TEST BANK managerial accounting 13e by garrison chapter 12

Chapter 12 Segment Reporting and Decentralization True/False Questions Allocating common fixed costs to segments on segmented income statements reduces the usefulness of such statements Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: Level: Easy A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: Level: Easy A responsibility center is a business segment whose manager has control over costs, revenues, or investments in operating assets Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: Level: Easy Residual income is used in the numerator to compute turnover in an ROI analysis Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy Net operating income is earnings before interest and taxes Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: Level: Easy Land held for possible plant expansion would be included as an operating asset in the ROI calculation Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium Margin equals Stockholders' Equity divided by Sales Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-5 Chapter 12 Segment Reporting and Decentralization The use of return on investment (ROI) as a performance measure may lead managers to reject a project that would be favorable for the company as a whole Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium Residual income is equal to the difference between total revenues and operating expenses Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium 10 When using residual income as a measure of performance, it is not meaningful to compare the residual incomes of divisions of different sizes Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy 11 The transfer price used for internal transfers between divisions of the same company can increase or decrease each division's reported profits Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12A LO: Level: Medium 12 For performance evaluation purposes, the lump-sum amount of fixed service department costs charged to an operating department should usually be based on either the operating department's peak-period or long-run average needs Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12B LO: Level: Easy 13 In service department cost allocations, sales dollars should be used as an allocation base whenever possible Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12B LO: Level: Easy 14 A cost center is also a responsibility center Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy 12-6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 12 Segment Reporting and Decentralization 15 The basic objective of responsibility accounting is to charge each manager with those costs and/or revenues over which he has control Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy Multiple Choice Questions 16 The impact on net operating income of short-run changes in sales for a segment can be most clearly predicted by analyzing: A) the contribution margin ratio B) the segment margin C) the ratio of the segment margin to sales D) net sales less segment fixed costs Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium 17 In a segmented contribution format income statement, what is the best measure of the long-run profitability of a segment? A) its gross margin B) its contribution margin C) its segment margin D) its segment margin minus an allocated portion of common fixed expenses Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: Level: Medium 18 In order to properly report segment margin as a guide to long-run segment profitability and performance, fixed costs must be separated into two broad categories One category is common fixed costs What is the other category? A) discretionary fixed costs B) committed fixed costs C) traceable fixed costs D) specialized fixed costs Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: Level: Easy Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-7 Chapter 12 Segment Reporting and Decentralization 19 Which of the following segment performance measures will decrease if there is an increase in the interest expense for that segment? A) B) C) D) Return on Investment Residual Income Yes Yes No Yes Yes No No No Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2; Level: Hard 20 Which of the following segment performance measures will increase if there is a decrease in the selling expenses for that segment? A) B) C) D) Return on Investment Residual Income Yes Yes No Yes Yes No No No Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2; Level: Medium 21 Some investment opportunities that should be accepted from the viewpoint of the entire company may be rejected by a manager who is evaluated on the basis of: A) return on investment B) residual income C) contribution margin D) segment margin Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium 12-8 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 12 Segment Reporting and Decentralization 22 Consider the following three conditions: I II III An increase in sales An increase in operating assets A reduction in expenses Which of the above conditions provide a way in which a manager can improve return on investment? A) Only I B) Only I and II C) Only I and III D) Only II and III Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium 23 When calculating a segment's return on investment (ROI), which of the following assets of that segment would be considered a part of average operating assets? A) cash B) accounts receivable C) plant and equipment D) all of the above Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium 24 Which of the following measures of performance encourages continued expansion by an investment center so long as it is able to earn a return in excess of the minimum required return on average operating assets? A) return on investment B) transfer pricing C) the contribution approach D) residual income Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-9 Chapter 12 Segment Reporting and Decentralization 25 Residual income is: A) Net operating income plus the minimum required return on average operating assets B) Net operating income less the minimum required return on average operating assets C) Contribution margin plus the minimum required return on average operating assets D) Contribution margin less the minimum required return on average operating assets Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy 26 Which of the following is NOT a common approach used to set transfer prices? A) market price B) variable cost C) negotiation D) suboptimization Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12A LO: Level: Easy 27 For performance evaluation purposes, the variable costs of a service department should be charged to operating departments using: A) the actual variable rate and the budgeted level of activity for the period B) the budgeted variable rate and the actual level of activity for the period C) the budgeted variable rate and the budgeted level of activity for the period D) the actual variable rate and the peak-period or long-run average servicing capacity Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12B LO: Level: Medium 12-10 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 12 Segment Reporting and Decentralization 28 Which of the following companies is following a policy with respect to the costs of service departments that is not recommended? A) To charge operating departments with the depreciation of forklifts used at its central warehouse, Shalimar Electronics charges predetermined lump-sum amounts calculated on the basis of the long-term average use of the services provided by the warehouse to the various segments B) Manhattan Electronics uses the sales revenue of its various divisions to allocate costs connected with the upkeep of its headquarters building C) Rainier Industrial does not allow its service departments to pass on the costs of their inefficiencies to the operating departments D) Golkonda Refinery separately allocates fixed and variable costs incurred by its service departments to its operating departments Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12B LO: Level: Medium Source: CMA; adapted 29 A segment of a business responsible for both revenues and expenses would be called: A) a cost center B) an investment center C) a profit center D) residual income Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-11 Chapter 12 Segment Reporting and Decentralization 30 Devlin Company has two divisions, C and D The overall company contribution margin ratio is 30%, with sales in the two divisions totaling $500,000 If variable expenses are $300,000 in Division C, and if Division C's contribution margin ratio is 25%, then sales in Division D must be: A) $50,000 B) $100,000 C) $150,000 D) $200,000 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Hard Solution: Total company contribution margin = $500,000 × 30% = $150,000 Total company variable expenses = $500,000 − $150,000 = $350,000 Division C contribution margin ratio = (Sales − $300,000) ÷ Sales = 0.25 Sales − $300,000 = 0.25 × Sales (0.75 × Sales) ÷ 0.75 = $300,000 ÷ 0.75 Sales = $400,000 Division D sales = Total company sales − Division C sales = $500,000 − $400,000 = $100,000 Divisions Sales Less variable expenses Contribution margin Contribution margin ratio 12-12 Total Company Division C Division D $500,000 $400,000 $100,000 350,000 300,000 50,000 $150,000 $100,000 $ 50,000 0.30 0.25 0.50 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 12 Segment Reporting and Decentralization 31 Toxemia Salsa Company manufactures five flavors of salsa Last year, Toxemia generated net operating income of $40,000 The following information was taken from last year's income statement segmented by flavor (brackets indicate a negative amount): Wimpy Mild Medium Hot Atomic Contribution margin $(2,000) $45,000 $35,000 $50,000 $162,000 Segment margin $(16,000) $(5,000) $7,000 $10,000 $94,000 Segment margin less allocated common fixed expenses $(26,000) $(15,000) $(3,000) $0 $84,000 Toxemia expects similar operating results for the upcoming year If Toxemia wants to maximize its profitability in the upcoming year, which flavor or flavors should Toxemia discontinue? A) no flavors should be discontinued B) Wimpy C) Wimpy and Mild D) Wimpy, Mild, and Medium Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; LO: Level: Medium Solution: The segment margin is a better indication of profitability of individual products than the segment margin less allocated common fixed expenses The products with negative segment margins should be discontinued to maximize profit: Wimpy and Mild Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-13 Chapter 12 Segment Reporting and Decentralization 32 Uchimura Corporation has two divisions: the AFE Division and the GBI Division The corporation's net operating income is $42,000 The AFE Division's divisional segment margin is $15,700 and the GBI Division's divisional segment margin is $175,400 What is the amount of the common fixed expense not traceable to the individual divisions? A) $149,100 B) $57,700 C) $217,400 D) $191,100 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium Solution: Total Company Divisional segment margin $191,100 Less common fixed costs not traceable to the individual divisions X Net operating income $ 42,000 ($15,700 + $175,400) Common fixed costs not traceable to the individual divisions = $191,100 − $42,000 = $149,100 12-14 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 12 Segment Reporting and Decentralization 124 The Clipper Corporation had net operating income of $380,000 and average operating assets of $2,000,000 The corporation requires a return on investment of 18% Required: a Calculate the company's return on investment (ROI) and residual income (RI) b Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950 Would it be in the best interests of the company to make this investment? c Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950 If the division planning to make the investment currently has a return on investment of 20% and its manager is evaluated based on the division's ROI, will the division manager be inclined to request funds to make this investment? d Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950 If the division planning to make the investment currently has a residual income of $50,000 and its manager is evaluated based on the division's residual income, will the division manager be inclined to request funds to make this investment? Ans: a Return on investment = Net operating income ÷ Average operating assets = $380,000 ÷ $2,000,000 = 19% Residual income = Net operating income − (Average operating assets × Minimum required rate of return) = $380,000 − ($2,000,000 × 0.18) = $20,000 b Return on investment = Net operating income ÷ Average operating assets = $12,950 ÷ $70,000 = 18.5% Since the return on investment of the project exceeds the company’s minimum required rate of return, the project should be accepted It would increase both the company’s residual income and its return on investment c The manager of the division would not be inclined to request funds to make the investment in the new project since its return on investment is only 18.5%, which is less than the division’s current return on investment of 20% The new project would drag down the division’s return on investment d The manager of the division would be inclined to request funds for the new project The project’s return on investment of 18.5% exceeds the minimum required rate of return of 18%, which would result in an increase in residual income if the project were accepted AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2; 12-74 Level: Medium Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 12 Segment Reporting and Decentralization 125 Geballe Industries is a division of a major corporation Last year the division had total sales of $21,420,000, net operating income of $2,270,520, and average operating assets of $6,000,000 The company's minimum required rate of return is 10% Required: a What is the division's margin? b What is the division's turnover? c What is the division's return on investment (ROI)? Ans: AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Easy AICPA FN: Reporting 126 Ide Industries is a division of a major corporation The following data are for the latest year of operations: Required: What is the division's residual income? Ans: Residual income = Net operating income − Minimum required rate of return × Average operating assets = $1,743,000 - 18% × $7,000,000 = $483,000 AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Easy Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition AICPA FN: Reporting 12-75 Chapter 12 Segment Reporting and Decentralization 127 Brodrick Corporation uses residual income to evaluate the performance of its divisions The minimum required rate of return for performance evaluation purposes is 19% The Games Division had average operating assets of $140,000 and net operating income of $25,900 in August Required: What was the Games Division's residual income in August? Ans: Net operating income $25,900 Minimum required return (19% × $140,000) 26,600 Residual income ($700) AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Easy AICPA FN: Reporting 128 The Casket Division of Saal Corporation had average operating assets of $950,000 and net operating income of $135,200 in January The company uses residual income to evaluate the performance of its divisions, with a minimum required rate of return of 13% Required: What was the Casket Division's residual income in January? Ans: Net operating income Minimum required return (13% × $950,000) Residual income AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Easy 12-76 $135,200 123,500 $11,700 AICPA FN: Reporting Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 12 Segment Reporting and Decentralization 129 Ulrich Company has a Castings Division which does casting work of various types The company's Machine Products Division has asked the Castings Division to provide it with 20,000 special castings each year on a continuing basis The special casting would require $12 per unit in variable production costs In order to have time and space to produce the new casting, the Castings Division would have to cut back production of another casting - the RB4 which it presently is producing The RB4 sells for $40 per unit, and requires $18 per unit in variable production costs Boxing and shipping costs of the RB4 are $6 per unit Boxing and shipping costs for the new special casting would be only $1 per unit, thereby saving the company $5 per unit in cost The company is now producing and selling 100,000 units of the RB4 each year Production and sales of this casting would drop by 25 percent if the new casting is produced Some $240,000 in fixed production costs in the Castings Division are now being covered by the RB4 casting; 25 percent of these costs would have to be covered by the new casting if it is produced and sold to the Machine Products Division Required: According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division? Show all computations Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-77 Chapter 12 Segment Reporting and Decentralization Ans: Transfer Price = Variable cost + Lost contribution margin per unit on outside sales Variable costs: Variable production costs Boxing and shipping Total $12 $13 Lost contribution margin on outside sales: RB4 selling price per unit Variable costs per unit ($18 + $6) Contribution margin per unit Loss in production (100,000 × 0.25) Total lost contribution margin $40 24 $16 ì 25,000 $400,000 $400,000 ữ 20,000 new castings = $20 per casting Therefore, the lower limit on the transfer price should be: Transfer price = $13 + $20 = $33 per casting AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting Appendix: 12A 12-78 LO: Level: Hard Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 12 Segment Reporting and Decentralization 130 Ishtaki Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers The company's Equipment Division has asked the Parts Division to provide it with 20,000 special parts each year The special parts would require $16.00 per unit in variable production costs The Equipment Division has a bid from an outside supplier for the special parts at $25.00 per unit In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the PW27 that it presently is producing The PW27 sells for $38.00 per unit, and requires $29.00 per unit in variable production costs Packaging and shipping costs of the PW27 are $2.00 per unit Packaging and shipping costs for the new special part would be only $0.50 per unit The Parts Division is now producing and selling 40,000 units of the PW27 each year Production and sales of the PW27 would drop by 40% if the new special part is produced for the Equipment Division Required: a What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 20,000 special parts per year from the Parts Division to the Equipment Division? b Is it in the best interests of Ishtaki Corporation for this transfer to take place? Explain Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-79 Chapter 12 Segment Reporting and Decentralization Ans: a From the perspective of the Parts Division, profits would increase as a result of the transfer if and only if: Transfer price > Variable cost + Opportunity cost The opportunity cost is the contribution margin on the lost sales, divided by the number of units transferred: Opportunity cost = [($38.00-$29.00-$2.00)×16,000*]/20,000 = $5.60 * 40%×40,000 = 16,000 Therefore, Transfer price > ($16.00+$0.50)+$5.60 = $22.10 From the viewpoint of the Equipment Division, the transfer price must be less than the cost of buying the units from the outside supplier Therefore, Transfer price < $25.00 Combining the two requirements, we get the following range of transfer prices: $22.10 < Transfer price < $25.00 b Yes, the transfer should take place From the viewpoint of the entire company, the cost of transferring the units within the company is $22.10, but the cost of purchasing the special parts from the outside supplier is $25.00 Therefore, the company’s profits increase on average by $2.90 for each of the special parts that is transferred within the company, even though this would cut into production and sales of another product AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting Appendix: 12A 12-80 LO: Level: Hard Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 12 Segment Reporting and Decentralization 131 Division G has asked Division F of the same company to supply it with 5,000 units of part WD26 this year to use in one of its products Division G has received a bid from an outside supplier for the parts at a price of $19.00 per unit Division F has the capacity to produce 25,000 units of part WD26 per year Division F expects to sell 21,000 units of part WD26 to outside customers this year at a price of $18.00 per unit To fill the order from Division G, Division F would have to cut back its sales to outside customers Division F produces part WD26 at a variable cost of $12.00 per unit The cost of packing and shipping the parts for outside customers is $2.00 per unit These packing and shipping costs would not have to be incurred on sales of the parts to Division G Required: a What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 5,000 parts this year from Division G to Division F? b Is it in the best interests of the overall company for this transfer to take place? Explain Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-81 Chapter 12 Segment Reporting and Decentralization Ans: a From the perspective of Division G, profits would increase as a result of the transfer if and only if: Transfer price > Variable cost + Opportunity cost The opportunity cost is the contribution margin on the lost sales, divided by the number of units transferred: Opportunity cost = [($18.00 - $12.00 - $2.00)×1,000*]/5,000 = $0.80 * Demand from outside customers 21,000 Units required by Division G 5,000 Total requirements 26,000 Capacity 25,000 Required reduction in sales to outside customers 1,000 Therefore, Transfer price > $12.00 + $0.80 = $12.80 From the viewpoint of Division F, the transfer price must be less than the cost of buying the units from the outside supplier Therefore, Transfer price < $19.00 Combining the two requirements, we get the following range of transfer prices: $12.80 < Transfer price < $19.00 b Yes, the transfer should take place From the viewpoint of the entire company, the cost of transferring the units within the company is $12.80, but the cost of purchasing them from the outside supplier is $19.00 Therefore, the company’s profits increase on average by $6.20 for each of the special parts that is transferred within the company AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting Appendix: 12A Level: Medium 12-82 LO: Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 12 Segment Reporting and Decentralization 132 Cannata Corporation has two operating divisions-a North Division and a South Division The company's Logistics Department services both divisions The variable costs of the Logistics Department are budgeted at $32 per shipment The Logistics Department's fixed costs are budgeted at $372,300 for the year The fixed costs of the Logistics Department are determined based on peak-period demand North Division South Division Percentage of Peak Period Capacity Required 25% 75% Budgeted Shipments 1,700 5,600 At the end of the year, actual Logistics Department variable costs totaled $335,000 and fixed costs totaled $382,850 The North Division had a total of 4,700 shipments and the South Division had a total of 5,300 shipments for the year Required: a Prepare a report showing how much of the Logistics Department's costs should be charged to each of the operating divisions at the end of the year b How much of the actual Logistics Department costs should not be charged to the operating divisions at the end of the year? Who should be held responsible for these uncharged costs? Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-83 Chapter 12 Segment Reporting and Decentralization Ans: a The amount of cost that would be charged to each of the operating divisions at the end of the year would be as follows: North Division South Division Variable cost allocation: $32 × 4,700 shipments $150,400 $32 × 5,300 shipments $169,600 Fixed cost allocation: 25% × $372,300 93,075 75% × $372,300 279,225 Total cost charged $243,475 $448,825 b The uncharged costs are: Total actual costs incurred Costs charged Spending variance Variable Fixed $335,000 $382,850 320,000 372,300 $15,000 $10,550 The spending variance represents the difference between the Logistics Department’s actual costs and what those costs should have been, given the actual level of activity This difference is properly the responsibility of the Logistics Department and should not be charged to the operating divisions AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement Appendix: 12B 12-84 LO: Level: Medium Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 12 Segment Reporting and Decentralization 133 Sauseda Corporation has two operating divisions-an Inland Division and a Coast Division The company's Customer Service Department provides services to both divisions The variable costs of the Customer Service Department are budgeted at $38 per order The Customer Service Department's fixed costs are budgeted at $433,200 for the year The fixed costs of the Customer Service Department are determined based on the peak period orders Inland Division Coast Division Percentage of Peak Period Capacity Required 40% 60% Budgeted Orders 2,400 5,200 At the end of the year, actual Customer Service Department variable costs totaled $303,240 and fixed costs totaled $450,280 The Inland Division had a total of 2,430 orders and the Coast Division had a total of 5,170 orders for the year Required: a Prepare a report showing how much of the Customer Service Department's costs should be charged to each of the operating divisions at the end of the year b How much of the actual Customer Service Department costs should not be charged to the operating divisions at the end of the year? Who should be held responsible for these uncharged costs? Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-85 Chapter 12 Segment Reporting and Decentralization Ans: a The amount of cost that would be charged to each of the operating divisions at the end of the year would be as follows: Inland Division Coast Division Variable cost allocation: $38 × 2,430 orders $92,340 $38 × 5,170 orders $196,460 Fixed cost allocation: 40% × $433,200 173,280 60% × $433,200 259,920 Total cost charged $265,620 $456,380 b The uncharged costs are: Total actual costs incurred Costs charged Spending variance Variable Fixed $303,240 $450,280 288,800 433,200 $14,440 $17,080 The spending variance represents the difference between the Customer Service Department’s actual costs and what those costs should have been, given the actual level of activity This difference is properly the responsibility of the Customer Service Department and should not be charged to the operating divisions AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement Appendix: 12B 12-86 LO: Level: Medium Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 12 Segment Reporting and Decentralization 134 Nealon Corporation's Maintenance Department provides services to the company's two operating divisions-the Paints Division and the Stains Division The variable costs of the Maintenance Department are budgeted based on the number of cases produced by the operating departments The fixed costs of the Maintenance Department are determined based on the number of cases produced by the operating departments during the peak period Data appear below: Maintenance Department Budgeted variable cost $7 per case Budgeted total fixed cost $600,000 Actual total variable cost $432,072 Actual total fixed cost $602,860 Paints Division Percentage of peak period capacity required Budgeted cases Actual cases 30% 15,000 15,020 Stains Division Percentage of peak period capacity required Budgeted cases Actual cases 70% 45,000 44,990 Required: a Prepare a report showing how much of the Maintenance Department's costs should be charged to each of the operating divisions at the end of the year b How much of the actual Maintenance Department costs should not be charged to the operating divisions at the end of the year? Who should be held responsible for these uncharged costs? Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-87 Chapter 12 Segment Reporting and Decentralization Ans: a The amount of cost that would be charged to each of the operating divisions at the end of the year would be as follows: Paints Division Stains Division Variable cost allocation: $7 × 15,020 orders $105,140 $7 × 44,990 orders $314,930 Fixed cost allocation: 30% × $600,000 180,000 70% × $600,000 420,000 Total cost charged $285,140 $734,930 b The uncharged costs are: Variable Fixed Total actual costs incurred $432,072 $602,860 Costs charged 420,070 600,000 Spending variance $12,002 $2,860 The spending variance represents the difference between the Maintenance Department’s actual costs and what those costs should have been, given the actual level of activity This difference is the responsibility of the Maintenance Department and should not be charged to the operating divisions AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement Appendix: 12B 12-88 LO: Level: Easy Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition ... $10 = $39 Garrison/ Noreen/Brewer, Managerial Accounting, Twelfth Edition 12- 21 Chapter 12 Segment Reporting and Decentralization 43 Product A, which is produced by the Parts Division of BYP Corporation,... Medium 12- 18 Garrison/ Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 12 Segment Reporting and Decentralization Solution: Net operating income = Sales × Margin on sales = $120 ,000... return) = $60,000 − ($240,000 × 20%) = $60,000 − $48,000 = $12, 000 12- 20 Garrison/ Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 12 Segment Reporting and Decentralization 42 Division