UNIVERSITY OF DAR ES SALAAM

BUSINESS SCHOOL
DEPARTMENT OF ACCOUNTING

REVIEW QUESTIONS

AC 202: MANAGERIL ACCOUNTING II

TOPIC: PERFOMANCE MEASUREMENTS FOR

DIVISIONALISED ORGANISATIONS

DATE OF 16TH MAY 2022

ISSUE

[SET 02]

Prepared by: Mshana Ally A.: MFA- (OG), B.Com Accounting (Hons.), CPA (T), and ATEC (II) |
Phone1: +255 713 762 452
1. What is meant by the term decentralization?
2. What benefits result from decentralization?
3. Distinguish between a cost center, a profit center, and an investment center.
4. What is meant by the terms margin and turnover in ROI calculations?
5. What is meant by residual income?
6. In what way can the use of ROI as a performance measure for investment centers lead to bad
decisions? How does the residual income approach overcome this problem?
7. Briefly explain the advantages and disadvantages of using Residual income as a performance
measure for a divisionalised organization
8. Mkenda Ltd. of Dodoma, Tanzania, is a company specializing in providing design services to
residential developers. Last year the company had net operating income of TZS. 600,000 on
sales of TZS. 3,000,000. The company’s average operating assets for the year were TZS.
2,800,000 and its minimum required rate of return was 18%.

Required: Compute the company’s residual income for the year.

9. Manase Services Company, a division of a major oil company, provides various services to the operators
of the mtambani oil field in Mtwara. Data concerning the most recent year appear below:

Sales . . . . . . . . . . . . . . . . . . . . . . . . . TZS. 7,500,000

Net operating income . . . . . . . . . . . . TZS. 600,000

Average operating assets . . . . . . . . . TZS. 5,000,000

Required:

i. Compute the margin for Manase Services Company.

ii. Compute the turnover for Manase Services Company.
iii. Compute the return on investment (ROI) for Manase Services Company.
10. Provide the missing data in the following table for a distributor of martial arts products:

Division

Alpha Bravo Charlie

Sales . . . . . . . . . . . . . . . . . . . . . . . . . TZS. ? TZS. 11,500,000 TZS. ?

Net operating income . . . . . . . . . . . . TZS. ? TZS. 920,000 TZS. 210,000

Average operating assets . . . . . . . . . TZS. 800,000 TZS.? TZS. ?

Margin . . . . . . . . . . . . . . . . . . . . . . . . 4% ? 7%

Turnover . . . . . . . . . . . . . . . . . . . . . . . 5 ? ?

Return on investment (ROI) . . . . . . . . ? 20% 14%4

11. Masuki Corp. of Japan has two regional divisions with headquarters in Mwanza and Arusha.
Selected data on the two divisions follow:

Division

Mwanza Arusha

Sales . . . . . . . . . . . . . . . . . . . . . . . . . TZS. 3,000,000 TZS. 9,000,000

Net operating income . . . . . . . . . . . . TZS. 210,000 TZS. 720,000

Average operating assets . . . . . . . . . TZS. 1,000,000 TZS. 4,000,000

Required:

i. For each division, compute the return on investment (ROI) in terms of margin and turnover.
Where necessary, carry computations to two decimal places.
ii. Assume that the company evaluates performance using residual income and that the minimum
required rate of return for any division is 15%. Compute the residual income for each division.
iii. Is Arusha’s greater amount of residual income an indication that it is better managed? Explain.
12. Selected operating data for two divisions of Cynthia, Ltd., of Tanzania are given below:

Division

Morogoro Singida

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TZS. 4,000,000 TZS. 7,000,000

Average operating assets . . . . . . . . . . . . . . . TZS. 2,000,000 TZS. 2,000,000

Net operating income . . . . . . . . . . . . . . . . . . TZS. 360,000 TZS. 420,000

Property, plant, and equipment (net) . . . . . . . TZS. 950,000 TZS. 800,000

Required:

i. Compute the rate of return for each division using the return on investment (ROI) formula
stated in terms of margin and turnover.
ii. Which divisional manager seems to be doing the better job? Why?
13. A family friend has asked your help in analyzing the operations of three anonymous companies
operating in the same service sector industry. Supply the missing data in the table below:

Company

A B C

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . TZS. 9,000 TZS. 7,000 TZS. 4,500

Net operating income . . . . . . . . . . . . . . . TZS. ? TZS. 280 TZS. ?

Average operating assets . . . . . . . . . . . . TZS. 3,000 TZS. ? TZS. 1,800

Return on investment (ROI) . . . . . . . . . . . 18% 14% ?

Minimum required rate of return:

Percentage . . . . . . . . . . . . . . . . . . . . . . 16% ? 15%

Shilling amount . . . . . . . . . . . . . . . . . . . TZS. ? TZS. 320 TZS. ?

Residual income . . . . . . . . . . . . . . . . . . . TZS. ? TZS. ? TZS. 90

14. Financial data for Mchembe, Inc., for last year follow
Mchembe, Inc. Balance Sheet
Beginning-Balance Ending-Balance
Assets TZS. TZS.
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,000 120,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . 450,000 530,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320,000 380,000
Plant and equipment, net . . . . . . . . . . . . . . . . . . . . 680,000 620,000
Investment in Ting Co ... .. . . . . . . . . . . . . . . . . . 250,000 280,000
Land (undeveloped) . . . . . . . . . . . . . . . . . . . . . . . . 180,000 170,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,020,000 2,100,000

Liabilities and Stockholders’ Equity TZS. TZS.

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 360,000 310,000
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000 1,500,000
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . 160,000 290,000
Total liabilities and stockholders’ equity . . . . . . . . 2,020,000 2,100,000

Mchembe, Inc. Income Statement TZS. TZS.

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,050,000
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . 3,645,000
Net operating income . . . . . . . . . . . . . . . . . . . . . . . 405,000
Interest and taxes:
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . 150,000
Tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000 260,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,000
The company paid dividends of TZS. 15,000 last year. The “Investment in Ting Co..,” on the
balance sheet represents an investment in the stock of another company.
Required:
i.Compute the company’s margin, turnover, and return on investment (ROI) for last year.
ii.The board of directors of Mchembe, Inc., has set a minimum required rate of return of 15%.
What was the company’s residual income last year?
15. “I know headquarters wants us to add that new product line,” said Andy, manager of Ngozi
Company’s Office Products Division. “But I want to see the numbers before I make any move.
Our division’s return on investment (ROI) has led the company for three years, and I don’t want
any letdown.”
Ngozi Company is a decentralized wholesaler with five autonomous divisions. The divisions
are evaluated on the basis of ROI, with year-end bonuses given to the divisional managers who
have the highest ROIs. Operating results for the company’s Office Products Division for the
most recent year are given below:
TZS.
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000,000
Variable expenses . . . . . . . . . . . . . . . . . . . . . . . . 6,000,000
Contribution margin . . . . . . . . . . . . . . . . . . . . . . . 4,000,000
Fixed expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 3,200,000
Net operating income . . . . . . . . . . . . . . . . . . . . . 800,000
Divisional operating assets . . . . . . . . . . . . . . . . . 4,000,000

The company had an overall return on investment (ROI) of 15% last year (considering all
divisions). The Office Products Division has an opportunity to add a new product line that
would require an additional investment in operating assets of TZS. 1,000,000. The cost and
revenue characteristics of the new product line per year would be:

Sales . . . . . . . . . . . . . . . . . . . . . . . TZS. 2,000,000

Variable expenses . . . . . . . . . . . . . 60% of sales
Fixed expenses . . . . . . . . . . . . . . . TZS. 640,000

Required:
i. Compute the Office Products Division’s ROI for the most recent year; also
compute the ROI as it would appear if the new product line is added.
ii. If you were in Andy’s position, would you accept or reject the new product line?
Explain.
iii. Why do you suppose headquarters is anxious for the Office Products Division to
add the new product line?
iv. Suppose that the company’s minimum required rate of return on operating assets
is 12% and that performance is evaluated using residual income.
a. Compute the Office Products Division’s residual income for the most recent
year; also compute the residual income as it would appear if the new product
line is added.
b. Under these circumstances, if you were in Andy’s position, would you accept
or reject the new product line? Explain
16. The contribution format income statement for Kelvin Company for last year is given below:

Total Unit
TZS. TZS.
Sales . . . . . . . . . . . . . . . . . . . . . . . 4,000,000 80.00
Variable expenses . . . . . . . . . . . . . 2,800,000 56.00
Contribution margin . . . . . . . . . . . . 1,200,000 24.00
Fixed expenses . . . . . . . . . . . . . . . 840,000 16.80
Net operating income . . . . . . . . . . 360,000 7.20
Income taxes @ 30% . . . . . . . . . . 108,000 2.16
Net operating income . . . . . . . . . . 252,000 5.04

The company had average operating assets of TZS. 2,000,000 during the year.

Required:
1. Compute the company’s return on investment (ROI) for the period using the ROI formula
stated in terms of margin and turnover.
For each of the following questions, indicate whether the margin and turnover will increase,
decrease, or remain unchanged as a result of the events described, and then compute the
new ROI figure. Consider each question separately, starting in each case from the data used
to compute the original ROI in (1) above.
2. Using Lean Production, the company is able to reduce the average level of inventory by
TZS. 400,000. (The released funds are used to pay off short-term creditors.)
3. The company achieves a cost savings of TZS. 32,000 per year by using less costly materials.
4. The company issues bonds and uses the proceeds to purchase TZS. 500,000 in machinery
and equipment at the beginning of the period. Interest on the bonds is TZS. 60,000 per year.
Sales remain unchanged. The new, more efficient equipment reduces production costs by
TZS. 20,000 per year.
5. As a result of a more intense effort by sales people, sales are increased by 20%; operating
assets remain unchanged.
6. Obsolete inventory carried on the books at a cost of TZS. 40,000 is scrapped and written
off as a loss.
7. The company uses TZS. 200,000 of cash (received on accounts receivable) to repurchase
and retire some of its common stock.
17. Mernad Co (TP Co) is a large supplier of industrial metals. The company is split into two divisions:
Division F and Division N. Each division operates separately as an investment centre, with each one
having full control over its non-current assets. In addition, both divisions are responsible for their
own current assets, controlling their own levels of inventory and cash and having full responsibility
for the credit terms granted to customers and the collection of receivables balances. Similarly, each
division has full responsibility for its current liabilities and deals directly with its own suppliers.
Each divisional manager is paid a salary of TZS. 120,000 per annum plus an annual performance-
related bonus, based on the return on investment (ROI) achieved by their division for the year. Each
divisional manager is expected to achieve a minimum ROI for their division of 10% per annum. If a
manager only meets the 10% target, they are not awarded a bonus. However, for each whole
percentage point above 10% which the division achieves for the year, a bonus equivalent to 2% of
annual salary is paid, subject to a maximum bonus equivalent to 30% of annual salary.
The following figures relate to the year ended 31 August 2015:
Division F Division N
TZS. ’000 TZS. ’000
Sales 14,500 8,700
Controllable profit 2,645 1,970
Less apportionment of Head Office costs (1,265) (684)
––––––– ––––––
Net profit 1,380 1,286
––––––– ––––––
Non-current assets 9,760 14,980
Inventory, cash and trade receivables 2,480 3,260
Trade payables 2,960 1,400

During the year ending 31 August 2015, Division N invested TZS. 6·8m in new equipment including
a technologically advanced cutting machine, which is expected to increase productivity by 8% per
annum. Division F has made no investment during the year, although its computer system is badly in
need of updating. Division F’s manager has said that he has already had to delay payments to suppliers
(i.e. accounts payables) because of limited cash and the computer system ‘will just have to wait’,
although the cash balance at Division F is still better than that of Division N.

Required:
(a) For each division, for the year ended 31 August 2015, calculate the appropriate closing return
on investment (ROI) on which the payment of management bonuses will be based. Briefly
justify the figures used in your calculations.
Note: There are 3 marks available for calculations and 2 marks available for discussion

(b) Based on your calculations in part (a), calculate each manager’s bonus for the year ended 31
August 2015.
(c) Discuss whether ROI is providing a fair basis for calculating the managers’ bonuses and the
problems arising from its use at TP Co for the year ended 31 August 2015
18. Tumbo Co is a large manufacturing company specializing in the manufacture of a wide range of
Tumbo clothing and equipment. The company has two divisions: Clothing (Division C) and
Equipment (Division E). Each division operates with little intervention from Head Office and
divisional managers have autonomy to make decisions about long-term investments.
Tumbo Co measures the performance of its divisions using return on investment (ROI), calculated
using controllable profit and average divisional net assets. The target ROI for each of the divisions is
18%. If the divisions meet or exceed this target the divisional managers receive a bonus.
Last year, an investment which was expected to meet the target ROI was rejected by one of the
divisional managers because it would have reduced the division’s overall ROI. Consequently, Tumbo
Co is considering the introduction of a new performance measure, residual income (RI), in order to
discourage this dysfunctional behavior in the future. Like ROI, this would be calculated using
controllable profit and average divisional net assets.
The draft operating statement for the year, prepared by the company’s trainee accountant, is shown
below:
Division C Division E
TZS.’000 TZS.’000
Sales revenue 3,800 8,400
Less variable costs (1,400 ) (3,030 )
–––––– ––––––
Contribution 2,400 5,370
Less fixed costs (945 ) (1,420 )
–––––– ––––––
Net profit 1,455 3,950
–––––– ––––––
Opening divisional controllable net assets 13,000 24,000
Closing divisional controllable net assets 9,000 30,000

Notes:
(1) Included in the fixed costs are depreciation costs of TZS. 165,000 and TZS. 460,000 for Divisions
C and E respectively. 30% of the depreciation costs in each division relates to assets controlled
but not owned by Head Office. Division E invested TZS. 2m in plant and machinery at the
beginning of the year, which is included in the net assets figures above, and uses the reducing
balance method to depreciate assets. Division C, which uses the straight-line method, made no
significant additions to non-current assets. It is the policy of both divisions to charge a full year’s
depreciation in the year of acquisition.
(2) Head Office recharges all of its costs to the two divisions. These have been included in the fixed
costs and amount to TZS. 620,000 for Division C and TZS. 700,000 for Division E.
(3) Tumbo Co has a cost of capital of 12%.

Required:
a) Calculate the return on investment (ROI) for each of the two divisions of Tumbo Co.
b) Discuss the performance of the two divisions for the year, including the main reasons why their
ROI results differ from each other. Explain the impact the difference in ROI could have on the
behavior of the manager of the worst performing division.
c) Calculate the residual income (RI) for each of the two divisions of Tumbo Co and briefly
comment on the results of this performance measure.
 d) Explain the advantages and disadvantages of using residual income (RI) to measure divisional
performance.

19. Jump has a network of sports clubs which is managed by local managers reporting to the main board.
The local managers have a lot of autonomy and are able to vary employment contracts with staff and
offer discounts for membership fees and personal training sessions. They also control their own
maintenance budget but do not have control over large amounts of capital expenditure.
A local manager's performance and bonus is assessed relative to three targets. For every one of these
three targets that is reached in an individual quarter, TZS. 400 is added to the manager's bonus, which
is paid at the end of the year. The maximum bonus per year is therefore based on 12 targets (three
targets in each of the four quarters of the year). Accordingly the maximum bonus that could be earned
is 12 x TZS. 400 = TZS. 4,800, which represents 40% of the basic salary of a local manager. Jump
has a 31 March year end.
The performance data for one of the sports clubs for the last four quarters is as follows.

Qtr to Qtr to 30 Qtr to Qtr to

30 June September 31 December 31 March
20X1 20X1 20X1 20X2
Number of members 3,000 3,200 3,300 3,400
Member visits 20,000 24,000 26,000 24,000
Personal training sessions booked 310 325 310 339
Staff days 450 480 470 480
Staff lateness days 20 28 28 20
Days in quarter 90 90 90 90

Agreed targets are:

(1) Staff must be on time over 95% of the time (no penalty is made when staff are absent from
work).
(2) On average 60% of members must use the clubs' facilities regularly by visiting at least 12 times
per quarter.
(3) On average 10% of members must book a personal training session each quarter.
Required:
(a) Calculate the amount of bonus that the manager should expect to be paid for the latest financial
year.
(b) Discuss to what extent the targets set are controllable by the local manager (you are required to
make a case for both sides of the argument).
(c) Describe two methods as to how a manager with access to the accounting and other records
could unethically manipulate the situation so as to gain a greater bonus