Chapter 22 - Decentralization and Performance Evaluation
PROBLEM SET B
Problem 22-1B (60 minutes)
Part 1
Average occupancy cost = $340,000 / 20,000 sq. ft. = $17 per sq. ft.
These costs are assigned to Ferrero's department as follows
Department / Square Footage / Rate / TotalFerrero’s Dept. / 2,000 / $17 / $34,000
Part 2
Market rates are used to allocate occupancy costs for the building rent. Lighting and cleaning costs are allocated to the departments on all three floors at the average rate per square foot. Costs assigned to each class are:
Occupancy Costs / TotalCosts / Value-Based
Costs / Usage-Based
Costs
Building rent / $300,000 / $300,000
Lighting expense / 24,000 / $24,000
Cleaning expense / 16,000 / ______ / 16,000
Totals / $340,000 / $300,000 / $40,000
Value-based costs are allocated in two steps
(i) Compute market value of each floor
Floor / Square Footage / Value perSq. Ft. / Total
First floor / 7,500 / $40 / $300,000
Second floor / 7,500 / 20 / 150,000
Basement floor / 5,000 / 10 / 50,000
Total market value / $500,000
Problem 22-1B (Continued)
(ii) Allocate the $300,000 to each floor based on its percent of market value
Floor / MarketValue / % of
Total / Allocated
Cost / Cost per
Sq. Ft.
First floor / $300,000 / 60% / $180,000 / $24.00
Second floor / 150,000 / 30 / 90,000 / 12.00
Basement floor / 50,000 / 10 / 30,000 / 6.00
Totals / $500,000 / 100% / $300,000
Usage-based cost allocation rate = $40,000 / 20,000 sq. ft.
= $2.00 per sq. ft.
Total allocation rates for the departments on all three floors are
Floor / Value / Usage / TotalFirst floor / $24 / $2.00 / $26.00
Second floor / 12 / 2.00 / 14.00
Basement floor / 6 / 2.00 / 8.00
These rates are applied to allocate occupancy costs to Ferrero’s department
Department / Square Footage / Rate / TotalFerrero’s Department
/ 2,000 / $8.00 / $16,000Part 3
A basement manager would prefer the allocation based on market value. This is a reasonable and logical approach to allocation of occupancy costs. With a flat rate method, all square footage has equal value. This is not logical for this type of occupancy. Less cost would be allocated to the basement departments if the market value method were used.
Problem 22-2B (45 minutes)
Part 1
Sadar Company
Departmental Income Statements
/Department
/Videos
/Music
Sales
/$370,500
/$279,500
Cost of goods sold
/320,000
/175,000
Gross margin
/50,500
/104,500
Direct expenses
/ /Salaries
/35,000
/25,000
Maintenance
/12,000
/10,000
Utilities
/5,000
/4,500
Insurance
/4,200
/3,700
Total direct expenses
/56,200
/43,200
Departmental contribution to overhead
/(5,700)
/61,300
Allocated indirect expenses
/ /Advertising*
/8,550
/6,450
Salaries**
/16,200
/10,800
Office expenses***
/2,000
/1,200
Total allocated indirect expenses
/26,750
/18,450
Departmental net income
/$ (32,450)
/$ 42,850
* / Advertising allocation: / Sales / % / Amount / AllocatedVideos / $370,500 / 57% / $15,000 / $ 8,550
Music / 279,500 / 43% / 15,000 / 6,450
Total / $650,000 / 100% / $15,000
** / Salaries allocation: / Employees / % / Amount / Allocated
Videos / 3 / 60% / $27,000 / $16,200
Music / 2 / 40% / 27,000 / 10,800
Total / 5 / 100% / $27,000
*** / Office expenses allocation: / Sq. ft. / % / Amount / Allocated
Videos / 5,000 / 62.5% / $3,200 / $2,000
Music / 3,000 / 37.5% / 3,200 / 1,200
Total / 8,000 / 100.0% / $3,200
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Problem 22-2B (Concluded)
Part 2
The video department has both a negative contribution to overhead and a negative departmental net income. It is not even covering its own direct costs, and is therefore not contributing anything to overhead. Before deciding whether to eliminate the video department, Sadar should consider whether any of the direct expenses can be reduced or if the revenues can be increased. Sadar should also consider whether eliminating videos would affect music sales. If expenses cannot be reduced or video sales cannot be increased, and music sales are not affected, Sadar should consider eliminating the video department.
Problem 22-3B (70 minutes)
HOLLYWOOD ENTERTAINMENTForecasted Departmental Income Statements
For Year Ended December 31, 2012
Movies / Video Games / Compact Discs /
Combined
Sales / $594,000 / $198,000 / $250,000 / $1,042,000 / (1)
Cost of goods sold / 415,800 / 152,460 / 162,500 / 730,760 / (2)
Gross profit / 178,200 / 45,540 / 87,500 / 311,240
Direct expenses
Sales salaries / 35,000 / 14,000 / 18,000 / 67,000
Advertising / 10,500 / 5,500 / 10,000 / 26,000
Store supplies used / 3,630 / 770 / 1,500 / 5,900 / (3)
Depreciation of equipment / 4,200 / 2,800 / 1,000 / 8,000
Total direct expenses / 53,330 / 23,070 / 30,500 / 106,900
Allocated expenses
Rent expense / 22,140 / 4,320 / 9,540 / 36,000 / (4)
Utilities expense / 3,075 / 600 / 1,325 / 5,000 / (4)
Share of office dept. expenses / 34,770 / 11,590 / 14,640 / 61,000 / (5)
Total allocated expenses / 59,985 / 16,510 / 25,505 / 102,000
Total expenses / 113,315 / 39,580 / 56,005 / 208,900
Net income / $ 64,885 / $ 5,960 / $ 31,495 / $ 102,340
Supporting Computations—coded (1) through (5) in statement above
Note 1 (Sales)
Movies / VideoGames / Compact
Discs
2011 sales / $540,000 / $180,000
Growth rate (10% increase) / x 110% / x 110%
2012 sales / $594,000 / $198,000 / $250,000
Note 2 (Cost of Goods Sold)
Movies / VideoGames / Compact
Discs
2011 cost of goods sold / $378,000 / $138,600
2011 sales / $540,000 / $180,000
2011 cost as % of sales / 70% / 77%
2012 sales / $594,000 / $198,000 / $250,000
2012 cost as % of sales / x 70% / x 77% / x 65%*
2012 cost of goods sold / $415,800 / $152,460 / $162,500
* The 65% cost of goods sold percent is computed as 100% minus the predicted 35% gross margin.
Problem 22-3B (Continued)
Note 3 (Store Supplies Used)
Movies / VideoGames / Compact
Discs
2011 store supplies used / $ 3,300 / $ 700
Growth rate (10% increase) / x 110% / x 110%
2012 store supplies / $ 3,630 / $ 770 / $ 1,500
Note 4 (Rent and Utilities)
Movies / VideoGames / Compact
Discs
2011 rent / $29,520 / $ 6,480
One-fourth from movies to
compact discs /
(7,380) / $ 7,380
One-third from video games
to compact discs / ______ /
(2,160) /
2,160
2012 allocation of $36,000 rent / $22,140 / $ 4,320 / $ 9,540
Percent of total* / 61.5% / 12.0% / 26.5%
2012 allocation of $5,000
total utilities /
$ 3,075 /
$ 600 /
$ 1,325
Note 5 (Office Department Expenses)
Movies / VideoGames / Compact
Discs
2012 sales / $594,000 / $198,000 / $250,000
Percent of total sales / 57.0% / 19.0% / 24.0%
2012 allocation of $61,000
total office department
expenses($53,000 in 2011
plus $8,000 increase) /
$ 34,770 /
$ 11,590 /
$ 14,640
* If students round to something other than one-tenth of a percent, their numbers will slightly vary.
Problem 22-4B (50 minutes)
Part 1
a.
Responsibility Accounting Performance ReportManager, Refrigerator Department
For the Month of April
Budgeted / Actual / Over (Under)
Amount / Amount / Budget
Controllable Costs
Raw materials
/ $400,000 / $375,000 / $(25,000)Employee wages / 172,000 / 174,700 / 2,700
Supplies used / 15,000 / 14,000 / (1,000)
Depreciation—Equipment / 53,000 / 53,000 / 0
Totals / $640,000 / $616,700 / $(23,300)
b.
Responsibility Accounting Performance ReportManager, Dishwasher Department
For the Month of April
Budgeted / Actual / Over (Under)
Amount / Amount / Budget
Controllable Costs
Raw materials
/ $200,000 / $200,000 / $ 0Employee wages / 80,000 / 76,800 / (3,200)
Supplies used / 9,000 / 10,000 / 1,000
Depreciation—Equipment / 37,000 / 37,000 / 0
Totals / $326,000 / $323,800 / $(2,200)
Problem 22-4B (Continued)
c.
Responsibility Accounting Performance ReportManager, Chicago Plant
For the Month of April
Budgeted / Actual / Over (Under)
Amount / Amount / Budget
Controllable Costs
Dept. manager salaries / $ 104,000 / $ 101,500 / $ (2,500)
Utilities / 48,000 / 55,200 / 7,200
Building rent / 80,000 / 76,000 / (4,000)
Other office salaries / 40,000 / 35,200 / (4,800)
Other office costs / 21,000 / 29,800 / 8,800
Refrigerator department / 640,000 / 616,700 / (23,300)
Dishwasher department / 326,000 / 323,800 / (2,200)
Totals / $1,259,000 / $1,238,200 / $(20,800)
Part 2
The department managers did a good job of controlling costs and meeting the budget. The combined efforts of the managers resulted in a $20,800 below budget amount for the plant for the year. However, this result was due to the efforts of the refrigerator department manager ($23,300 under budget) and the dishwasher department manager ($2,200 under budget). If instead these two department managers’ actual costs had been exactly equal to budgeted costs, the plant manager’s controllable costs would have been over budget by $4,700.
Problem 22-5BB (60 minutes)
Part 1
Allocations of joint cost on the basis of sales values
Land preparation, seeding, and cultivating: $400,000
Grade / SalesValue / Percent of Total* / Allocated Cost
No. 1 / $600,000 / 64.5% / $258,000
No. 2 / 300,000 / 32.3 / 129,200
No. 3 / 30,000 / 3.2 / 12,800
Total / $930,000 / 100.0% / $400,000
Harvesting, sorting, and grading: $ 16,000
Grade / SalesValue / Percent
of Total / Allocated
Cost
No. 1 / $600,000 / 64.5% / $ 10,320
No. 2 / 300,000 / 32.3 / 5,168
No. 3 / 30,000 / 3.2 / 512
Total / $930,000 / 100.0% / $ 16,000
Delivery: $7,000 to Grade Nos. 1 & 2
Grade / SalesValue / Percent
of Total / AllocatedCost
No. 1 / $600,000 / 66.7% / $ 4,669
No. 2 / 300,000 / 33.3 / 2,331
No. 3 (direct) / ______ / 0.0 / 1,000
Total / $900,000 / 100.0% / $ 8,000
*The problem instructs students to round percents to one decimal place.
Answers will vary slightly for students that round differently.
Problem 22-5BB (Continued)
Part 2
SARAH AND STEW SALSAIncome Statement
For Year Ended December 31, 2011
No. 1 / No. 2 / No. 3 / Combined
Sales (by grade)
No. 1: 400,000 lbs. @ $1.50 / $600,000
No. 2: 300,000 lbs. @ $1.00 / $300,000
No. 3: 100,000 lbs. @ $0.30 / $30,000
Total sales / $930,000
Costs
Land preparation, seeding,
and cultivating /
258,000 /
129,200 /
12,800 /
400,000
Harvesting, sorting & grading / 10,320 / 5,168 / 512 / 16,000
Delivery / 4,669 / 2,331 / 1,000 / 8,000
Total costs / 272,989 / 136,699 / 14,312 / 424,000
Net income (loss) / $327,011 / $163,301 / $15,688 / $506,000
Part 3
Delivery costs include both crating and hauling costs. The Salsas are able to identify the portion of the cost directly related to the No. 3 tomatoes, presumably because the No. 3s are going to a different destination than the No. 1 and No. 2 tomatoes. If the No. 1s and No. 2s are going to the same place, then the hauling portion of the delivery cost may truly be a joint cost, at least for the No. 1 and No. 2 tomatoes.
However, since the No. 1 and No. 2 tomatoes are different grades and are sold for different prices per pound, it seems safe to assume they are crated separately. If the cost of crating the No. 3 tomatoes can be traced as a direct cost, then it seems the crating costs for the No. 1s and No. 2s should also be identifiable as separate amounts. This means, perhaps, the crating portion of delivery costs is not a true joint cost.
22-1