ACCT 1B Study Guide - Final Guide: Balanced Scorecard, Cost Accounting, Management Accounting

23 views2 pages

amethysthyena724

16 Jun 2020

School

Irvine Valley College

Department

Accounting

Course

ACCT 1B

Professor

Seilo

For unlimited access to Study Guides, a Grade+ subscription is required.

Document Summary

Responsibility accounting for investment center: an important characteristic of an investment center is that the manager can control or significantly influence the investment of funds. Thus the primary basis for evaluating the managers performance of an investment center is roi (return on investment). Roi shows effectiveness of the manager in utilizing the assets at the managers disposal. Roi = investment center controllable margin average investment center operating assets. Both of these factors are controllable by the manager. Operating assets consist of current assets and plant assets used in operations. Non operating assets like an idle plant or land held for future use are excluded. Average operating assets usually based on cost or book value of assets at beginning and end of the year. Since an investment center is an independent entity for operating purposes, fc are controllable by the investment center. In addition, the report shows budgeted and actual roi below controllable margin.

Related Questions

Evaluating Profit and Investment Center Performance

P 3. Bobbie Howell, the managing partner of the law fi rmHowell, Bagan, and Clark, L LP,

makes asset acquisition and disposal decisions for the fi rm. Asmanaging partner, she

supervises the partners in charge of the fi rmâs th ree branchoffices. Those partners have

the authority to make employee com-

pensation decisions. The partnersâ compensation depends on theprofitability of their

branch office. Victoria Smith manages the City Branch, which hasthe following master

budget and actual results for the year:

Master Budget

Actual

Results

Billed hours

5,000

4,900

Revenue

$250,000

$254,800

Controllable variable costs

Direct labor

120,000

137,200

Variable overhead

40,000

34,300

Contribution margin

$90,000

$83,300

Controllable fixed costs

Rent

30,000

Other administrative expenses

45,000

42,000

Branch operating income

15,000

11,300

Required

1. Assume that the City Branch is a profit center. Prepare aperformance report that

includes a f lexible budget. Determine the variances betweenactual results, the f lexible

budget, and the master budget.

2. Evaluate Victoria Smithâs performance as manager of the CityBranch.

3. Assume that the branch managers are assigned responsibilityfor capital expenditures

and that the branches are thus investment centers. City Branchis expected to generate a

desired ROI of at least 30 percent on average invested assets of$40,000.

a. Compute the branchâs return on investment and residualincome.

b. Manager Insight:Using the ROI and residual income, evaluateVictoria Smithâs

performance as branch manager.

19-42 Calculating Return on Investment (ROI) and Residual Income (RI); Comparing Results Blackwood Industries manufactures die machinery. To meet its expansion needs, it recently (2014) acquired one of its suppliers, Delta Steel. To maintain Deltaâs separate identity, Blackwood reports Deltaâs operations as an investment center. Blackwood monitors all of its investment centers on the basis of return on investment (ROI). Management bonuses are based on ROI, and all investment centers are expected to earn a minimum 10% return before income taxes. Deltaâs ROI has ranged from 14% to 18% since 2014. The company recently had the opportunity for a new investment that would have yielded a 13% ROI. However, division management decided against the investment because it believed that the investment would decrease the divisionâs overall ROI. The 2016 operating statement for Delta follows. The divisionâs operating assets were $16,000,000 at the end of 2016, a 6% increase over the 2015 year-end balance.

DELTA DIVISION

Operating Statement for Year Ended

December 31, 2016 (000s omitted)

Sales $29,500

Cost of goods sold 19,920

Gross profit 9,580

Operating expenses:

Administration $2,808

Selling 4,332 7,140

Operating income $2,440

Required

1. Calculate the following performance measures for 2016 for the Delta division:

a. Return on average investment in operating assets.

b. Residual income (RI) calculated on the basis of average operating assets.

2. Which performance measure (ROI or RI) should Blackwood Industries use to provide the proper incentive for each division to act autonomously in the firmâs best interests? Would Deltaâs management have been more likely to accept the capital investment opportunity if RI had been used as a performance measure instead of ROI? Explain.

3. What type of strategic performance measurement do you recommend for the Delta division? Explain.

âI know headquarters wants us to add that new product line,âsaid Fred Halloway, manager of Kirsi Productsâ East Division. âButI want to see the numbers before I make a move. Our divisionâsreturn on investment (ROI) has led the company for three years, andI donât want any letdown.â

Kirsi Products is a decentralizedwholesaler with four autonomous divisions. The divisions areevaluated on the basis of ROI, with year-end bonuses given todivisional managers who have the highest ROI. Operating results forthe companyâs East Division for last year are given below:


Sales	$	28,000,000
Variable expenses		13,000,000

Contribution margin		15,000,000
Fixed expenses		12,816,000

Netoperating income	$	2,184,000

Divisional operating assets	$	5,600,000

The company had an overall ROI of 18% last year (considering alldivisions). The companyâs East Division has an opportunity to add anew product line that would require an investment of $3,030,000.The cost and revenue characteristics of the new product line peryear would be as follows:


Sales	$9,393,000
Variable expenses	65% ofsales
Fixed expenses	$2,601,861

Suppose that thecompanyâs minimum required rate of return on operating assets is15% and that performance is evaluated using residual income.

a.	Compute the EastDivisionâs residual income for last year; also compute the residualincome as it would appear if the company performed the same as lastyear and added the new product line.

	Residualincome
Present	$
Newproduct line alone	$
Total	$

Under thesecircumstances, if you were in Fred Halloway's position would youaccept or reject the new product line?

Reject

Financial datafor Bridger, Inc., for last year are as follows:

Bridger, Inc. Balance Sheet
	Beginning Balance		Ending Balance
Assets
Cash	$	127,000	$	126,000
Accounts receivable		333,000		489,000
Inventory		574,000		472,000
Plant and equipment, net		806,000		793,000
Investment in Brier Company		410,000		432,000
Land(undeveloped)		245,000		248,000

Total assets	$	2,495,000	$	2,560,000

Liabilities and Stockholders' Equity
Accounts payable	$	371,000	$	339,000
Long-term debt		972,000		972,000
Stockholders' equity		1,152,000		1,249,000

Total liabilities and stockholders' equity	$	2,495,000	$	2,560,000

Bridger, Inc. Income Statement
Sales		$	4,278,000
Operating expenses			3,507,960

Net operating income			770,040
Interest and taxes:
Interestexpense	$ 130,000
Tax expense	208,000		338,000

Net income		$	432,040

The company paiddividends of $335,040 last year. The âInvestment in Brier Companyâon the balance sheet represents an investment in the stock ofanother company.

Required:
1.	Compute the companyâs margin, turnover, and return on investment(ROI) for last year. (Round your intermediate calculationsand final answers to 1 decimal place.)


Margin	%
Turnover
ROI	%

2.	The board ofdirectors of Bridger, Inc., has set a minimum required return of19%. What was the companyâs residual income last year?

Residual income

lavenderelephant611

ACCT 1B Study Guide - Final Guide: Balanced Scorecard, Cost Accounting, Management Accounting

Document Summary

Get access

Related Documents

ACCT 1B Lecture Notes - Lecture 21: Cash Flow Statement, Treasury Stock, Cash Flow

ACCT 1B Lecture Notes - Lecture 32: Deferred Tax, Income Statement, Ordinary Income

ACCT 1B Lecture Notes - Lecture 30: Impaired Asset, Cash Flow Statement

Related Questions