports........................
Appliances.................
Total unit sales.......
64,000
72,000
32,000
168,000
16,000
72,000
32,000
120,000
80,000
36,000
96,000
212,000
160,000
180,000
160,000
500,000
Revenueb
Furniture....................
Sports........................
Appliances.................
Total revenue..........
$ 512,000
1,440,000
480,000
$2,432,000
$ 128,000
1,440,000
480,000
$2,048,000
$ 640,000
720,000
1,440,000
$2,800,000
$1,280,000
3,600,000
2,400,000
$7,280,000
Variable costsc
Furniture....................
Sports........................
Appliances.................
Total variable costs
Contribution margin....
$ 384,000
864,000
336,000
$1,584,000
$ 848,000
$ 96,000
864,000
336,000
$1,296,000
$ 752,000
$ 480,000
432,000
1,008,000
$1,920,000
$ 880,000
$ 960,000
2,160,000
1,680,000
$4,800,000
$2,480,000
$165,000
134,400
$ 135,000
96,000
$ 200,000
169,600
$ 500,000
400,000
60,000
$ 359,400
100,000
$ 331,000
250,000
$ 619,600
$ 750,000
$ 750,000
1,160,000
$2,060,000
$ 488,600
$ 421,000
$ 260,400 $ (750,000)
$ 420,000
Fixed costs
Manufacturing
overheadd...............
Depreciatione.............
Administrative and
selling expenses....
Total fixed costs.....
Operating income
(loss).............................
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Managerial Accounting, 5/e
Sales in units
Total Units
% of Sales
= Units Sold
United States
Furniture.............................................
Sports..................................................
Appliances..........................................
160,000
180,000
160,000
.40
.40
.20
64,000
72,000
32,000
Canada
Furniture.............................................
Sports..................................................
Appliances..........................................
160,000
180,000
160,000
.10
.40
.20
16,000
72,000
32,000
Asia
Furniture.............................................
Sports..................................................
Appliances..........................................
160,000
180,000
160,000
.50
.20
.60
80,000
36,000
96,000
Revenue
Units Sold
Unit Price
Revenue
United States
Furniture...................................................
Sports........................................................
Appliances................................................
64,000
72,000
32,000
$ 8.00
20.00
15.00
$ 512,000
1,440,000
480,000
Canada
Furniture...................................................
Sports........................................................
Appliances................................................
16,000
72,000
32,000
8.00
20.00
15.00
128,000
1,440,000
480,000
Asia
Furniture...................................................
Sports........................................................
Appliances................................................
80,000
36,000
96,000
8.00
20.00
15.00
640,000
720,000
1,440,000
McGraw-Hill/Irwin
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12-36
Variable costs
Units
Sold
(1)
Variable
Mfg.
Cost/Unit
(2)
Variable
Selling
Cost/Unit
(3)
Total
Variable
Cost
(1) [(2) + (3)]
United States
Furniture...........................
Sports................................
Appliances........................
64,000
72,000
32,000
$4.00
9.50
8.25
$2.00
2.50
2.25
$ 384,000
864,000
336,000
Canada
Furniture...........................
Sports................................
Appliances........................
16,000
72,000
32,000
4.00
9.50
8.25
2.00
2.50
2.25
96,000
864,000
336,000
Asia
Furniture...........................
Sports................................
Appliances........................
80,000
36,000
96,000
4.00
9.50
8.25
2.00
2.50
2.25
480,000
432,000
1,008,000
Manufacturing overhead
Total
Manufacturing
Overhead
United States........................
Canada..................................
Asia.......................................
Total.......................................
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$500,000
500,000
500,000
Area
Variable
Costs
$1,584,000
1,296,000
1,920,000
$4,800,000
Proportion
Allocated
of
Manufacturing
total
Cost
33%
27%
40%
$165,000
135,000
200,000
$500,000
Depreciation expense
United States
Canada...
Asia.
Total
2.
Total
Depreciation
$400,000
400,000
400,000
Area
Units
Sold
168,000
120,000
212,000
500,000
Proportion
of
Total
33.6%
24.0%
42.4%
Allocated
Depreciation
$134,400
96,000
169,600
$400,000
Areas where the companys management should focus its attention in order to
improve corporate profitability include the following:
The income statement by product line shows that the furniture product line may
not be profitable. The furniture product line does have a positive contribution.
However, the fixed costs assigned to the product line result in a loss. Management
should investigate:
The possibility of increasing the selling price of these products.
The possibility of increasing volume by cutting prices or increasing
advertising, resulting in a larger total contribution margin.
Cutting variable costs associated with this product line.
Discontinuing the manufacture of furniture and concentrating on the other
product lines that are more profitable.
How much of the fixed costs allocated to furniture are separable (avoidable) if
the product line is discontinued.
McGraw-Hill/Irwin
Inc.
12-38
The income statement by geographic area shows that the Asian market is the least
profitable sales area. In order to improve the profit margin in the Asian market,
management should:
Investigate the selling and administrative expenses in this area as they are
considerably higher than those in other areas.
Consider increasing the sales of product lines other than furniture as
this product line makes the smallest contribution to profit.
McGraw-Hill/Irwin
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Managerial Accounting, 5/e
ISSUE 12-53
MANAGER'S JOURNAL: ANOTHER JACK WELCH ISN'T GOOD ENOUGH," THE WALL
STREET JOURNAL, NOVEMBER 22, 1999, MICHAEL ALLEN.
The next leader of GE will need to have even bigger ideas and imagination than today's
CEO. He or she must have the vision and foresight to anticipate what the enterprise will
need to become over the next 20 years. He or she will need to lead leaders and have the
political skills to deal with challenges from outside the company.
McGraw-Hill/Irwin
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12-40
ISSUE 12-54
HERB KELLEHER HAS ONE MAIN STRATEGY: TREAT EMPLOYEES WELL," THE WALL
STREET JOURNAL, AUGUST 31, 1999, HAL LANCASTER.
1. Build a culture with an esprit de corps.
2. Structure training exercises so that everyone has to contribute to complete them
successfully.
3. Give people the license to be themselves and motivate others in that way. Give each
person the opportunity to be a maverick.
4. Allow and encourage people to take pride in what they're doing.
5. Fight bureaucracy and hierarchy.
6. Recognize that people are still the most important part of an organization. How
management treats its employees determines how they treat people outside the
company.
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