HANDOUT 1

ACC 7 MANAGEMENT ADVISORY SERVICES II

RESPONSIBILITY ACCOUNTING – SEGMENTED INCOME STATEMENT

Problem 1. ELLA Co. is the largest holding company in the country engaged in real estate, manufacturing,
mining, power, retailing and banking. Its power plant segment, Electro Corp has shown the following data for the
year ended 31 December 2015.

Revenues P 3 000 000

Variable expenses 1 000 000
Fixed expenses controllable by Electro Corp’s general manager 800 000
Fixed expenses controllable by ELLA Co.’s general manager traceable to
Electro Corp 1 300 000
ELLA Co.’s head office’s common expenses allocated to its business units
(25% of these expenses were allocated to Electro Corp) 800 000

a. How much is Electro Corp’s contribution margin?

b. How much is Electro Corp’s segment controllable margin?
c. How much is Electro Corp’s segment margin?
d. How much is Electro Corp’s operating income?

e. What figure is relevant in deciding whether the manager of Electro Corp is doing a good job?
f. What figure is relevant in deciding whether the division, Electro Corp is doing well?

Problem 2. The Cloth division of JEAN, Inc. produces only one type of fabric. The 1mx1m sized fabric has a
selling price of PhP20.00. Costs for each 1mx1m piece of fabric include:

Direct material of PhP3.00; Direct labor of PhP4.00; Variable factory overhead of PhP1.00; Fixed factory overhead
allocation of PhP4. Variable selling and Fixed administrative costs are PhP2.00 and PhP1.00 respectively.

The division produced 100 000 1mx1m fabric squares this year and sold 95 000 of them. This is the first year of
operations. Actual figures equal budgeted. JEAN’s head office allocated PhP700 000 common fixed costs to the
division.

a. How much is the Cloth division’s manufacturing margin?

b. How much is the Cloth division’s contribution margin?
c. If only 40% of the Cloth division’s fixed cost is controllable by the manager of the cloth division, how
much is the segment controllable margin?
d. If only 40% of the Cloth division’s fixed cost is controllable by the manager of the cloth division, how
much is the segment margin?
e. How much is the division’s operating income?

f. What is the purpose of computing for (e.)?

Problem 3. Segmented income statement of the two division of KEVIN Co. for the month of June is given below:

Division A Division B
Sales P 165,000 P 135,000
Variable expenses (99,000) (54,000)
Segment’s Contribution margin 66,000 81,000
Controllable fixed expenses (30,000) (40,000)
Segment controllable margin 36,000 41,000
Non-controllable traceable fixed expenses (12,000) (19,000)
Segment margin 24,000 22,000

a. Assuming that the two divisions are of the same size and operations, which division has a better
performance for the month?
b. Assuming the two divisions is of the same size and operations, the manager of which division performed
better in June?
c. During June, the sales clerks in Division A received salaries that totaled PhP25 000. Assume that in July,
the salaries of these sales clerks are discontinued and instead they are paid a commission of 18% of
sales. If sales in Division A increase by P35,000 as a result of this change, the segment margin for
Division A in July would be:
d. A proposal has been made that will lower variable costs in Division B to 37% of sales. The reduction can
be accomplished only if B Division‘s traceable fixed costs are allowed to increase by P12 000. If this
proposal is implemented, and if sales remain constant, Division B’s segment margin would be:
 Answer Key

Problem 1.
a. 2000K
b. 1200K
c. (100K)
d. (300K)
e. 1200K
f. (100K)

Problem 2
a. 1140K
b. 950K
c. 750K
d. 450K
e. (250K)
f. NONE

Problem 3
a. A
b. B
c. 27K
d. 14 050