Financial and Managerial Accounting

Business

Quiz 22 :

Responsibility Accounting and Transfer Pricing

Quiz 22 :

Responsibility Accounting and Transfer Pricing

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Osborn Diversified Products, Inc.. is a billion-dollar manufacturing company with headquarters in Dayton. Ohio. The company has 15 divisions, two of which are the Battery Division and the Golf Cart Division. The company's Battery Division supplies the Golf Cart Division with batteries used to power electric carts. Jim Peterson, age 45. is the general manager of the Battery Division. Jim has been with the company for 18 years and has done a remarkable job managing his operations. Unfortunately, due to health reasons, his physician has ordered that he take early retirement effective immediately. Jim is the single parent of a daughter who is currently a sophomore at a private university in Boston. Sara Morrison, age 65, is the general manager of the Golf Cart Division. She has been with the company for 40 years and has been subjected to intense ridicule regarding her performance. In a fit of rage, the company's CEO recently told Sara that he "regrets the day he ever promoted a woman to division manager." Sara and her husband Rob are independently wealthy with a net worth in excess of $20 million. She will happily retire from the company with a full pension in several months. Both Jim and Sara receive bonuses based on the responsibility margins earned by their respective divisions. However. Jim's contract specifies that his bonus is to be calculated net of any intercompany transactions. Thus his bonus is based on the Battery Division's segment margin less that portion earned from selling batteries to the Golf Cart Division. Due to an undetected computer error. Jim's recent bonus was not calculated net of intercompany transactions. As such, the bonus was approximately $40,000 more than it should have been. Jim is the only division manager affected by the error. No one else in the company is aware that the error occurred. In view of Jim's personal situation, his attorney has advised him-off the record-to keep the money because the probability of the mistake being detected is extremely remote. Due to the design of the company's responsibility accounting system, the only person likely to ever detect the error is Sara, and the chance that she will do so prior to her retirement is slim. Instructions Have a group discussion.and come to an agreement on the following issues: a. Will this billion-dollar company be significantly damaged by the error in computing Jim's bonus? if you were in Jim's situation, what would you do? Defend your answer. b. Assume that Sara becomes aware of the error one week prior to her retirement. She remains bitter over the criticism and sexist remarks she has received from the company's CEO, yet she is basically an honest person. What would you do if you were Sara? c. Is it ethical for Jim's attorney to suggest-albeit off the record-that Jim keep the money? What would you do if you were. Jim's attorney? d. Assume that you are Jim's daughter, who attends a private Boston university. You have learned that the only chance your father has.of keeping you enrolled at this prestigious institution is to subsidize your tuition with the excess $40,000 he received from his company. However, if you were to transfer back to Ohio and live at home, there would be sufficient funds to pay for your education. What would you do in this situation? Defend your answer.
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(a) Financially, the $40,000 error is not apt to significantly damage Osborn. However, this does not mean that Jim should keep the money and let the error go unreported. Jim has an ethical responsibility to make the company aware of its mistake. To do otherwise is the same as stealing.
(b) There is no easy answer to this question. One option for Sara is to inform Jim that she knows about the error in his bonus payment. She should also let him know that he has an ethical and legal obligation to return the money to the company. If he says that he will return it, she may choose to trust him. If he says that he will not return it, one may argue that she has an obligation to "blow the whistle" on Jim.
(c) It is not ethical for Jim's attorney to suggest that he keep the money. The attorney's professional code of ethics certainly does not condone stealing. Thus, the attorney should strongly suggest that Jim return the money. However, if Jim refuses to do so, the attorney may not "blow the whistle" on him because of the legal profession's legal and ethical responsibility to maintain client confidentiality.
(d) Once again, there is no correct answer to this question. However, if Jim's daughter decides to stay in Boston, she must live with the fact that her college education was subsidized with stolen money. It would certainly be advantageous for her to graduate with a degree from the prestigious university. Therefore, she should make every possible effort to obtain financial aid (work-study, student loans, grants, etc.). If her efforts fail, and Jim returns the money, she may have to finish her education in Ohio.

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What are some of the uses that management may make of accounting information about individual responsibility centers of the business?
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Management makes use of accounting information about individual responsibility centers of the business in many ways, including (1) planning and allocating resources, (2) evaluating the performance of responsibility centers, (3) controlling costs, and (4) evaluating the performance of center managers.

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The following are nine technical accounting terms introduced or emphasized in this chapter: img Each of the following statements may (or may not) describe one of these technical terms. For each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. a. The costs deducted from contribution margin to determine responsibility margin. b. Cost to produce plus a predetermined markup. c. Fixed costs that are readily controllable by the manager. d. A subtotal in a responsibility income statement, equal to responsibility margin plus committed fixed costs. e. The subtotal in a responsibility income statement that is most useful in evaluating the short- run effect of various marketing strategies on the income of the business. f. The subtotal in a responsibility income statement that comes closest to indicating the change in income from operations that would result from closing a particular part of the business.
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Responsibility accounting: Responsibility accounting is a concept that states that each cost that is incurred in the company is responsibility of some or the other person working in the company.
a.
Costs deducted from contribution margin to determine responsibility margin are Traceable fixed costs.
b.
Goods transferred at cost to produce plus a predetermined markup is known as cost-plus transfer price.
c.
None. Out of the given terms, none explains the given statement.
d.
A subtotal in a responsibility income statement which is equal to responsibility margin plus committed fixed costs is termed as performance margin.
e.
The sub-total in a responsibility income statement that is most useful in evaluating the short-run effect of various marketing strategies on the income of the business is termed as Contribution Margin.
f.
The subtotal in a responsibility income statement that comes closest to indicating the change in income from operations that would result from closing a particular part of the business is termed as responsibility margin.
g.
The amount used in recording products or services supplied by one business unit to another is termed as transfer price.

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Fasteners. Inc.. produces two products: zippers and buckles. Cost and revenue data for each product line for the current month are as follows: img In addition, fixed costs that are common to both product lines amount to $35,000. Instructions a. Prepare Fasteners. Inc.'s responsibility income statement for the current month. Report the responsibility margin for each product line and income from operations for the company as a whole. Also include columns showing all dollar amounts as percentages of sales. b. According to the analysis performed in part a. which product line is more profitable? Should the common fixed costs be considered when determining the profitability of individual product lines? Why or why not? c. Use the contribution margin ratios for each product line. Assume Fasteners. Inc.. has S12.000 to be used for advertising one of the two product lines, with the expectation that this expenditure will result in additional sales of $40,000. Show the contribution associated with the $12,000 advertising expenditure for each product line. To which product line should the advertising he devoted?
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Contribution Margin versus Responsibility Margin Marshall's grocery store has a small bakery'that sells a. variety of baked goods. The manager of the bakery responsibility center has decided to sell a cup of coffee and doughnut combo at the low price of $1.75, as a means of attracting customers. The incremental cost of labor per combo sale has been calculated as $0.89, the variable cost of the doughnut is $0.37, and the variable cost of the coffee (including cup) is $0.42. What is the contribution margin for the combo? How does the manager think the combo will affect the bakery's responsibility margin?
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Distinguish among a cost center, a profit center, and an investment center, and give an example of each for a multi-hospital corporation.
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Contribution Margin Effects Assume that Department A has a lower contribution margin ratio but a higher responsibility margin ratio than Department B. If $10,000 in advertising is expected to increase the sales of either department by $50,000, in which department would the advertising dollars be spent to the best advantage?
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Regal Flair Enterprises has two product lines: jewelry and women's apparel. Cost and revenue data for each product line for the current month are as follows: img In addition to the costs show n above, the company incurs monthly fixed costs of $100,000 common to both product lines. Instructions a. Prepare Regal Flair Fnterprises's responsibility income statement for the current month. Report the responsibility margin for each product line and income from operations for the company as a w hole. Also include columns showing all dollar amounts as percentages of sales. b. Assume that a marketing survey shows that a $75,000 monthly advertising campaign focused on either product line should increase that product line's monthly sales by approximately $150,000. Do you recommend this additional advertising for either or both product lines? Show computations to support your conclusions. c. Management is considering expanding one of the company's two product lines. An investment of a given dollar amount is expected to increase the sales of the expanded product line by $300,000. It is also expected to increase the traceable fixed costs of the expanded product line by 75 percent. Based on this information, which product line do you recommend expanding? Explain the basis for your conclusion.
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Brown Enterprises has two product lines: bags and shoes. Cost and revenue data for each product line for the current month are as follows: img In addition to the costs shown above, the company incurs monthly fixed costs of. $75,000 common to both product lines. Instructions a. Prepare Brown Enterprises's responsibility income statement for the current month. Report the responsibility margin for each product line and income from operations for the company as a whole. Also include columns showing all dollar amounts as percentages of sales. b. Assume that a marketing survey shows that a $50,000 monthly advertising campaign focused on either product line should increase that product line's monthly sales by approximately $100,000. Do you recommend this additional advertising for either or both product lines? Show computations to support your conclusions. c. Management is considering expanding one of the company's two product lines. An investment of a given dollar amount is expected to increase the sales of the expanded product line by $250,000. It is also expected to increase the traceable fixed costs of the expanded product line. by 60 percent. Based on this information, which product line do you recommend expanding? Explain the basis for your conclusion.
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Giant Chef Equipment Company is organized into two divisions: Commercial Sales and Home Products. During June, sales for the Commercial Sales Division totaled $1,500,000, and its contribution margin ratio averaged 34 percent. Sales generated by the Home Products Division totaled $900,000, and its contribution margin ratio averaged 50 percent. Monthly fixed costs traceable to each division are $180,000. Common fixed costs for the month amount to $120,000. Instructions a. Prepare Giant Chef Equipment's responsibility income statement for the current month. Be certain to report responsibility margin for each division and income from operations for the company as a whole. Also include columns showing all dollar amounts as percentages of sales. b. Compute the dollar sales volume required for the Home Products Division to earn a monthly responsibility margin of $500,000. c. A marketing study indicates that sales in the Home Products Division would increase by 5 percent if advertising expenditures for the division were increased by $15,000 per month. Would you recommend this increase in advertising? Show computations to support your decision.
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Name three types of transfer prices and explain when each type of transfer price would be used.
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Kraxton Chemie Company consists of seven divisions. Divisions One through Five make products that are sold in the competitive market. Divisions Two and Three make their own investment and transfer pricing decisions. Twenty-five percent of Division Two's output is devoted to a component that is transferred to Division Three as part of the subassembly of Division Three's main product. Divisions Six and Seven provide services to the other divisions. Eighty percent of Division Six's output is environmental cleanup services provided to Divisions One and Two. The remaining twenty percent is sold to external customers. Finally, Division Seven is devoted to R D activities that support the entire company. What type of responsibility center design would you recommend for Kraxton Chemie Company?
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Preparing and Using Responsibility Income Statements Chocolatiers Company produces two products: Solid chocolate and powdered chocolate. Cost and revenue data for each product line for the current month are as follows: img In addition, fixed costs that are common to both product lines amount to $125,000. Instructions a. Prepare Chocolatiers's responsibility income statement for the current month. Report the responsibility margin for each product line and income from operations for the company as a whole. Also include columns showing all dollar amounts as percentages of sales. b. According to the analysis performed in part a, which product line is more profitable? Should the common fixed costs be considered when determining the profitability of individual product lines? Why or why not? c. Chocolatiers has $15,000 to be used in advertising for one of the two product lines and expects that this expenditure will result in additional sales of $50,000. How should the company decide which product line to advertise?
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Preparing and Using a Responsibility Income Statement Glassware Company is organized into two divisions: Etched Glass and Clear Glass. During August, sales for the Etched Division totaled $7,500,000, and its contribution margin ratio averaged 38 percent. Sales generated by the Clear Division totaled $6,000,000 and its contribution margin ratio averaged 45 percent. Monthly fixed costs traceable to each division are $1,200,000. Common fixed costs for the month amount to $100,000. Instructions a. Prepare Glassware Company's responsibility income statement for the current month. Be certain to report the responsibility margin for each division and income from operations for the company as a whole. Also include columns showing all dollar amounts as percentages of sales. b. Compute the dollar sales volume required for the Clear Glass Division to earn a monthly responsibility margin of $1,600,000. c. A marketing study indicates that sales in the Clear Glass Division would increase by 4 percent if advertising expenditures for the division were increased by $12,000 per month. Would you recommend this increase in advertising? Show computations to support your decision.
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Video World owns and operates a national chain of video game arcades. Indicate whether Video World would evaluate each of the following as an investment center, a profit center (other than an investment center), or a cost center. Briefly explain the reason for your answer. a. An individual video arcade within a chain of video arcades. b. A snack bar within one of the company's arcades. c. A particular video game within one of the company's arcades. d. The security officers at each arcade location.
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The controller of Maxwell Department Store is preparing an income statement divided by sales departments and including subtotals for contribution margin, performance margin, and responsibility margin. Indicate the appropriate classification of the seven items (a through g) listed below. Select from the following cost classifications: Variable costs Traceable fixed costs-controllable Traceable fixed costs-committed Common fixed costs None of the above. a. Cost of operating the store's accounting department. b. Cost of advertising specific product lines (classify as a fixed cost). c. Sales taxes on merchandise sold. d. Depreciation on the sewing machinery used in the Alterations Department. e. Salaries of departmental sales personnel. f. Salary of the store manager. g. Cost of merchandise sold in the Sportswear Department.
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You have just been hired as the controller of Land's End Hotel. The hotel prepares monthly responsibility income statements in which all fixed costs are allocated among the various profit centers in the hotel, based on the relative amounts of revenue generated by each profit center. Robert Chamberlain, manager of the hotel dining room, argues that this approach understates the profitability of his department."Through developing a reputation as a fine restaurant, the dining room has significantly increased its revenue. Yet the more revenue we earn, the larger the percentage of the hotel's operating costs that are charged against our department. Also, whenever vacancies go up, rental revenue goes down, and the dining room is charged with a still greater percentage of overall operating costs. Our strong performance is concealed by poor perlonnance in departments responsible for keeping occupancy rates up." Chamberlain suggests that tixed costs relating to the hotel should be allocated among the profit centers based on the number of square feet occupied by each department. Debra Mettenburg. manager of the Sunset Lounge, objects to Chamberlain's proposal. She points out that the lounge is very big. because it is designed for hotel guests to read, relax, and watch the sunset. Although the lounge does serve drinks, the revenue earned in the lounge is small in relation to its square footage. Many guests just come to the lounge for the free hors d'oeuvres and don't even order a drink. Chamberlain's proposal would cause the lounge to appear unprofitable. yet a hotel must have some "open space" for its guests to sit and relax. Instructions With a group of students: a. Separately evaluate the points raised by each of the two managers. b. Suggest an approach to allocating the hotel's fixed, costs among the various profit centers.
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General Mills produces and sells a variety of food products in numerous countries. Access its home page and look at the company overview at the following address: www.generalmills.com Now consider Kirby Company. It manufactures and sells one product line-vacuum cleaners and their accessories. Access its home page at the following address: www.Kirchy.com Instructions a. Based on information from the Web site, how would you divide General Mills into responsibility centers based on product lines? Give examples of possible investment centers, profit centers, and cost centers. b. Based on information from the Web site, how would you divide Kirhy. into responsibility centers? Give examples of possible investment centers, profit centers, and cost centers. c. What organizational factors might account for the differences between the two firms' responsibility center systems? Internet sites are time and date sensitive. It is the purpose of these exercises to have you explore the Internet. You may need to use the Yahoo! search engine (or another favorite search engine) to find a company's current Web address.
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Transfer Prices Moto Corporation manufactures and sells motor bikes. The Wheel Frame Division creates parts that are both sold externally and transferred internally to the Assembly Division for assembly. Wheel #606 sells externally for $48 and the variable cost to make it is $26. What would you recommend as the transfer price between Wheels Frames and Assembly if there is a competitive external market for #606? Would your answer change if there were no external market for #606? Why? What would the transfer price be if upper management required cost plus 20 percent as the transfer price?
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Hospital Profit Centers img Researchers suggest that many angioplasties and implanted cardiac pacemaker surgeries done in the United States each year are medically unwarranted. The additional risk to patients' health posed by these surgeries and the high cost of health care that result are an obvious concern to those who are trying to balance the risks and benefits in health care decisions. However, the financial stakes are very high because Boston Scientific Corp. and Johnson Johnson and other companies that make pacemakers and the stents for angioplasties earn significant profits on them. In addition, these cardiac-related surgeries help make cardiac units some of the most profitable responsibility centers in hospitals. Instructions a. ?The paragraph above states that cardiac surgery is a profit center for hospitals. List three or four other profit centers that might be found in a hospital. List at least three cost centers. b. ?Write a short paragraph identifying the ethical issues that are related to designating a surgery procedure as a "profit center." Consider how these problems could be avoided within the responsibility center framework.
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