Accounting Study Set 8

Service department charges The Customer Service Department of Door Industries Inc. asked the Publications Department to prepare a brochure for its training program. The Publications Department delivered the brochures and charged the Customer Service Department a rate that was 25% higher than could be obtained from an outside printing company. The policy of the company required the Customer Service Department to use the internal publications group for brochures. The Publications Department claimed that it had a drop in demand for its services during the fiscal year, so it had to charge higher prices in order to recover its payroll and fixed costs. Should the cost of the brochure be transferred to the Customer Service Department in order to hold the Customer Service Department head accountable for the cost of the brochure What changes in policy would you recommend

Divisional income statements and rate of return on investment analysis The Whole Earth Food Company is a diversified food company with three operating divisions organized as investment centers. Condensed data taken from the records of the three divisions for the year ended June 30, 2014, are as follows: The management of The Whole Earth Food Company is evaluating each division as a basis for planning a future expansion of operations. Instructions 1. Prepare condensed divisional income statements for the three divisions, assuming that there were no service department charges. 2. Using the DuPont formula for rate of return on investment, compute the profit margin, investment turnover, and rate of return on investment for each division. 3. If available funds permit the expansion of operations of only one division, which of the divisions would you recommend for expansion, based on parts (1) and (2) Explain.

Service department charges and activity bases For each of the following service departments, identify an activity base that could be used for charging the expense to the profit center. a. Legal b. Duplication services c. Electronic data processing d. Central purchasing e. Telecommunications f. Accounts receivable

Evaluating division performance over time The Norsk Division of Gridiron Concepts Inc. has been experiencing revenue and profit growth during the years 2012-2014. The divisional income statements are provided below. Assume that there are no charges from service departments. The vice president of the division, Tom Yang, is proud of his division's performance over the last three years. The president of Gridiron Concepts Inc., Anna Evans, is discussing the division's performance with Tom, as follows: Tom: As you can see, we've had a successful three years in the Norsk Division. Anna: I'm not too sure. Tom: What do you mean Look at our results. Our income from operations has more than doubled, while our profit margins are improving. Anna: I am looking at your results. However, your income statements fail to include one very important piece of information; namely, the invested assets. You have been investing a great deal of assets into the division. You had $735,000 in invested assets in 2012, $1,500,000 in 2013, and $3,500,000 in 2014. Tom: You are right. I've needed the assets in order to upgrade our technologies and expand our operations. The additional assets are one reason we have been able to grow and improve our profit margins. I don't see that this is a problem. Anna: The problem is that we must maintain a 15% rate of return on invested assets. 1. Determine the profit margins for the Norsk Division for 2012-2014. 2. Compute the investment turnover for the Norsk Division for 2012-2014. Round to two decimal places. 3. Compute the rate of return on investment for the Norsk Division for 2012-2014. 4. Evaluate the division's performance over the 2012-2014 time period. Why was Anna concerned about the performance

Budgetary performance for cost center Mandel Company's costs were over budget by $252,000. The company is divided into West and East regions. The East Region's costs were under budget by $74,000. Determine the amount that the West Region's costs were over or under budget. Conley Company's costs were under budget by $198,000. The company is divided into North and South regions. The North Region's costs were over budget by $52,000. Determine the amount that the South Region's costs were over or under budget.

Differentiate between a profit center and an investment center.

Ethics and professional conduct in business Rambotix Company has two divisions, the Semiconductor Division and the X-ray Division. The X-ray Division may purchase semiconductors from the Semiconductor Division or from outside suppliers. The Semiconductor Division sells semiconductor products both internally and externally. The market price for semiconductors is $100 per 100 semiconductors. Dave Bryant is the controller of the X-ray Division, and Howard Hillman is the controller of the Semiconductor Division. The following conversation took place between Dave and Howard: Dave: I hear you are having problems selling semiconductors out of your division. Maybe I can help. Howard: You've got that right. We're producing and selling at about 90% of our capacity to outsiders. Last year we were selling 100% of capacity. Would it be possible for your division to pick up some of our excess capacity After all, we are part of the same company. Dave: What kind of price could you give me Howard: Well, you know as well as I that we are under strict profit responsibility in our divisions, so I would expect to get market price, $100 for 100 semiconductors. Dave: I'm not so sure we can swing that. I was expecting a price break from a "sister" division. Howard: Hey, I can only take this "sister" stuff so far. If I give you a price break, our profits will fall from last year's levels. I don't think I could explain that. I'm sorry, but I must remain firm-market price. After all, it's only fair-that's what you would have to pay from an external supplier. Dave: Fair or not, I think we'll pass. Sorry we couldn't have helped. Was Dave behaving ethically by trying to force the Semiconductor Division into a price break Comment on Howard's reactions.

Weyerhaeuser developed a system that assigns service department expenses to user divisions on the basis of actual services consumed by the division. Here are a number of Weyerhaeuser's activities in its central Financial Services Department: • Payroll • Accounts payable • Accounts receivable • Database administration-report preparation For each activity, identify an activity base that could be used to charge user divisions for service.

Budget performance report for a cost center E-Net Company sells electronics over the Internet. The Consumer Products Division is organized as a cost center. The budget for the Consumer Products Division for the month ended January 31, 2014, is as follows (in thousands): During January, the costs incurred in the Consumer Products Division were as follows: Instructions 1. Prepare a budget performance report for the director of the Consumer Products Division for the month of January. 2. For which costs might the director be expected to request supplemental reports

Evaluating divisional performance The three divisions of Yummy Foods are Snack Goods, Cereal, and Frozen Foods. The divisions are structured as investment centers. The following responsibility reports were prepared for the three divisions for the prior year: 1. Which division is making the best use of invested assets and should be given priority for future capital investments 2. Assuming that the minimum acceptable rate of return on new projects is 19%, would all investments that produce a return in excess of 19% be accepted by the divisions 3. Can you identify opportunities for improving the company's financial performance

Profit center responsibility reporting Traxonia Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO) evaluates divisional performance, using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31, 2014: The company operates three service departments: Shareholder Relations, Customer Support, and Legal. The Shareholder Relations Department conducts a variety of services for shareholders of the company. The Customer Support Department is the company's point of contact for new service, complaints, and requests for repair. The department believes that the number of customer contacts is an activity base for this work. The Legal Department provides legal services for division management. The department believes that the number of hours billed is an activity base for this work. The following additional information has been gathered: Instructions 1. Prepare quarterly income statements showing income from operations for the three divisions. Use three column headings: East, West, and Central. 2. Identify the most successful division according to the profit margin. 3. Provide a recommendation to the CEO for a better method for evaluating the performance of the divisions. In your recommendation, identify the major weakness of the present method.

What is the major shortcoming of using income from operations as a performance measure for investment centers

Budget performance report for a cost center The Eastern District of Adelson Inc. is organized as a cost center. The budget for the Eastern District of Adelson Inc. for the month ended December 31, 2014, is as follows: During December, the costs incurred in the Eastern District were as follows: Instructions 1. Prepare a budget performance report for the manager of the Eastern District of Adelson for the month of December. 2. For which costs might the supervisor be expected to request supplemental reports

Divisional income statements The following data were summarized from the accounting records for Endless River Construction Company for the year ended June 30, 2014: Prepare divisional income statements for Endless River Construction Company.

Service department charges The centralized employee travel department of Kensy Company has expenses of $435,000. The department has serviced a total of 4,000 travel reservations for the period. The Northeast Division has made 1,800 reservations during the period, and the Pacific Division has made 2,200 reservations. How much should each division be charged for travel services The centralized computer technology department of Lee Company has expenses of $264,000. The department has provided a total of 2,500 hours of service for the period. The Retail Division has used 1,125 hours of computer technology service during the period, and the Commercial Division has used 1,375 hours of computer technology service. How much should each division be charged for computer technology department services

Profit center responsibility reporting Thomas Railroad Company organizes its three divisions, the North (N), South (S), and West (W) regions, as profit centers. The chief executive officer (CEO) evaluates divisional performance, using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31, 2014: The company operates three service departments: the Dispatching Department, the Equipment Management Department, and the Treasurer's Department. The Dispatching Department manages the scheduling and releasing of completed trains. The Equipment Management Department manages the railroad cars inventories. It makes sure the right freight cars are at the right place at the right time. The Treasurer's Department conducts a variety of services for the company as a whole. The following additional information has been gathered: Instructions 1. Prepare quarterly income statements showing income from operations for the three regions. Use three column headings: North, South, and West. 2. Identify the most successful region according to the profit margin. 3. Provide a recommendation to the CEO for a better method for evaluating the performance of the regions. In your recommendation, identify the major weakness of the present method.

Income from operations for profit center Using the data for Kensy Company from Practice Exercise 24-2A along with the data provided below, determine the divisional income from operations for the Northeast and Pacific divisions. Using the data for Lee Company from Practice Exercise 24-2B along with the data provided below, determine the divisional income from operations for the Retail Division and the Commercial Division.

Budget performance reports for cost centers Partially completed budget performance reports for Maguire Company, a manufacturer of air conditioners, are provided on the following page. a. Complete the budget performance reports by determining the correct amounts for the lettered spaces. b. Compose a memo to Holly Keller, vice president of production for Maguire Company, explaining the performance of the production division for May.

Divisional income statements and rate of return on investment analysis E.F. Lynch Company is a diversified investment company with three operating divisions organized as investment centers. Condensed data taken from the records of the three divisions for the year ended June 30, 2014, are as follows: The management of E.F. Lynch Company is evaluating each division as a basis for planning a future expansion of operations. Instructions 1. Prepare condensed divisional income statements for the three divisions, assuming that there were no service department charges. 2. Using the DuPont formula for rate of return on investment, compute the profit margin, investment turnover, and rate of return on investment for each division. 3. If available funds permit the expansion of operations of only one division, which of the divisions would you recommend for expansion, based on parts (1) and (2) Explain.

Differentiate between centralized and decentralized operations.