Managerial Accounting Braun 4th Edition Solutions Manual

Managerial Accounting Braun 4th Edition Solutions
Manual
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Managerial Accounting Braun 4th Edition Solutions Manual
Chapter 10 Performance Evaluation
Chapter 10
Performance Evaluation
Quick Check
Answers:
QC-1. d QC-3. c QC-5. b QC-7. a QC-9. c

QC-2. b QC-4. c QC-6. d QC-8. b QC-10. d
Short Exercises
(5 min.) S10-1
a. An investment center
b. A cost center
c. A profit center
d. Lower
e. A revenue center
f. A cost center; A responsibility center
g. A profit center
h. An investment center
i. A profit center
(5 min.) S10-2
a. Cost
b. Profit
c. Profit
d. Revenue
e. Profit
f. Investment
g. Cost
h. Profit
(5 – 10 min.) S10-3
a. Decentralized
b. Decentralized
c. Centralized
d. Decentralized
e. Decentralized
f. Centralized
g. Decentralized
Copyright © 2015 Pearson Education, Inc. 10-1
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Managerial Accounting 4e Solutions Manual
(5 – 10 min.) S10-4
Cost center 1. Manager of the Housekeeping Department at the Holiday Inn

Investment center 2. Manager of the Holiday Inn Express corporate division
Cost center 3. Manager of the complimentary breakfast buffet at a Holiday Inn
Express
Revenue center 4. Manager of Holiday Inn’s central reservation office
Profit center 5. Managers of various corporate-owned Holiday Inn locations
Investment center 6. Manager of the Holiday Inn corporate division
(10 min.) S10-5
Eastern Division - Sales Revenue for Peony Restaurants

For the month ending June 30
Product Actual Sales Budgeted Sales Variance Variance %

Food $ 159,580 $ 158,000 $1,580 F 1.0% F
Dessert $ 22,800 $ 24,000 $1,200 U 5.0% U
Bar $ 71,550 $ 67,500 $4,050 F 6.0% F
Catering $ 43,120 $ 44,000 $ 880 U 2.0% U
10-2 Copyright © 2015 Pearson Education, Inc.

(10 min.) S10-6
Sales Capital
margin turnover ROI
Functional Ingredients 26.0% 2.20 57.20%
Consumer Markets 12.5% 2.00 25.00%
Performance Materials 26.0% 1.00 26.00%
Functional Ingredients
Sales margin $5,720 / $22,000 = 26.0%
Capital turnover $22,000 / $10,000 = 2.2
ROI 26.0% x 2.2 = 57.20%
Consumer Markets
Sales margin $2,675 / $21,400 = 12.5%
ROI 12.5% x 2.0 = 25.0%
Performance Markets
Sales margin $4,810 / $18,500 = 26.0%
ROI 26.0% x 1.0 = 26.0%
(10 min.) S10-7
1. Enter the formula, then calculate each division’s ROI.
Operating Income ÷ Total Assets = ROI

Snow Sports $ 950,000 ÷ $ 4,900,000 = 19.4 %
Non-Snow Sports $ 1,482,000 ÷ $ 7,100,000 = 20.9 %
2. Top management has extra funds to invest. Which division will most likely receive those funds? Why?
The Non-Snow Sports division will most likely receive those funds because it has a higher ROI.
3. Can you explain why one division’s ROI is higher?
There is not enough information to explain why one ROI is greater.
How could management gain more insight?
Use the expanded ROI formula.

(10 - 15 min.) S10-8
Req. 1
Snow Sports Non-snow Sports
Operating income $950,000 $1,482,000
÷ Sales ÷$5,000,000 ÷$7,800,000
Sales margin 19% 19%
Based on the divisions’ sales margins, we know that the sales margin was not the reason the divisions had different
ROIs.
Req. 2
Sales $5,000,000 $7,800,000
÷ Total assets ÷$4,900,000 ÷$7,100,000
Capital turnover 1.02 1.10
Based on the divisions’ capital turnover rates, we know that the capital turnover rate was the reason that the divisions
had different ROIs.
Req. 3
Sales margin (from S10-7) 19% 19%
× Capital turnover (from part 1) ×1.02 ×1.10
ROI 19.4% 20.9%
Do your answers agree with the basic ROI? Yes
(5 - 10 min.) S10-9
Snow Sports RI = $950,000 − ($4,900,000 × 13%) = $313,000
Non-Snow Sports RI = $1,482,000 − ($7,100,000 × 13%) = $559,000
Both divisions have positive residual income. This means that the divisions are earning income at a rate that exceeds
management’s minimum expectations.
This result is consistent with the ROI calculations.
(5 min.) S10-10
Lowest – Variable cost of $8
Highest – Market price of $23
The Electrical Division would not transfer the component for less than its variable cost ($8) or it would be losing money
on each transfer. The Stand Mixer Division would not pay more than the price that it can buy the component on the
market for, or $23.

(10 - 15 min.) S10-11
1. The master budget indicates that the company planned to sell 4 pools in April.
2. The actual results indicate that the company sold 5 pools in April.
3. The flexible budget for performance reports is always based on the actual output for the month. This is done so
that managers can compare apples-to-apples, meaning they can compare actual revenues and expenses to those
they would expect to achieve given the same volume. Therefore, the company’s flexible budget is based on 5
pools.
4. The budgeted sales price is $24,200 per pool.
5. The budgeted variable cost is $11,600 per pool.
6. As the name suggests, the flexible budget variance is the difference between the flexible budget and the actual
results. Since both the actual results and the flexible budget are based on the same volume of output, this variance
highlights unexpected revenues and expenses that are caused by factors other than volume.
7. The volume variance is the difference between the static (master) budget and the flexible budget. As the name
suggests, this variance arises only because the number of units actually sold differs from the volume originally
planned for in the static master budget.
8. See completed Performance Report below.
Golden Pools
Income Statement Performance Report
Year Ended April 30
Flexible budget
Flexible for actual
Actual results at budget number of Volume Master
actual prices variance output units variance budget
Output units 5 0 6 1 5
Sales revenue $ 115,000 $ 6,000 U $ 121,000 $ 24,200 F $ 96,800
Variable expenses 55,000 3,000 F 58,000 11,600 U 46,400
Fixed expenses 25,000 4,000 F 29,000 0 29,000
Total expenses $ 80,000 $ 7,000 F $ 87,000 $ 11,600 U $ 75,400

(10 -15 min.) S10-12
Sweet Earth Organic Chocolates

Master Budget Performance Report - Sales and Operating Expenses
For Year Ended December 31
Flexible
Budget Flexible Volume Master
Actual Variance Budget Variance Budget
13,400 13,400 12,100
batches batches batches
Sales Revenue ($26 per batch) $ 344,900 $ 3,500 U $ 348,400 $ 33,800 F $ 314,600
Variable Operating Expenses:
Sales Expense ($2 per batch sold) $ 26,300 $ 500 F $ 26,800 $ 2,600 U $ 24,200
Shipping Expense ($1 per batch sold) 12,600 800 F 13,400 1,300 U 12,100
Fixed Operating Expenses:
Salaries 10,300 500 U 9,800 - 9,800
Office Rent 1,000 - 1,000 - 1,000
Total Operating Expenses $ 50,200 $ 800 F $ 51,000 $ 3,900 U $ 47,100
(10 - 15 min.) S10-13
a. Financial perspective
b. Internal business perspective
c. Learning and growth perspective
d. Internal business perspective (post-sales service)
e. Customer perspective
f. Internal business perspective
g. Internal business perspective OR Customer perspective
h. Financial perspective
i. Internal business perspective
j. Learning and growth perspective
k. Customer perspective
l. Learning and growth perspective
(10 min.) S10-14
a. Flexible budget
b. Flexible budget variance
c. Return on Investment (ROI)
d. Favorable variance
e. Revenue center
f. Volume variance
g. Capital turnover
h. Unfavorable variance

(continued) S10-14
i. Management by exception
j. Cost center
k. Investment center
l. Direct fixed expenses
m. Sales margin
n. Key performance indicators (KPI)
o. Master budget variance
p. Goal congruence
q. Profit center
r. Common fixed expenses
(10 min.) S10-15
Integrity - Mitigate actual conflicts of interest,

Benjamin, the controller at Bristal Industries, does not regularly communicate with business associates
inform management that his sister is the principal to avoid apparent conflicts of interest. Advise all
partner in a consulting firm that is bidding on work at parties of any potential conflicts.
1. Bristal Industries.
Each month Jenna, a corporate controller, prepares

segment reports for all of the divisions of her company. Competence - Provide decision support
In these reports, she includes every general ledger information and recommendations that are
account. As a result, the report for each division is accurate, clear, concise, and timely.
several pages long and no one except Jenna and her
2. staff can interpret the reports.
In the past six years since he graduated with an

accounting degree, Joe has not attended any Competence - Maintain an appropriate level of
continuing education seminars. He has figured that he professional expertise by continually developing
knows enough to do his job since he has not forgotten knowledge and skills.
any relevant information from his college degree
3. program.
In casual conversation with friends on a Friday night,

Confidentiality - Keep information confidential
Loren talks about how transfer prices are set at the
except when disclosure is authorized or legally
company where he is an accountant. As part of that
required.
conversation, he shares the variable costs of the
4. company's main product.
In the year end report to the Board of Directors,

Samuel, the controller, prepares the performance
report for the board of directors. The board will base
Credibility - Communicate information fairly
the annual bonuses on this report. Samuel designs the
and objectively.
report so that the favorable KPIs are displayed
prominently, while the KPIs that are unfavorable are
either not included or are buried deep in the later
5. pages of the report so that they are unlikely to be seen.

Exercises (Group A)
(5 – 10 min.) E10-16A
a. Investment
b. Profit
c. Investment
d. Revenue
e. Investment
f. Cost
g. Revenue
h. Cost
i. Profit
j. Cost
k. Profit
(10 - 15 min.) E10-17A
Req. 1
Budget
Variance % Variance
Water Sports Subunit Actual Budget (U or F) (U or F)
Direct Materials $ 13,400 $12,500 $900 U 7.20% U
Direct Labor 18,940 20,000 1,060 F 5.30% F
Indirect Labor 35,220 30,000 5,220 U 17.40% U

Utilities 9,555 8,750 805 U 9.20% U
Depreciation 26,125 26,125 0 0

Repairs and Maintenance 8,430 10,000 1,570 F 15.70% F
Total $111,670 $107,375 $4,295 U 4.00% U
Req. 2
This subunit must be a cost center.
Req. 3
Repairs and maintenance and Indirect labor
Req. 4
No, favorable variances should be investigated to make sure they are not hurting the business in the long run.

(15 min.) E10-18A
Performance Report
Crandell Industries - Pharmaceutical Segment
For Fiscal Year Ending December 31
(all data is in millions)
Actual Budgeted Variance Variance %

Sales $1,436,400 $ 1,260,000 $ 176,400F 14.00%
Less Variable Expenses:
Variable Cost of Goods Sold $192,600 $ 180,000 $ 12,600U 7.00%
Variable Operating Expenses 121,500 $ 135,000 $ 13,500F 10.00%

Contribution Margin $1,122,300 $ 945,000 $ 177,300F 18.76%
Less Direct Fixed Expenses:
Fixed Manufacturing $117,700
Overhead $ 107,000 $ 10,700U 10.00%
Fixed Operating Expenses 16,160 $ 16,000 $ 160U 1.00%
Segment Margin 988,440 $ 822,000 $ 166,440F 20.25%
Less Common Fixed Expenses 17,170 $ 17,000 $ 170U 1.00%
Operating Income $971,270 $ 805,000 $ 166,270F 20.65%
(10 - 15 min.) E10-19A
Req. 1
Residential Professional
Operating income $ 70,200 $152,040
÷ Total assets ÷$195,000 ÷$362,000
Return on investment 36% 42%
Each division’s ROI is very high; however, the Professional Division has an even higher ROI than the Residential Division.
Req. 2
÷ Sales ÷$585,000 ÷$1,013,600
The Professional Division is earning about $0.15 on each dollar of sales whereas the Residential Division is only earning
about $0.12 on each dollar of sales. The Professional Division’s higher sales margin helps to account for its higher ROI.
Req. 3
Sales $585,000 $1,013,600
÷ Total assets ÷$195,000 ÷$ 362,000
Capital turnover 3.00 2.80
The Professional Division is generating $2.80 of sales for every dollar of assets invested in the division. The Residential
Division is generating $3.00 of sales for every dollar of assets invested. The Residential Division is even more efficient.

(continued) E10-19A
Req. 4
× Capital turnover ×3.00 ×2.80
ROI 36% 42%
Does your answer for the residential ROI agree with the basic ROI? Yes
Does your answer for the professional ROI agree with the basic ROI? Yes
What can you conclude?
Even though the Residential Division’s efficiency (as measured by the capital turnover) is higher than that of the
Professional Division, the Professional Division’s profitability (as measured by the sales margin) is so much higher that it
causes the Professional Division’s ROI to be much higher than the Residential Division’s.
Req. 5
Residential RI = $70,200 − ($195,000 × 24%) = $23,400
Professional RI = $152,040 − ($362,000 × 24%) = $65,160
Both divisions are exceeding management’s expectations.
(10 - 15 min.) E10-20A
Kyler Company Fielding Industries Johnson, Inc.
Sales (S) $100,000 $810,000 $530,000

Operating income (OI) $40,000 $129,600 $63,600
Total assets (TA) $80,000 $180,000 $212,000
Sales margin (SM) 40% 16% 12%
Capital turnover (CT) 1.25 4.50 2.50
Return on investment (ROI) 50% 72% 30%
Target rate of return 10% 19% 21%

Residual income (RI) $32,000 $95,400 $19,080

(10 min.) E10-21A
Req. 1
Sales Margin = $7,560 ÷ $27,000
= 28%
Capital Turnover = $27,000 ÷ $12,000

= 2.25 times
ROI = $7,560 ÷ $12,000

= 63%
Req. 2
RI = $7,560 − (16% x $12,000) = $5,640
(10 - 15 min.) E10-22A
Req. 1
The original return on investment (ROI) for Gable Ceramics is 17.5%.
Req. 2
If this investment opportunity were undertaken, the ROI would be 16%.
If the manager of this division is evaluated based on ROI she would not want to make this investment. Investing in the
new project would decrease the division’s ROI.
Req. 3
The ROI of the investment opportunity is 10%.
From the standpoint of Kerwin Corporation this investment is desirable. The ROI of the investment opportunity
exceeds Kerwin’s required rate of return.
Req. 4
The residual income (RI) for Gable Ceramics if this investment opportunity were to be undertaken is $31,500.
If the manager of this division is evaluated based on RI she would want to make this investment. The positive RI
indicates that the division is earning more than management’s expectations.
Req. 5
The RI of the investment opportunity is $900.
From the standpoint of Kerwin Corporation this investment is desirable. The RI of the investment opportunity is
positive, meaning the investment opportunity would earn more than management’s target required return.
Req. 6
Of the two performance measurement methods, ROI and RI, RI is more likely to promote goal congruence. The RI of
the investment alone is positive, meaning the investment will increase the division’s RI by that amount. This would
motivate both the division manager and the company management to make the investment. The arrival at the same
conclusion by both the manager and company management indicates goal congruence.

(10 min.) E10-23A
Req. 1
Lowest – Variable cost of $18 ($17 + $1.) Highest – Market price of $85
Req. 2
If Gibson Motors has a cost-plus transfer price policy of full absorption cost plus 10%, the transfer price would be
$22.
Req. 3
Market price; $85
(15 - 20 min.) E10-24A
Echo Canyon Muffins

Flexible Budget Performance Report - Sales and Operating Expenses
Flexible
Budget Flexible Volume Master
Actual Variance Budget Variance Budget
8,100 cases 8,100 cases 7,900 cases
Sales Revenue ($27 per case) $ 226,200 $ 7,500 F $ 218,700 $ 5,400 F $ 213,300
Packaging Expense ($1 per case sold) $ 8,600 $ 500 U $ 8,100 $ 200 U $ 7,900
Shipping Expense ($3 per case sold) $ 25,100 $ 800 U $ 24,300 $ 600 U $ 23,700
Sales Commissions (4% of sales price) $ 9,048 $ 300 U $ 8,748 $ 216 U $ 8,532
Salaries $ 7,000 $ 400 U $ 6,600 $ - $ 6,600
Office Rent $ 3,200 $ - $ 3,200 $ - $ 3,200
Depreciation $ 2,800 $ - $ 2,800 $ - $ 2,800
Insurance Expense $ 1,500 $ 300 F $ 1,800 $ - $ 1,800
Office Supplies Expense $ 1,400 $ 600 U $ 800 $ - $ 800
Total Operating Expenses $ 58,648 $ 2,300 U $ 56,348 $ 1,016 U $ 55,332
Operating Income $ 167,552 $ 5,200 F $ 162,352 $ 4,384 F $ 157,968

(15-20 min.) E10-25A
Req. 1
Flexible Static
Ski Products-Subunit X Budget Sales Volume (Master)
Revenue by Product Actual Variance Flexible Budget Variance Budget
Downhill— $ 320,000
Model RI $ 8,000 (F) $ 312,000 $18,000 (F) $ 294,000
Downhill—
Model RII 152,000 11,000 (U) 163,000 20,000 (F) 143,000
Cross-Country—
Model EXI 290,000 1,000 (U) 291,000 19,000 (U) 310,000
Cross-Country—
Model EXII 253,000 6,000 (F) 247,000 18,500 (U) 265,500
Snowboard—
Model LXI 430,000 4,000 (F) 426,000 18,000 (F) 408,000
Total $1,445,000 $ 6,000 (F) $1,439,000 $18,500 (F) $1,420,500
Req. 2
This subunit is a revenue center.
Req. 3
The sales volume variance is always due strictly to volume — therefore, the number of units sold was different than
budgeted for every model. The company sales mix appears to be shifting in the direction of downhill ski and snowboard
sports. This could result in a build-up of cross-country ski inventory.
Management may need to do a better job marketing their cross-country skis. Additionally, the company may end up
with delivery delays for downhill sports equipment if production schedules are not revised to accommodate the
increasing demand for downhill skis and snowboards.
(15 - 20 min.) E10-26A
a. Flexible budget variance

b. Volume variance
c. 24,000 units
d. $220,800
e. $153,600
f. $9,000 favorable
g. $217,280

(15 - 20 min.) E10-27A
Mancato Corporation
Balanced Scorecard Report
For Quarter Ended December 31
Perspective Objective KPI Goal Actual Goal Achieved?
Financial
Increase profitability of core Core product line profit as % 22% 25% √
product line of core product line sales
Increase sales of core product line Sales revenue growth 2,000,000 2,250,000 √
Customer
Increase market share Market Share % 13% 20% √
Number of Customers 130,000 125,000
Internal business process
Improve post-sales service Average repair time (# of 1.7 1.1 √
days)
Safety Number of Plant Accidents 4.0 3.0 √
Learning and growth
Improve employee job satisfaction Employee Turnover rate 7% 9%
Improve employee product Employee training hours 2,425 2,250
knowledge

(15 - 20 min.) E10-28A
a. Financial
b. Internal business
c. Learning and growth
d. Customer
e. Community
f. Internal business
g. Financial
h. Customer
i. Financial
j. Internal business
k. Learning and growth
l. Community
m. Community
n. Customer
o. Learning and growth
p. Internal business
q. Internal business
r. Customer

Exercises (Group B)
(5 – 10 min.) E10-29B
a. Profit
b. Cost
c. Revenue
d. Cost
e. Profit
f. Investment
g. Investment
h. Cost
i. Revenue
j. Profit
k. Investment
(10 - 15 min.) E10-30B
Req. 1
Budget
Variance % Variance
Water Sports–Subunit Actual Budget (U or F) (U or F)
Direct Materials $ 21,480 $20,000 $1,480 U 7.40% U
Direct Labor 16,660 17,500 840 F 4.80% F
Indirect Labor 28,140 24,000 4,140 U 17.25% U
Utilities 10,940 10,000 940 U 9.40% U
Depreciation 21,800 21,800 0 0
Repairs and Maintenance 4,195 5,000 805 F 16.10% F
Total $103,215 $98,300 $4,915 U 5.00% U
Req. 2
This subunit is a cost center.
Req. 3
Indirect labor
Repairs and maintenance
Req. 4
No, favorable variances should be investigated to make sure they are not hurting the business in the long run.

(15 min.) E10-31B
Performance Report
Clayton Industries - Pharmaceutical Segment
For Fiscal Year Ending December 31
(all data is in millions)
Variance
Actual Budgeted Variance %
Sales $ 908,280 $ 783,000 $ 125,280F 16.00%
Less Variable Expenses:
Variable Cost of Goods Sold $ 310,590 $ 304,500 $ 6,090U 2.00%
Variable Operating Expenses $ 78,300 $ 87,000 $ 8,700F 10.00%
Contribution Margin $ 519,390 $ 391,500 $ 127,890F 32.67%
Less Direct Fixed Expenses:
Fixed Manufacturing Overhead $ 112,270 $ 103,000 $ 9,270U 9.00%
Fixed Operating Expenses $ 22,000 $ 20,000 $ 2,000U 10.00%
Segment Margin $ 385,120 $ 268,500 $ 116,620F 43.43%
Less Common Fixed Expenses $ 23,690 $ 23,000 $ 690U 3.00%
Operating Income $ 361,430 $ 245,500 $ 115,930F 47.22%

(10-15 min.) E10-32B
Req. 1
÷ Total assets ÷$195,000 ÷$362,000
Return on investment 36% 42%
Each division’s ROI is very high; however, the Professional Division has an even higher ROI (46%) than the Residential
Division.
Req. 2
÷ Sales ÷$585,000 ÷$1,013,600
The Professional Division is earning about $0.15 on each dollar of sales whereas the Residential Division is only earning
about $0.15 on each dollar of sales. The Professional Division’s higher sales margin helps to account for its higher ROI.
Req. 3
Sales $585,000 $1,013,600
÷ Total assets ÷$195,000 ÷$ 362,000
Capital turnover 3.00 times 2.80 times
The Professional Division is generating $2.80 of sales for every dollar of assets invested in the division. The Residential
Division is generating 32.00 of sales for every dollar of assets invested. The Residential Division is even more efficient.
Req. 4
ROI 36% 42%
Does your answer for the residential ROI agree with the basic ROI? Yes
Does your answer for the professional ROI agree with the basic ROI? Yes
What can you conclude?
Even though the Residential Division’s efficiency (as measured by the capital turnover) is higher than that of the
Professional Division, the Professional Division’s profitability (as measured by the sales margin) is so much higher that it
causes the Professional Division’s ROI to be much higher than the Residential Division’s.
Req. 5
RI = Operating Income − Minimum acceptable income
= Operating Income − (Target rate of return × Total assets)
Residential RI = $70,200 − ($195,000 × 27%) = $17,550

Professional RI = $152,040 − ($362,000 × 27%) = $54,300
Both divisions are exceeding management’s expectations.

(10 min.) E10-33B
Osborne Plumb Industries Calloway Inc.

Company
Sales (S) $108,000 $840,000 $520,000
Operating income (OI) $43,200 $126,000 $41,600
Total assets (TA) $72,000 $200,000 $208,000
Sales margin (SM) 40% 15% 8%
Capital turnover (CT) 1.50 4.20 2.50
Return on investment (ROI) 60% 63% 20%
Target rate of return 9% 19% 18%
Residual income (RI) $36,720 $88,000 $4,160
(10 min.) E10-34B
Req. 1
Sales Margin = Operating income ÷ Sales
Sales Margin = $8,060 ÷ $31,000
= 26%
Capital Turnover = Sales ÷ Total Assets

Capital Turnover = $31,000 ÷ $15,500
= 2.00 times
ROI = Operating income ÷ Total Assets

ROI = $8,060 ÷ $15,500
= 52%
Req. 2
RI = Operating Income − (Target rate of return × Total assets)
RI = $8,060 − (15% x $15,500) = $5,735

(10-15 min.) E10-35B
Req. 1
The original return on investment (ROI) for the Cleary Ceramics division before the additional investment is 17.5%.
Req. 2
If this investment opportunity were undertaken the ROI would be 16.4%.
If the manager of this division is evaluated based on ROI, she would not want to make this investment. Investing in the
new project would decrease the division’s ROI.
Req. 3
The ROI of the investment opportunity is 12%.
From the standpoint of Alderman Corporation this investment is undesirable. The ROI of the investment opportunity is
less than Alderman’s required rate of return.
Req. 4
The residual income (RI) for Cleary Ceramics if this investment opportunity were to be undertaken is $7,700. If the
manager of this division is evaluated based on RI, she would want to make this investment. The positive RI indicates
that the division is earning more than management’s expectations.
Req. 5
The RI of the investment opportunity is $(3,300).
From the standpoint of Alderman Corporation this investment is not desirable. The RI of the investment opportunity is
negative, meaning the investment opportunity would earn more than management’s target required return.
Req. 6
Of the two performance measurement methods, ROI and RI, RI is more likely to promote goal congruence. The RI of
the investment alone is negative, meaning the investment will increase the division’s RI by that amount. This would
motivate both the division manager and the company management not to make the investment. The arrival at the
same conclusion by both the manager and company management indicates goal congruence.
(10 min.) E10-36B
Req. 1
Lowest – Variable cost of $36 ($31 + $5) Highest – Market price of $60
Req. 2
If Gloucester Motors has a cost-plus transfer price policy of full absorption cost plus 10%, the transfer price would be
$44.
Req. 3
Market price; $60

(15-20 min.) E10-37B
Sweet Street Muffins

Flexible Budget Performance Report - Sales and Operating Expenses
Flexible
Budget Volume
Actual Variance Flexible Budget Variance Master Budget
8,400 cases 8,400 cases 7,900 cases
Sales Revenue ($33 per case) $ 284,800 $ 7,600F $ 277,200 $ 16,500F $ 260,700
Packaging Expense ($3 per case sold) $ 26,100 $ 900U $ 25,200 $ 1,500U $ 23,700
Shipping Expense ($1.00 per case sold) $ 8,900 $ 500U $ 8,400 $ 500U $ 7,900
Sales Commissions (2% of sales price) $ 5,696 $ 152U $ 5,544 $ 330U $ 5,214
Salaries $ 7,700 $ 800U $ 6,900 $ - $ 6,900
Office Rent $ 3,300 $ - $ 3,300 $ - $ 3,300
Depreciation $ 3,000 $ - $ 3,000 $ - $ 3,000
Insurance Expense $ 2,000 $ 300F $ 2,300 $ - $ 2,300
Office Supplies Expense $ 1,300 $ 200U $ 1,100 $ - $ 1,100
Total Operating Expenses $ 57,996 $ 2,252U $ 55,744 $ 2,330U $ 53,414
Operating Income $ 226,804 $ 5,348F $ 221,456 $ 14,170F $ 207,286

(15-20 min.) E10-38B
Req. 1
Ski products-
Subunit X Flexible Static
Revenue by Budget Sales Volume (Master)
Product Actual Variance Flexible Budget Variance Budget
Downhill— $ 323,000 $ 3,000 (F) $ 320,000 $19,000 (F) $ 301,000
Model RI
Downhill— 152,000 13,000 (U) 165,000 22,000 (F) 143,000
Model RII
Cross-Country— 289,000 1,000 (U) 290,000 18,000 (U) 308,000
Model EXI
Cross-Country— 255,000 10,000 (F) 245,000 20,500 (U) 265,500
Model EXII
Snowboard— 420,000 4,000 (F) 416,000 16,000 (F) 400,000
Model LXI
Total $1,439,000 $ 3,000 (F) $1,436,000 $18,500 (F) $1,417,500
Req. 2
This subunit is a revenue center.
Req. 3
Using the flexible budget variance as a guide, no items would be investigated.
Using the sales volume variance as a guide, the following items will be investigated:
• Cross-Country Model EXI

• Cross-Country Model EXII
• Downhill Model R1
• Downhill Model RII
• Snowboard Model LXI
Interpret your results.
The sales volume variance is always due strictly to volume — therefore, the number of units sold was different than
budgeted for every model. The company sales mix appears to be shifting in the direction of downhill ski and snowboard
sports. This could result in a buildup of cross-country ski inventory.
Management may need to do a better job marketing their cross-country skis. Additionally, the company may end up
with delivery delays for downhill sports equipment if production schedules are not revised to accommodate the
increasing demand for downhill skis and snowboards.

(15-20 min.) E10-39B
a. Flexible budget variance

b. Volume variance
c. 25,000 units
d. $235,000
e. $156,250
f. $7,500 favorable
g. $210,500
(15-20 min.) E10-40B
Jubilee Corporation
Balanced Scorecard Report
For Quarter Ended December 31
Perspective Objective KPI Goal Actual Goal Achieved?
Financial
Gross margin growth percentage Gross margin growth 27% 28% Yes
percentage
Sales revenue Growth –Core Core product line $2,300,000 $2,000,000 No

product line
Customer
Number of repeat customers Number of customers 100,000 103,000 Yes
Market share percentage Percentage repeat 18% 13% No

customers
Internal business process
Average repair time (number of Average repair time in 1.1 days 1.3 days No
days) days
Number of new core products Core products 15 19 Yes
Learning and growth
Employee training Hours of employee 2,400 2,275 NO

training
Employee turnover rate Employee turnover rate 5% 7% No

(15-20 min.) E10-41B
a. Learning and growth

b. Learning and growth
c. Customer
d. Customer
e. Internal business
f. Customer
g. Community
h. Internal business
i. Learning and growth
j. Internal business
k. Financial
l. Financial
m. Internal business
n. Financial
o. Community
p. Customer
q. Community
r. Internal business

Problems (Group A)
(20-25 min.) P10-42A
Req. 1
Lively Bubbles, Inc.
Flexible Budget Income Statement
Month Ended July 31
Flexible Budget
per Output
Unit Output Units (Kits)
45,000 50,000 55,000
$3.05 $137,250 $152,500 $167,750
Sales revenue
Variable expenses:
Cost of goods sold 1.25 56,250 62,500 68,750
Sales commissions 0.15 6,750 7,500 8,250
Utilities expense 0.20 9,000 10,000 11,000
Fixed expenses:
Salary expense 30,000 30,000 33,000
Depreciation expense 20,000 20,000 23,000
Rent expense 10,000 10,000 15,000
Utilities expense 4,000 4,000 4,000
Total expenses 136,000 144,000 163,000
Operating income $ 1,250 $ 8,500 $ 4,750

(continued) P10-42A
Req. 2
Req. 3
The advantage of the graph in the previous step is that Lively Bubbles’ managers can look at the graph to estimate
total expenses at any output level up to 55,000 bubble kits, not just the three levels shown in the columnar format in
the first step. The disadvantage of the graph is that looking at the graph provides only an estimate of the budgeted
cost.

(15-20 min.) P10-43A
Req. 1
Lively Bubbles, Inc.
Month Ended July 31
Flexible Budget
Actual Results Flexible for Actual Sales Volume Static (Master)
at Actual Prices Budget Number of Variance Budget
Variance Output Units
Output units (kits) 50,000 -0- 50,000 5,000F 45,000
Sales revenue $160,500 $8,000F $152,500 $15,250F $137,250
Variable expenses:
Cost of goods sold 63,000 500U 62,500 6,250U 56,250
Sales commissions 9,000 1,500U 7,500 750U 6,750

expense
Utilities expense 10,000 0 10,000 1,000U 9,000
Fixed expenses:
Salary expense 32,200 2,200U 30,000 0 30,000
Depreciation 20,000 0 20,000 0 20,000

expense
Rent expense 9,550 450F 10,000 0 10,000
Utilities expense 4,000 0 4,000 0 4,000
Total expenses 147,750 3,750U 144,000 8,000U 136,000
Operating income $ 12,750 $4,250F $ 8,500 $ 7,250F $ 1,250
Req. 2
The favorable sales volume variance for operating income is much larger than the favorable flexible budget variance.
Most of the difference between master budget operating income and actual operating income resulted from selling
5,000 more bubble kits than expected.
Req. 3
Lively Bubbles’ static target budget variance is $11,500 favorable, meaning that its operating income is higher than
expected per the static budget.
A favorable sales volume variance reveals whether profits increased due to more units being sold.
A favorable sales revenue flexible budget variance means the sale price was higher.

(15-20 min.) P10-44A
Req. 1
Paint Stores Consumer
Operating income $ 440,000 $ 148,200
÷ Total assets ÷$1,250,000 ÷$1,425,000
Return on investment 35.2% 10.4%
Req. 2
÷ Sales ÷$4,000,000 ÷$1,140,000
The Consumer Division is more profitable on each dollar of sales.
Req. 3
Sales $4,000,000 $1,140,000
÷ Total assets ÷$1,250,000 ÷$1,425,000
The Paint Stores Division is more efficient in generating sales with its assets.
Req. 4
ROI 35.2% 10.4%
The Consumer Division’s profitability on each dollar of sales is higher than the Paint Stores Divisions’ profitability.
However, the Paint Stores Division’s efficiency is significantly higher than the Consumer Division’s efficiency. These
results cause the Paint Stores Division’s ROI to be higher than the Consumer Division’s ROI.
Req. 5
RI = Operating income − Minimum acceptable income
= Operating income − (Target rate of return × Total assets)
Paint Stores RI = $440,000 − ($1,250,000 × 21%) = $177,500

Consumer RI = $148,200 − ($1,425,000 × 21%) = $(151,050)
Only the Paint Stores Division is meeting management’s target rate of return. The Consumer Division should work on
improving its capital turnover rate. Improving the capital turnover rate may help the division achieve positive residual
income.
Req. 6
Most companies use the average asset balance since the income used in the ROI calculation is earned over the course
of the entire year.
Management must also decide whether it wishes to use the gross book value of assets or the net book value of assets.
The net book value is often used since the figure is easily pulled straight from the balance sheet. However, ROI using
that value will artificially rise over time due to depreciation.

(continued) P10-44A
Req. 7
Risk level of the division’s business
Interest rates on company debt
Investors’ expectations
Competitors’ rate of return
Return being earned by other divisions
General economic conditions
Req. 8
RI does a better job of goal congruence.
Req. 9
Investment centers are responsible for both generating profit and efficiently managing the division’s assets. Budget
versus actual performance reports are insufficient because they do not measure how efficiently the division uses its
assets.

(15-20 min.) P10-45A
Req. 1
(Millions of dollars) Net Revenue Operating Profit Total Assets
Home furnishings
$10,500 $2,625 $6,250
Office furniture
9,000 1,800 6,000
Store displays
12,100 1,210 11,000
Healthcare furnishings
1,500 495 625
Req. 2
(Millions of dollars) Operating Profit Net Revenue Sales Margin
Home furnishings
$2,625 $10,500 25.00%
Office furniture
1,800 9,000 20.00%
Store displays
1,210 12,100 10.00%
495 1,500 33.00%
The Store Displays Division of FlashCo has a much lower sales margin than the other divisions. Store Displays is only
earning $0.10 on every $1 of sales, whereas the other divisions range from $0.20 to $0.33 on every dollar of sales.
Healthcare Furnishings has the highest sales margin.
Req. 3
(Millions of dollars) Net Revenue Total Assets Capital Turnover
Home furnishings
$10,500 $6,250 1.68
Office furniture
9,000 6,000 1.5
Store displays
12,100 11,000 1.1
1,500 625 2.4
The divisions have very different capital turnover rates. This means that the divisions vary greatly in their ability to
generate sales revenue from their assets. Healthcare furnishings has the highest capital turnover while Store Displays
has the lowest capital turnover.

(continued) P10-45A
Req. 4
(Millions of dollars) Operating Profit Total Assets ROI
Home furnishings
$2,625 $6,250 42.00%
Office furniture
1,800 6,000 30.00%
Store displays
1,210 11,000 11.00%
495 625 79.20%
Home furnishings and Healthcare furnishings have the highest ROI. Both of these divisions had the highest sales
margins, which is a factor as to why they have the highest ROI. Store Displays had the lowest ROI, in part driven by the
fact that it had the lowest sales margin of the four divisions.
Req. 5
Financial reporting is for the benefit of external users, not internal management. Therefore, not all company
information is disclosed in the financial statements. Residual income (RI) calculations involve management’s target rate
of return. Since this information is not presented, residual income cannot be calculated by an external user without
making an assumption about the rate.
(15–20 minutes) P10-46A

Req. 1
The highest acceptable transfer price for the divisions is $30, the market price.
Req. 2
Variable manufacturing Variable manufacturing
= Direct materials + Direct labor +
cost overhead
$20 = $11 + $5 + $4
Assuming the transfer price is negotiated between the divisions, the lowest acceptable transfer price would be the
total variable manufacturing cost, $20. (Note: The assumption is made here that the variable selling expenses are only
incurred for external sales and not for in-house sales.)
Req. 3
The manager of the Small Components Division would prefer the $30 transfer price. The manager of the Computer
Division would prefer the $20 transfer price.
Req. 4
Fixed
Variable Decrease in fixed manufacturing
Full absorption cost = + manufacturing -
manufacturing cost overhead
overhead
$25 = $20 + $6 - $1
If the company’s policy requires that all in-house transfers must be priced at total manufacturing cost plus 25%, the
transfer price would be $27.50 [$25 x ($25 x 10%)].

(continued) P10-46A
Req. 5
If the company requires all in-house transfers must be priced at total variable manufacturing cost plus 25%, the
transfer price would be $25 [$20 x ($20 x 25%)].
Req. 6
Variable selling
Transfer price = ( Full absorption cost + ) x 105%
expense
$28.35 = ( $25 + $2 ) x 105%
If the company does incur the variable selling expenses on internal transfers and it sets transfer prices at 105% of the
sum of full absorption cost and the variable selling expenses, the transfer price would be $28.35.

(15-20 min.) P10-47A
Req. 1
Sports–Subunit X Actual Flexible Budget Flexible Budget Percent
Variance Variance*
(U or F)
Sales $545,500 $500,000 $45,500 F 9.10% F
Cost of goods sold 387,000 375,000 12,000 U 3.20% U
Gross margin 158,500 125,000 33,500 F 26.80% F
Operating expenses 10,380 10,000 380 U 3.80% U
Operating income before

Common fixed expenses 148,120 115,000 33,120 F 28.80% F
Common fixed expenses

(allocated) 52,000 40,000 12,000 U 30.00% U
Operating income $96,120 $75,000 $21,120 F 28.16% F
*flexible budget variance ÷ flexible budget
Req. 2
This performance report includes both revenue and cost data; therefore, this subunit must be a profit center.
Req. 3
Service department charges
Req. 4
Managers should investigate favorable as well as unfavorable variances. Favorable variances may be due to
bookkeeping or budgeting errors. Management needs to evaluate large favorable as well as unfavorable variances to
determine the root cause of the variance.
Req. 5
The flexible budget variances are not due to sales volume differences between budget and actual. Differences in sales
volume are captured by the sales volume variance, not the flexible budget. The flexible budget variance is due to
something other than sales volume.
Req. 6
Management will not place much weight on the cost of goods sold variance because it does not exceed 10%.
Additionally, they may not place much weight on the service department charges because this is not a direct cost of the
subunit.
Req. 7
This performance report addresses the financial perspective of the balanced scorecard. Financial performance
measures tend to be lag indicators. They typically measure the results of past decisions.

(continued) P10-47A
Req. 8
Customer perspective—customer satisfaction ratings
Internal business perspective—number of new products developed
Learning and Growth perspective—hours spent training employees
Each one of these performance measures is a lead indicator that tends to project future performance. The
performance indicators listed above are often better at projecting future performance than past financial data.

Problems (Group B)
(20-25 min.) P10-48B
Req. 1
Precious Bubbles, Inc.
Flexible Budget Income Statement
Month Ended March 31
Flexible Budget
per Output
Unit Output Units (Kits)
65,000 70,000 75,000
$3.05 $198,250 $213,500 $228,750
Sales revenue
Variable expenses:
Cost of goods sold 1.25 81,250 87,500 93,750
Sales commissions 0.15 9,750 10,500 11,250
Utilities expense 0.20 13,000 14,000 15,000
Fixed expenses:
Salary expense 30,000 30,000 33,000
Depreciation expense 20,000 20,000 23,000
Rent expense 10,000 10,000 16,000
Utilities expense 5,000 5,000 5,000
Total expenses 169,000 177,000 197,000
Operating income $ 29,250 $ 36,500 $ 31,750

(continued) P10-48B
Req. 2
Req. 3
The advantage of the graph in the previous step is that Precious Bubbles’ managers can look at the graph to estimate
total expenses at any output level up to 75,000 bubble kits, not just the three levels shown in the columnar format in
the first step. The disadvantage of the graph is that looking at the graph provides only an estimate of the budgeted
cost.

(15-20 min.) P10-49B

Req. 1
Precious Bubbles, Inc.
Year Ended March 31
Flexible budget
Flexible for actual
Actual results at budget number of Volume Master
actual prices variance output units variance budget
Output units 70,000 0 70,000 5,000 F 65,000
Sales revenue $ 221,600 8,100 F $213,500 15,250 F $198,250
Variable expenses:
Cost of goods sold 88,250 750 U 87,500 6,250 U 81,250
Sales commissions 13,250 2750 U 10,500 750 U 9,750
Utility expense 14,000 0 14,000 1,000 U 13,000
Fixed expenses:
Salary expense 32,300 2,300 U 30,000 0 30,000
Depreciation expense 20,000 0 20,000 0 20,000
Rent expense 9,650 350 F 10,000 0 10,000
Utility expense 5,000 0 5,000 0 5,000
Total expenses $ 182,450 5,450 U 177,000 8,000 U 169,000
Operating income $ 39,150 2,650 F $ 36,500 7,250 F $ 29,250
Req. 2
The favorable sales volume variance for operating income is much larger than the favorable flexible budget variance.
Most of the difference between master budget operating income and actual operating income resulted from selling
5,000 more bubble kits than expected.
Req. 3
Precious Bubbles’ static budget variance is $9,900 favorable, meaning that its operating income is higher than
expected per the static budget.
A favorable sales volume variance reveals whether profits increased due to more units being sold.
A favorable sales revenue flexible budget variance means the sale price was higher.

(15-20 min.) P10-50B
Req. 1
÷ Total assets ÷$1,400,000 ÷$2,000,000
Return on investment 35.00% 11.55%
Req. 2
÷ Sales ÷$3,920,000 ÷$1,400,000
Sales margin 12.5% 16.5%
The Consumer Division is more profitable on each dollar of sales.
Req. 3
Sales $3,920,000 $1,400,000
÷ Total assets ÷$1,400,000 ÷$2,000,000
The Paint Stores Division is more efficient in generating sales with its assets.
Req. 4
Sales margin 12.5% 16.50%
ROI 35.00% 11.55%
The Consumer Division’s profitability on each dollar of sales is higher than the Paint Stores Division’s profitability.
However, the Paint Stores Division’s efficiency is significantly higher than the Consumer Division’s efficiency. These
results cause the Paint Stores Division’s ROI to be higher than the Consumer Division’s ROI.
Req. 5
RI = Operating income − Minimum acceptable income
= Operating income − (Target rate of return × Total assets)
Paint Stores RI = $490,000 − ($1,400,000 × 23%) = $168,000

Consumer RI = $231,000 − ($2,000,000 × 23%) = $(229,000)
Only the Paint Stores Division is meeting management’s target rate of return. The Consumer Division should work on
improving its capital turnover rate. Improving the capital turnover rate may help the division achieve positive residual
income.
Req. 6
Most companies use the average asset balance since the income used in the ROI calculation is earned over the course
of the entire year.
Management must also decide whether they wish to use the gross book value of assets or the net book value of assets.
The net book value is often used because it is easily pulled straight from the balance sheet. However, ROI calculated
using the net book value of assets might artificially rise over time simply due to depreciation.

(continued) P10-50B
Req. 7
Risk level of the division’s business
Interest rates on company debt
Investors’ expectations
Competitors’ rate of return
Return being earned by other divisions
General economic conditions
Req. 8
RI does a better job of goal congruence.
Req. 9
Investment centers are responsible for both generating profit and efficiently managing the division’s assets. Budget
versus actual performance reports are insufficient because they do not measure how efficiently the division uses its
assets.

(15-20 min.) P10-51B
Req. 1
(Millions of dollars) Net Revenue Operating Profit Total Assets
Home furnishings
$10,000 $2,500 $8,000
Office furniture
9,100 1,820 6,500
Store displays
13,000 1,690 12,500
1,500 480 750
Req. 2
(Millions of dollars) Operating Profit Net Revenue Sales Margin
Home furnishings
$2,500 $10,000 25.00%
Office furniture
1,820 9,100 20.00%
Store displays
1,690 13,000 13.00%
480 1,500 32.00%
The Store Displays Division of GlennCo has a much lower sales margin than the other divisions. They are only earning
$0.13 on every $1 of sales, whereas the other divisions range from $0.20 to $0.32 on every dollar of sales. Health Care
Furnishings has the highest sales margin.
Req. 3
(Millions of dollars) Net Revenue Total Assets Capital Turnover
Home furnishings
$10,000 $8,000 1.25
Office furniture
9,100 6,500 1.4
Store displays
13,000 12,500 1.04
1,500 750 2
The divisions have very different capital turnover rates. This means that the divisions vary greatly in their ability to
generate sales revenue from their assets. Healthcare furnishings has the highest capital turnover while Store Displays
has the lowest capital turnover.

(continued) P10-51B
Req. 4
(Millions of dollars) Operating Profit Total Assets ROI
Home furnishings
$2,500 $8,000 31.25%
Office furniture
1,820 6,500 28%
Store displays
1,690 12,500 13.52%
480 750 64%
Home furnishings and Healthcare furnishings have the highest ROI. Both of these divisions had the highest sales
margins and capital turnover rates which accounts for their high ROI. Store Displays had the lowest ROI, in part driven
by the fact that it had the lowest sales margin of the four divisions.
Req. 5
Financial reporting is for the benefit of external users, not internal management. Therefore, not all company
information is disclosed in the financial statements. Residual income (RI) calculations involve management’s target rate
of return. Since this information is not presented, residual income cannot be calculated by an external user without
making an assumption about the rate.
(15–20 minutes) P10-52B

Req. 1
The highest acceptable transfer price for the divisions is $45, the market price.
Req. 2
Variable manufacturing Variable manufacturing
= Direct materials + Direct labor +
cost overhead
$28 = $20 + $5 + $3
Assuming the transfer price is negotiated between the divisions, the lowest acceptable transfer price would be the
total variable manufacturing cost, $28. (Note: The assumption is made here that the variable selling expenses are only
incurred for external sales and not for in-house sales.)
Req. 3
The manager of the Small Components Division would prefer the $45 transfer price. The manager of the Computer
Division would prefer the $28 transfer price.
Req. 4
Fixed
Variable Decrease in fixed manufacturing
Full absorption cost = + manufacturing -
manufacturing cost overhead
overhead
$40 = $28 + $8 - $4
If the company’s policy requires that all in-house transfers must be priced at total manufacturing cost plus 20%, the

(continued) P10-52B
Req. 5
If the company requires all in-house transfers must be priced at total variable manufacturing cost plus 25%, the
Req. 6
Transfer price before reduction in fixed Variable selling
= ( Full absorption cost + ) x 110%
manufacturing overhead expense
$46.20 = ( $40 + $2 ) x 110%
Transfer price before reduction in fixed

Transfer price = - Decrease in fixed manufacturing overhead
manufacturing overhead
$42.20 = $46.20 - $4
If the company does incur the variable selling expenses on internal transfers and it sets transfer prices at 110% of the
sum of full absorption cost and the variable selling expenses, the transfer price would be $42.40.

(15-20 min.) P10-53B
Req. 1
Flexible Flexible
Water Sports–Subunit X Actual Budget Budget Percent
Variance Variance*
(U or F)
Sales $543,000 $500,000 $43,000 F 8.6% F
Cost of goods sold 310,500 300,000 10,500 U 3.5% U
Gross margin 232,500 200,000 32,500 F 16.25% F
Operating expenses 78,450 75,000 3,450 U 4.6% U
Operating income before service

department charges 154,050 125,000 29,050 F 23.24% F

(allocated) 48,000 37,500 10,500 U 28% U
Operating income $106,050 $87,500 $18,550 F 21.2% F
*flexible budget variance ÷ flexible budget
Req. 2
This performance report includes both revenue and cost data; therefore, this subunit must be a profit center.
Req. 3
Req. 4
Managers should investigate favorable as well as unfavorable variances. Favorable variances may be due to
bookkeeping or budgeting errors. Management needs to evaluate large favorable as well as unfavorable variances to
determine the root cause of the variance.
Req. 5
The flexible budget variances are not due to differences in sales volume between budget and actual. Differences in
sales volume are captured by the sales volume variance, not the flexible budget. The flexible budget variance is due to
something other than sales volume.
Req. 6
Management will not place much weight on the cost of goods sold variance because it does not exceed 10%.
Additionally, it may not place much weight on the service department charges because this is not a direct cost of the
subunit.
Req. 7
This performance report addresses the financial perspective of the balanced scorecard. Financial performance
measures tend to be lag indicators. They typically measure the results of past decisions.

(continued) P10-53B
Req. 8
Customer perspective—customer satisfaction ratings
Internal business perspective—number of new products developed
Learning and Growth perspective—hours spent training employees
Each one of these performance measures is a lead indicator that tends to project future performance. The
performance indicators listed above are often better at projecting future performance than past financial data.

Discussion & Analysis
(30-45 min.) A10-54
1. Describe at least four advantages of decentralization. Also describe at least two disadvantages to
decentralization.
Decentralization provides many potential benefits. It frees top management time. By delegating responsibility for
daily operations to segment managers, top management can concentrate on long-term strategic planning and
higher-level decisions that affect the entire company. Decentralization encourages the use of expert knowledge by
allowing top management to hire the expertise each business segment needs to excel in its specific operations.
Specialized knowledge often helps segment managers make better decisions than the top company managers
could make. Segment managers can focus on just one segment of the company, allowing them to maintain close
contact with important customers and suppliers. Thus, decentralization often leads to improved customer and
supplier relations, which can result in quicker customer response times. Decentralization also provides segment
managers with training and experience necessary to become effective top managers. Companies often groom their
lower-level managers to move up through the company, taking on additional responsibility and gaining more
knowledge of the company with each step. Finally, empowering segment managers to make decisions increases
managers’ motivation and job satisfaction, which often improves job performance and retention.
Decentralization may also cause potential problems. Decentralization may cause a company to duplicate certain
costs or assets. Also, decentralized companies often struggle to achieve goal congruence. Segment managers may
not fully understand the big picture, or the ultimate goals that upper management is trying to achieve. They may
make decisions that are good for their segment but may be detrimental to another segment of the company or the
company as a whole.
2. Compare and contrast a cost center, a revenue center, a profit center, and an investment center. List a specific
example of each type of responsibility center. How is the performance of managers evaluated in each type of
responsibility center?
In a cost center, managers are accountable for costs only. Manufacturing operations, such as the Campbell’s
Chicken Noodle Soup manufacturing plant, are cost centers. The plant manager controls costs by ensuring that the
entire production process runs efficiently. The plant manager is not responsible for generating revenues because
he or she is not involved in selling the product. The plant manager is evaluated on his or her ability to control costs
by comparing actual costs to budgeted costs. In a revenue center, managers are accountable primarily for
revenues. Many times, revenue centers are sales territories, such as Campbell’s Soups Midwest and Southeast
sales regions. Managers of revenue centers may also be responsible for the costs of their own sales operations.
Revenue center performance reports compare actual revenues to budgeted revenues. In a profit center, managers
are accountable for both revenues and costs and, therefore, profits. For example, at Campbell’s, a manager is
responsible for the entire line of Campbell’s ready- to- serve and condensed soup products. This manager is
accountable for increasing sales revenue and controlling costs to achieve profit goals for the entire line of soups.
Superiors evaluate the manager’s performance by comparing actual revenues, expenses, and profits to the budget.
In an investment center, managers are responsible for: generating revenues, controlling costs, and efficiently
managing the division’s assets. Investment centers are generally large divisions of a corporation. Investment
centers are treated almost as if they were stand-alone companies. Division managers generally have broad
responsibility, including deciding how to use assets. As a result, managers are held responsible for generating as
much profit as they can with those assets.
3. Explain the potential problem that could arise from using ROI as the incentive measure for managers. What are
some specific actions a company might take to resolve this potential problem?
One serious drawback of ROI is the short-term focus of this measure. Companies usually prepare performance
reports and calculate ROI using a time frame of one year or less. If upper management uses a short time frame,
division managers have an incentive to take actions that will lead to an immediate increase in these measures,
even if such actions may not be in the company’s long-term interest. On the other hand, many potentially positive
actions may take longer than one year to generate income at the targeted level. Many product life cycles start

slow, even incurring losses in the early stages, before generating profit. As a potential remedy, management can
measure financial performance using a longer time horizon, such as three to five years. Extending the time frame
gives segment managers the incentive to think long term rather than short term and make decisions that will
positively impact the company over the next several years.
4. Describe at least two specific actions that a company could take to improve its ROI.
The ROI formula can be expanded to sales margin multiplied by capital turnover. By improving either of these
ratios, the ROI will be improved. The sales margin can be improved by increasing the amount of operating income
earned on every dollar of revenue. This can be achieved by cutting costs. Reducing or eliminating nonproductive
assets can improve the capital turnover ratio. There are many specifics actions that may be used to achieve these
objectives; therefore, student answers will vary.
5. Define residual income. How is it calculated? Describe the major weakness of residual income.
Residual income determines whether operations have created any excess income above and beyond
management’s expectations. Residual income is calculated as: Operating Income – Minimum acceptable income,
or Operating Income – (Target rate of return x Total assets).
6. Compare and contrast a master budget and a flexible budget.
A master budget is prepared before the beginning of the period. The master budget does not change with the
actual volume of production. A flexible budget can be prepared for a different volume that was originally
anticipated in the master budget.
7. Describe two ways managers can use flexible budgets.
Student answers will vary.

8. Define key performance indicator (KPI). What is the relationship between KPIs and a company’s objectives?
Select a company of any size with which you are familiar. List at least four examples of specific objectives that
company might have and one potential KPI for each of those specific objectives.
A key performance indicator (KPI) is a summary performance measure to assess how well a company is achieving
its goals. The KPI is a measurement used by managers to determine is the company is achieving its objectives.
Student answers for a specific company will vary.
9. List and describe the four perspectives found on a balanced scorecard. For each perspective, list at least two
examples of KPIs that might be used to measure performance on that perspective.
The financial perspective helps managers answer the question, “How do we look to shareholders?” Shareholders
are primarily concerned with the company’s profitability. Managers must continually attempt to increase profits
through: increasing revenue, controlling costs, or increasing productivity. The customer perspective helps
managers evaluate the question, “How do customers see us?” Customer satisfaction is a top priority for long-term
success. If customers aren’t happy, they won’t come back. Therefore, customer satisfaction is critical for the
company to achieve its financial goals.
Customers are typically concerned with four product or service attributes: price, quality, sales service, and delivery
time. The internal business perspective helps managers address the question, “At what business processes must
we excel to satisfy customer and financial objectives?” In other words, a company needs to tend to its internal
operations if it is to please customers. And only by pleasing customers will it achieve its financial goals. Answer to
that question incorporates three factors: innovation, operations, and post-sales support. The learning and growth
perspective helps managers assess the question, “Can we continue to improve and create value?” Much of a
company’s success boils down to its people. A company cannot be successful in the other perspectives (financial,
customer, internal operations) if it does not have the right people in the right positions, a solid and ethical
leadership team, and the information systems that employees need. Therefore, the learning and growth
perspective lays the foundation needed for success in the other perspectives. The learning and growth perspective
focuses on three factors: employee capabilities, information system capabilities, and the company’s “climate for
action.”

10. Contrast lag indicators with lead indicators. Provide an example of each type of indicator.
Lag indicators reveal the results of past decisions. Financial performance measures such as ROI or RI are lag
indicators because they convey trends based on historical information. Lead indicators are performance measures
that predict future performance.
11. Some companies integrate sustainability measures into the traditional four perspectives in their balanced
scorecards. Other companies create a new perspective (or two) for sustainability. Which method do you think
would result in better supporting sustainability efforts throughout the organization? Explain your viewpoint.
12. Find an annual report for a publicly held company (go to the company’s website and look for “Investor
Relations” or a similar link.) How many sustainability initiatives can you find in the annual report? What internal
balanced scorecard measures do you think they might use to measure progress on each sustainability initiative?
(You will have to use your imagination, since typically most balanced scorecard measures are not publicly
disclosed.)
A10-55
1. Locate the company’s annual report as outlined previously. Find the company’s segment information; it should
be in the “Notes to Consolidated Financial Statements” or other similarly named section. Look for the word
“Segment” in a heading—that is usually the section you need.
To create this SAMPLE set of solutions for this question, Starbucks Corporation was used.
Student answers will vary, depending upon the company chosen and the year used.
Starbucks Corporation has three reportable operating segments: United States, International, and Global CPG
(Consumer Products Group).
2. List the segments as reported in the annual report. Make a table listing each operating segment, its revenues,
income, and assets.
(in millions)
Segment Revenues Income Assets
US $7,882.0 $528.01 $2,362.9
International 2,103.4 110.0 1,272.7
Global CPG 392.6 205.3 116.0
3. Use the data you collected in Requirement 2 to calculate each segment’s sales margin. Interpret your results.
Sales margin = Operating income/Sales
US: $528.01/$7,882.0 = 6.7%
International: $110.1/$2,103.4 = 5.2%
Global CPG: $205.3/$392.6 = 52.3%
The CPG segment has the highest sales margin of the three segments at 52.3%. For every dollar of sales, the US
segment earned $0.67 and the International segment earned $0.52.

4. Use the data you collected in Question 2 to calculate each segment’s capital turnover. Interpret your results.
Capital turnover = Sales/Total assets
US: $7,882.0/$2,362.9 = 3.3
International: $2,103.4/$1,272.7 = 1.7
Global CPG: $392.6/$116.0 = 3.4
The capital turnover for the CPG and US segments are almost the same. The CPG segment generated $3.40 of
sales for every $1 of assets and the US generated $3.30. The International segment only generated $1.70 of sales
for every $1 of assets. The US and CPG segments use its assets more efficiently than the International segment.
5. Use the data you collected in Requirement 2 to calculate each segment’s ROI. Interpret your results.
ROI = Operating income/Total assets
US: $528.01/$2,362.9 = 22.3%
International: $110.0/$1,272.7 = 8.6%
CPG: $205.3/$116.0 = 177.0%
The CPG segment has a very high ROI in comparison to the other two segments. This is due to it having the highest
sales margin of the three segments.
6. Can you calculate RI using the data presented? Why or why not?
RI cannot be calculated for Starbucks because the target rate of return and WACC is not known.
7. The rules for how segments should be presented in the annual report are governed by external financial
accounting rules. The information you gathered for the previous requirements would be used by investors and
other external stakeholders in their analysis of the company and its stock. Internally, the company most likely
has many segments. Based on what you know about the company and its products or services, list at least five
potential segments that the company might use for internal reporting. Explain why this way of segmenting the
company for internal reporting could be useful to managers.
Five potential segments for internal reporting for Starbucks are:
1. Regional territories
2. Product lines
3. Brand lines
4. Customer base
5. Business function

(30-45 min.) A10-56
Req. 1
The two product segments are: 1) Oral, Personal and Home Care, and 2) Pet Nutrition.
(Millions of dollars) Operating Profit Net Sales Identifiable Assets
Oral, Personal and Home Care $3,062.6 $13,182.4 $8,870.5
Pet Nutrition 541.8 2,147.5 1,025.1
Req. 2
ROI calculation:
(Millions of dollars) Operating Profit Identifiable Assets ROI
Oral, Personal and Home Care $3,062.6 $8,870.5 34.53%
Pet Nutrition 541.8 1,025.1 52.85%
Req. 3
The Pet Nutrition Division has a much higher ROI than the Oral, Personal and Home Care Division. The expanded ROI
formula may offer some clues as to why this is the case. Sales margin and capital turnover are calculated below:
Sales Margin calculation:

(Millions of dollars) Operating Profit Net Sales Sales Margin
Oral, Personal and Home Care $3,062.6 $13,182.4 23.23%
Pet Nutrition 541.8 2,147.5 25.23%
Capital Turnover calculation:

Identifiable Capital
(Millions of dollars) Net Sales Assets Turnover
Oral, Personal and Home Care $13,182.4 $8,870.5 1.49
Pet Nutrition 2,147.5 1,025.1 2.09
The primary reason Pet Nutrition has a higher ROI is that it has a much higher capital turnover. The Pet Nutrition
Division has been able to generate $2.09 of sales on each dollar of its assets, whereas the Oral, Personal and Home
Care Division has only been able to generate $1.49 of sales on each dollar of its assets. Additionally, the Pet Nutrition
Division is earning about two cents more of income on every dollar of sales (25.23% vs. 23.23%). Both factors
combined give the Pet Nutrition Division an extremely high ROI.
Req. 4
The management team would most likely choose to allocate additional funds to the Pet Nutrition Division. The Pet
Nutrition Division is earning about $0.53 on every dollar invested whereas the Oral, Personal and Home Care division
is only earning about $0.35 on every dollar invested. The Pet Nutrition Division is yielding over 50% more return than
the other division.

A10-57
Ethics Mini-Case
1.
a. The ethical issues in this situation are:
Integrity: “Abstain from engaging in or supporting any activity that might discredit the profession.”
Deliberately shifting direct fixed costs to common fixed costs in reports that would affect real business
decisions would potentially discredit the profession.
Credibility: “Disclose all relevant information that could reasonably be expected to influence an intended
user’s understanding of the reports, analyses, or recommendations.” It is reasonable to expect that the direct
fixed expenses, if disclosed, would affect the understanding of the report. Thus, by shifting these costs to
common fixed expenses, Kayla Collins is violating this ethical principle.
Competence: “Provide decision support information and recommendations that are accurate, clear, concise,
and timely.” If Kayla Collins were to shift the direct fixed expenses to common fixed expenses, the decision
support information and recommendations would not be accurate.
b. Kayla Collins’ responsibilities as a management accountant are to be honest, fair and objective. She should
report the accurate figures for direct fixed costs even if this would result in her boyfriend, Craig Tatter, losing
his job.
2. By shifting the Small Engines division direct fixed costs to common fixed expenses, Grommet Company would
assume that the division is more efficient than it is in reality. This error would certainly influence the decision
about continuing the Small Engines division, since it would make the segment margin look favorable and more
profitable than it actually is.
3. No, the corporation as a whole could be harmed by Collins’ actions, which would potentially also harm the
shareholders or owners. By deliberately shifting direct fixed costs to common fixed costs, the corporation would be
keeping a nonprofitable division open, which would be a drain on the overall company’s profits.
A10-58
Real Life Mini-Case
1. Go to Panasonic’s website and locate the information for investors. In its 2012 annual report, it describes each
of the segments listed in the excerpt given in the case description. For each segment, write a brief description of
what products and services are included in that segment.
a. AVC Networks: Entertainment products mostly. TV’s, Blu-ray disks, computers, etc…
b. Appliances: Essential household appliances such as washers, dryers and air conditioners
c. Systems & Communications: Internet and communication devices such as phones, routers, etc…
d. Eco Solutions: Energy saving light fixtures and other devices
e. Automotive Systems: Multi-media equipment for cars and other electronic components
f. Industrial Devices: Electronic components such as circuit boards and semiconductors
g. Energy: Solar power and lithium-ion batteries
h. Other: Healthcare equipment

(continued) A10-58
2. For each of the segments in the Panasonic Segment Performance Report included in the case, calculate a
profitability ratio for each year by using the following formula.
Profit (loss)/Sales
2012 2011 2010
AVC Networks -.0396 .0121 .0098
Appliances .0532 .0566 .0409
Systems & Communications .0210 .0507 .0400
Eco Solutions .0390 .0379 .0327
Automotive Systems .0080 .0371 .0384
Industrial Devices -.0120 .0418 .0357
Energy -.0340 -.0239 0
Other .0130 .0264 .0147
3. The plasma factory described in the case would have been a part of which segment? For that segment for the
years 2010 through 2012, answer the following questions:
a. Did Sales increase, decrease, or remain about the same?
b. Did profit (loss) increase, decrease, or remain about the same?
c. Did the profitability ratio (as calculated in question 2) increase, decrease, or remain about the same?
d. What observations can you make about the performance of this segment?
The plasma TV’s would be part of the AVC Networks segment.

a. Sales decreased
b. Profits decreased to a loss
c. Profitability ratio decreased
d. This segment has undergone a dramatic downturn, and it is no longer profitable at the moment. There must
have been something significant that happened in the industry. Given that these products are in high demand,
perhaps Panasonic has new competition or their products have simply fallen out of favor.
4. For each of the other segments for the years 2010 through 2012 answer the following questions.
a. Did Sales increase, decrease, or remain about the same?
b. Did profit (loss) increase, decrease, or remain about the same?
c. Did the profitability ratio (as calculated in question 2) increase, decrease, or remain about the same?
Appliances
a. Sales increased
b. Profit increased
c. Profitability increased
Systems & Communications

a. Sales decreased
b. Profit decreased
c. Profitability decreased
Eco Solutions
a. Sales increased
b. Profit increased
c. Profitability increased

Managerial Accounting Braun 4th Edition Solutions Manual

Automotive Systems
a. Sales remained about the same
b. Profits decreased
Industrial Devices
a. Sales remained about the same
Energy
a. Sales increased
Other
a. Sales increased
b. Profits remained about the same
c. Profitability remained about the same
5. Of the eight segments, which three segments appear to be the strongest based on the limited information you
have in this case? Support your answer.
The three best segments appear to be appliances, Eco Solutions, Appliances and Other. This is because their sales
and profits were the three highest and they are showing a fairly consistent trend.
6. Of the eight segments, which segments appear to be the weakest based on the limited information you have in
this case? Support your answer.
The worst segment in the last year was AVC Networks because when their sales decreased below two trillion,
causing their profits to tank. They took a heavy loss; therefore, this was their worst segment.
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Chapter 10 Performance Evaluation

QC-1. d QC-3. c QC-5. b QC-7. a QC-9. c

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Cost center 1. Manager of the Housekeeping Department at the Holiday Inn

(10 min.) S10-5

Eastern Division - Sales Revenue for Peony Restaurants

Product Actual Sales Budgeted Sales Variance Variance %

10-2 Copyright © 2015 Pearson Education, Inc.

(10 min.) S10-6

(10 min.) S10-7

1. Enter the formula, then calculate each division’s ROI.

Operating Income ÷ Total Assets = ROI

Copyright © 2015 Pearson Education, Inc. 10-3

(10 - 15 min.) S10-8

Snow Sports RI = $950,000 − ($4,900,000 × 13%) = $313,000

Non-Snow Sports RI = $1,482,000 − ($7,100,000 × 13%) = $559,000

Lowest – Variable cost of $8

Highest – Market price of $23

10-4 Copyright © 2015 Pearson Education, Inc.

(10 - 15 min.) S10-11

Copyright © 2015 Pearson Education, Inc. 10-5

(10 -15 min.) S10-12

Sweet Earth Organic Chocolates

(10 - 15 min.) S10-13

10-6 Copyright © 2015 Pearson Education, Inc.

(10 min.) S10-15

Integrity - Mitigate actual conflicts of interest,

Each month Jenna, a corporate controller, prepares

In the past six years since he graduated with an

In casual conversation with friends on a Friday night,

In the year end report to the Board of Directors,

Copyright © 2015 Pearson Education, Inc. 10-7

(10 - 15 min.) E10-17A

Indirect Labor 35,220 30,000 5,220 U 17.40% U

Depreciation 26,125 26,125 0 0

10-8 Copyright © 2015 Pearson Education, Inc.

(15 min.) E10-18A

Actual Budgeted Variance Variance %

Variable Operating Expenses 121,500 $ 135,000 $ 13,500F 10.00%

(10 - 15 min.) E10-19A

Copyright © 2015 Pearson Education, Inc. 10-9

Both divisions are exceeding management’s expectations.

(10 - 15 min.) E10-20A

Kyler Company Fielding Industries Johnson, Inc.

Sales (S) $100,000 $810,000 $530,000

Target rate of return 10% 19% 21%

10-10 Copyright © 2015 Pearson Education, Inc.

(10 min.) E10-21A

Capital Turnover = $27,000 ÷ $12,000

ROI = $7,560 ÷ $12,000

(10 - 15 min.) E10-22A

Copyright © 2015 Pearson Education, Inc. 10-11

(10 min.) E10-23A

(15 - 20 min.) E10-24A

Echo Canyon Muffins

10-12 Copyright © 2015 Pearson Education, Inc.

(15-20 min.) E10-25A

(15 - 20 min.) E10-26A

a. Flexible budget variance

Copyright © 2015 Pearson Education, Inc. 10-13

(15 - 20 min.) E10-27A

10-14 Copyright © 2015 Pearson Education, Inc.