AC2105 Accounting for

Decision Making & Control

Presentation Week 6
Presented by:
Ping Yee, Ariel, Yee Shen, Bhagatjit, Warren 1
Q1 - Responsibility Centers
The Maple Way Golf Course is a private club that is owned by the members. It
has the following managers and organizational structure:

Required: Describe each of the managers in terms of being responsible for a

cost, profit, or investment center and possible performance measures for
each manager. 2
Responsibility in making decisions that affects
cost, sales, and capital employment of assets.

3
Eric Olson: GM responsible for all operations
SBU: Investment Center
Responsibility to exercise control
over the profitability (breakeven)
of the club and level of invested
capital. Invested capital includes
the purchase and upgrading of
club facilities.
Performance Measures: Prestige
of the club
Number of new memberships
yearly
Member Satisfaction of the club
Profit element of a private club as
a whole is less important than the
club’s prestige. The club should
still remain profitable but
member’s satisfaction and
membership turnover is more
important.
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Jennifer Jones: Manager of golf course
SBU: Cost Center
Members are generally not
required to pay for the use of the
golf course, with the exception of
guests. Main responsibility is in
the maintaining of course to a
certain standard.
Performance Measures:
Maintenance cost per / round of
golf played
Members’ satisfaction of golf
Quality of the course should be
maintained for the use of golfers,
but not at the expense of high
maintenance fees.
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Edwin Moses: Manager of the restaurant
SBU: Profit Center
Restaurant situated within the
club can be considered as a
business since members would
be patronising the restaurant as
customers and not members.
Performance Measures: Profit
growth YoY
Number of complaints from
customers
As a business, the restaurant
should remain profitable (keeping
revenue high and cost low).
Having a growth in profit is an
accurate representation of the
success of the restaurant.
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Mabel Smith: Head of golf lessons, shop and
reservation
SBU: Profit Center
Golf lessons and shop have both the
element of revenue and cost. Mabel
has the responsibility to ensure that
both remains profitable. The
scheduling of golf timings also falls
within the business of the club.
Performance Measures: Number of
lessons given, profit and wait time
Members’ and customers’
satisfaction
The success of golf lessons can be
reflected by the number of golf
lessons given. The effective
scheduling of member’s golf time
would help cut the waiting time.
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Wanda Itami: Manager of pool and recreation
SBU: Cost Center Performance Measures:
Maintenance cost / Cleanliness &
Usability index

Members are not required to pay Cleanliness and usability of

for the use of club pool and facilities should be maximised
recreation facilities. No with the least possible cost.
component of sales. Wanda’s
responsibility consist mainly of
the maintenance of facilities for
member’s use.

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Jake Reece: Manager of golf carts
SBU: Investment Center Performance Measures: ROI in
golf carts
Golf Cart Utilization
Number of Golf Carts Breakdown

Management of golf carts ROI reflects Jake’s ability to

includes the purchase and control maintenance expense,
maintenance of golf carts. increase rental of carts and
efficiency in use of carts.

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Q2 Case facts
● Retail stores are now adding food and beverage concepts to their retail
space to enhance the shopping experience and to distinguish themselves
in the retail market
● Muji has seen 40% increase in sales since opening of Café&Meal, a cafe in
its store
● Attributed to increase in customer traffic

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a) What type of responsibility center is appropriate
for a Cafe&Meal in a Muji store?
This would depend on the objectives of Muji when setting up this cafe

1. To increase profit by diversifying product offerings to include F&B: profit centre

- “good way for stores to distinguish themselves in an overcrowded retail market”
- “enhance the shopping experience and offer more than just products for sales”

1. To draw more customers to the store through the cafe by providing shoppers with experiences
that they cannot get online (i.e. more of a support function to Muji): cost centre
- “The cafe draws customers to the store and, after a meal, they usually shop at the retail section too"

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b) What costs can be traced directly to the cafe and
what costs should be allocated to the cafe?
Traced directly to the cafe Direct labour: salaries of chefs and service staff
that are working in the cafe

Direct cost of material: cost of ingredients for

preparation of food in the cafe

Cost of purchasing equipment for the cafe (e.g.

utensils, tables, chair, cooking tools)

Utilities (gas and water based on meter

readings) that are exclusively used by the cafe

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b) What costs can be traced directly to the cafe and
what costs should be allocated to the cafe?
Allocated to the cafe General, selling and administrative expenses
relating to the cafe (e.g. HQ staff in-charged of
the cafe)

Rent (approportioned using the land area

occupied by the cafe)

Utilities that are used throughout the retail

store and cafe such as electricity
(approportioned according to land area)

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c) Assume Muji wants to allocate the costs of the
cafe to all departments - are there potential
issues?
Costs can be allocated to different departments in various ways.

In this question, we are assuming costs are allocated to revenue generating

departments by proportion of sales.

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Potential Issues
1. Sense of unfairness
- Some department may not have experienced an increase or proportionate increase in sales
subsequent to the incorporation of the cafe but are still allocated the costs of the cafe
1. No motivation to work
- Managers and employees of other departments are being evaluated on the costs of the cafe
that are not within their control
1. Overspending by managers of the cafe
2. Difficulty in allocating costs to other departments
- Not easy to determine the percentage of customers who visit a particular department after
having a meal at the cafe
1. Inaccurate measure of a department’s profitability if the true allocation
method is not based on proportion of sales
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 Q3 Case Facts
Blackwood Industries manufactures die machinery
- Monitors all of its investment centers on the basis of
ROI
- Management bonuses are based on ROI
- All investment centers are expected to earn a
minimum 10% return before income taxes

Delta Steel (Acquired Supplier - Investment Center)

- ROI has ranged from 14% to 18% since 2017
- Opportunity for a new investment → Would yield a
13% ROI
- Division management decided against the investment The division’s operating assets were
- Investment would decrease the division’s overall $16,000,000 at the end of 2019 and there was a
6% increase over the 2018 year-end balance.
ROI
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1) Calculate the following performance measures
for 2019 for Delta Division:
a) Return on average investment in operating assets
Operating Assets (2019) = $16,000,000
Operating Assets (2018) = $16,000,000/1.06
= $15,094,339.62 (2 d.p)
Average Investment = ($16,000,000 + $15,094,339.62)/2
= $15,547,169.81
ROI = Operating Income/Average Investment
= $2,440,000/$15,547,169.81
= 15.69% (2 d.p)
17
1) Calculate the following performance measures
for 2019 for Delta Division:
b) Residual income based on average operating assets
Average Investment = ($16,000,000 + $15,094,339.62)/2
= $15,547,169.81 (Part a)
Residual Income = Operating Income - (Min rate of return X Average Investment)
= $2,440,000 - (10% X $15,547,169.81)
= $885,283.02 (2 d.p)

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2) Which performance measure (ROI or RI) should
Blackwood Industries use to provide the proper
incentive for each division to act autonomously in
the firm's best interest? Would Delta's
management have been more likely to accept the
capital investment opportunity if RI had been used
as a performance measure instead of ROI? Explain.
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● Blackwood industries should use RI → Goal congruence & expansion
needs as it will incentivise each division to accept projects as long as the
ROI > min rate of return 10%

● If ROI was used → Discourage high-ROI units (Delta) to invest in projects with
ROI higher than the minimum rate of return but lower than the unit’s current
ROI as this would decrease the overall unit ROI even though it is profitable for
the whole company → Goal incongruence

● Delta's management will be more likely to accept the capital investment

opportunity if RI had been used as the expected return of the investment
(13%) is higher than the min rate of return (10%).

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3) What type of strategic performance measurement
do you recommend for the Delta Division? Explain.

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Adopt the Balanced Scorecard Approach
● Measure financial and non-financial operations of Delta Division
● Evaluate short run and long run performance
Financial Perspective:
01 Residual Income
Customer Perspective:
02 Customer Satisfaction
Internal Business Process
03 Perspective:
Manufacturing cycle efficiency
Learning and growth
04 Perspective:
Employee Suggestions
● Encourage them to take up any projects with ROI
●
more than min rate of return (10%)
Achieved goal congruence
● Customer Retention
● Impact on sales and future income
● Percentage of the time spent in manufacturing
products that are devoted to value added activities
●
●
Pare away with non-value added activities
Reducing cost and speed up the manufacturing
process → offering faster turnaround time
● Improve on company processes
●
●
Motivates employees (empowerment)
Increase profits and morale of the employees in the
long run 22
Qn4
1.Compute asset turnover, return on sales and
return on investment (ROI) for each division and
for each year. Use year-end rather than average
asset values. Round to 2 decimal places.

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2017

Consumer Office supplies Computers

electronics
Asset turnover 155,780/84,550 = 48,750/22,500 = 100,500/21,450=
(Sales/year-end 1.84 2.17 4.69
assets)
Return on sales 16,750/155,780 2,100/48,750 = 2,350/100,500
(Profit/Sales) = 10.75% 4.31% = 2.34%

ROI 1.84 x 0.75% 2.17 x 4.31% = 4.69 x 2.34%

=19.78% 9.35% =10.96%

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2018

Consumer Office supplies Computers

electronics
Asset turnover 125,480/90,450 = 45,660/21,900 = 95,400/22,550 = 4.23
(Sales/year-end 1.39 2.08
assets)
Return on sales 9,500/125,480 2,340/45,660 1,650/95,400
(Profit/Sales) = 7.57% = 5.12% = 1.73%

ROI 1.39 x 7.57% = 2.08 x 5.12% = 4.23 x 1.73% =

10.52% 10.65% 7.32%

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2019

Consumer electronics Office supplies Computers

Asset turnover 90,950/92,450 = 0.98 52,800/18,000 = 114,350/24,100 =

(Sales/year-end 2.93 4.74
assets)
Return on sales 5,700/90,950 3,250/52,800 2,575/114,350
(Profit/Sales) = 6.27% = 6.16% = 2.25%

ROI 0.98 x 6.27% = 6.14% 2.93 x 6.16% = 4.74 x 2.25% =

18.05% 10.67%

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2. Use the ratios computed in requirement 1 to
explain the differences in profitability of the 3
divisions.

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 Consumer
electronics
2017 2018 2019

Asset 1.84 1.39 0.98

turnover
Return on 10.75% 7.57% 6.27%
sales
ROI 19.78% 10.52% 6.14%
For consumer electronics, there has been a decline in asset turnover, return on sales and ROI
for all 3 years.

Decline in Asset Turnover: Decreasing sales even though there’s an increase level of
investment, suggesting that there is lower return on the total assets that the company has
invested into.

Decline in Return on Sales and ROI: Inability to control expenses to increase revenue.
Therefore, its profitability for the consumer electronics division has been declining.
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 Office
supplies
2017 2018 2019

Asset 2.17 2.08 2.93

turnover
Return on 4.31% 5.12% 6.16%
sales
ROI 9.35% 10.65% 18.05%

For office supplies, there has been a constant increase of return on sales and ROI, showing that
even though its asset turnover fluctuates, there still a constant increase in profitability.

The reduction in assets Year on Year(YoY) while income increases YoY, with its ROI increasing
greatly, shows that cost management is good and profitable.

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 Computers

2017 2018 2019

Asset 4.69 4.23 4.74

turnover
Return on 2.34% 1.73% 2.25%
sales
ROI 10.97% 7.32% 10.67%

While for computer, there was a decline in ROI, return of sales and asset turnover in 2018, but
an increase for all three in 2019.
- Strong relationship between amount of assets invested and income

Assets increased YoY but in 2018, there was a big drop in profits and revenue. This indicates
abnormally low sales and higher cost.
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2017 - 2019 Asset Turnover Return on Return on Relative
Sales Investment Profitability

Consumer Overall Decreasing Decreasing Lowest

Electronics decrease trend trend (increase
in investment,
decrease in
income and
revenue)

Office Supplies Overall Increasing Increasing Highest

increase trend (Decrease in
asset invested,
ROI steadily
increased)

Computers Overall Consistent Consistent Medium

increase (strong
relationship
between assets
invested and
income) 31
3. Compute the total bonus amount to be paid
during each year; also compute individual
executive bonus amounts. Round to the nearest
whole dollar.

● Annual Bonus Award

● Executive share in the bonus pool, 10% annual residual income
● Residual income is operating income minus an interest charge of 6% of invested
assets 32
2017
MBI operating income = 16,750,000 + 2,100,000 + 2,350,000 = 21,200,000
Company’s residual income = 21,200,000 - 0.06 (84,550,000 + 22,500,000 + 21,450,000) = 13,490,000
Bonus pool = 10% x 13,490,000 = 1,349,000
Individual executive bonus amount = 1,349,000 / (300 + 40 + 120) = $2,933

2018
MBI operating income = 9,500,000 + 2,340,000 + 1,650,000 = 13,490,000
Company’s residual income = 13,490,000 - 0.06 (90,450,000 + 21,900,000 + 22,550,000) = 5,396,000
Bonus pool = 10% x 5,396,000 = 539,600
Individual executive bonus amount = 539,600 / (350 + 40 + 140) = $1,018

2019
MBI operating income = 5,700,000 + 3,250,000 + 2,575,000 = 11,525,000
Company’s residual income = 11,525,000 - 0.06 (92,450,000 + 18,000,000 + 24,100,000) = 3,452,000
Bonus pool = 10% x 3,452,000 = 345,200
Individual executive bonus amount = 345,200 / (375 + 37 + 185) = $578
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4. If the bonuses were calculated by divisional
residual income, what would the individual bonus
amounts be? Round to the nearest dollar.

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2017

Consumer electronics Office supplies Computers

Division residual 16,750,000 - 0.06 2,100,000 - 0.06 2,350,000 - 0.06

income ($) (84,550,000) (22,500,000) (21,450,000)
= 11,677,000 = 750,000 = 1,063,000

Bonus Pool ($) 10% x 11,677,000 = 10% x 750,000 = 10% x 1,063,000 =

1,167,700 75,000 106,300

Number of 300 40 120

executives

Individual bonus 1,167,700 / 300 = 75,000 / 40 = 1875 106,300 / 120 = 886

amount ($) 3892

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2018

Consumer electronics Office supplies Computers

Division residual 9,500,000 - 0.06 2,340,000 - 0.06 1,650,000 - 0.06

income ($) (90,450,000) (21,900,000) (22,550,000)
= 4,073,000 = 1,026,000 = 297,000

Bonus Pool ($) 10% x 4,073,000 = 10% x 1,026,000 = 10% x 297,000 =

407,300 102,600 29,700

Number of 350 40 140

executives

Individual bonus 407,300 / 350 = 1164 102,600 / 40 = 2565 29,700 / 140 = 212
amount ($)

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2019

Consumer electronics Office supplies Computers

Division residual 5,700,000 - 0.06 3,250,000 - 0.06 2,575,000 - 0.06

income ($) (92,450,000) (18,000,000) (24,100,000)
= 153,000 = 2,170,000 = 1.129.000

Bonus Pool ($) 10% x 153,000 = 10% x 2,170,000 = 10% x 1,129,000 =

15,300 217,000 112,900

Number of 375 37 185

executives

Individual bonus 15,300 / 375 = 41 217,000 / 37 = 5865 112,900 / 185 = 610

amount ($)

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5. Discuss the advantages and disadvantages of
basing the bonus on MBI’s residual income
compared to the divisional residual income.

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Advantages:

• The company wide bonus plan promotes the sharing of corporate wide assets.
• It promotes collaboration and coordination between each division to keep costs down or increase
revenue
• Appears more fair since pay linked to overall firm performance indicates effort of all managers in
contributing to the success

Disadvantages:

• It includes many of the factors that which are not under the control of the divisional managers.
• The company wide bonus incentive also penalizes the executives of the profitable divisions by sharing
the income over all the divisions and executives which are not responsible for profit.
• Encourages complacency among senior executives in underperforming divisions

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Q6 - Crystal Jade balanced scorecard (BSC)
Background information:

● Crystal Jade (CJ) was established in 1991

● Serves Chinese cuisine
● Has over 100 outlets across 25 major cities
● French luxury company, LMVH, acquired 90% stake in 2014
● CJ is valued to be over S$100m

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Philosophy of Crystal Jade-- strategy employed

● Strong emphasis on
the dining experience

● Sees itself as a place

for people to connect
over food

● Prides itself as selling

authentic quality
Chinese dishes

Differentiation
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SWOT Analysis of Crystal Jade
Strengths Weaknesses

● Very strong and ubiquitous brand name ● Razor thin profit margins
● Safe restaurant to eat in (very relevant ● Raw materials (eg: eggs) are subjected
for today’s context) to price fluctuations (eg: H1N1)

Opportunities Threats

● Global and regional expansion ● Intense competition (inherent in F&B)

● Targeting High/Middle/Low income ● Oversaturation of F&B outlets

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43
 Balanced Scorecard of Crystal Jade
Strategic Measures Targets Initiatives
objectives (Example)

Increase revenue % increase in Up 5% Strengthen customer

growth revenue relationships

Financial Reduce cost for each Cost per shop Down 5% Analyse direct material prices
shop and conduct hedging strategy

Source from more vendors

Remove non-performing
dishes from menu
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 Balanced Scorecard of Crystal Jade
Strategic Measures Targets Initiatives
objectives (Example)

Improve customer Segment customer Up 5% Improve customer

profitability profitability by groups membership program for
(eg: by spending power) return customer

Apply appropriate pricing to

different groups
Customer
Improve customer Customer satisfaction 80% good or More product mix in the
satisfaction levels surveys and Yelp or excellent in respective outlets
Tripadvisor or survey and
Hungrygowhere increase ratings Reduce perceived waiting time
for the customers

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 Balanced Scorecard of Crystal Jade
Strategic Measures Targets Initiatives
objectives (Example)
Introduce new dishes Number of new 2 per quarter Incentivize new profitable
profitable dishes dishes to be developed as per
current trend

Safety Incidents of OSHA and Maintain Require training on workplace

food poisoning safety and food safety
Internal
Improve productivity Order taking and <20% per Reengineer order taking
processes
cooking time order processes to instantly send
orders to kitchen

Increase quality of Number of food <5 per month Implement consistent food
food complaints preparation techniques and
cooking methods
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 Balanced Scorecard of Crystal Jade
Strategic Measures Targets Initiatives
objectives (Example)

Communicate % of employees trained 100% Require workshops on CJ’s

strategy throughout on CJ’s strategy vision, mission and promise
company

Learning Increase employee Analyse salary and All Pay competitive salaries,
morale turnover conduct exit interviews and
and
conduct cohesion
growth

Enhance employee Training hours in 3 hours a Build employee training

skills relevant skills month programs

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NTU’s game time:
Kahoot!

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