ACCT1022 Chapter Notes - Chapter 12: Income Statement, Balanced Scorecard, Profit Center
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BOR CPAs, Inc. is a closely held corporation owned by threestockholders who used the initials of their last names to form thecorporation’s name: Cyrus Bailey, John Ogden, and Samuel Rogers.The firm’s Certified Public Accountants (CPAs) perform audits ofboth public companies and privately owned companies. BOR’s CPAsalso provide tax services to both individuals and businesses.
The corporation is divided into two profit centers: the AuditDivision and the Tax Division. Each division is composed of twocost centers. The Audit Division is composed of two cost-centerdepartments: Public Company Audits and Private Company Audits. TheTax Division is composed of two cost-center departments also:Individual Tax and Business Tax.
BOR, a decentralized organization, is interested in evaluatingthe performance of the two divisions. The stockholders areresponsible for deciding on investment in the two divisions. CyrusBailey is in charge of the performance evaluation, and turns to youfor assistance. Mr. Bailey is only interested in evaluatingoperations at the profit center (division) level, and not at thecost center (department) level.
Mr. Bailey is considering temporarily using some of the stafffrom the Tax Division to assist the Audit Division during theupcoming busy audit season, and would like to evaluate the effectof this on net income. The Tax Division is estimated to have 800hours of excess capacity.
The unit for determining sales revenue in both divisions is the"engagement", which means the total agreed-upon work for a givenclient in either audit or tax for a given year. The company chargeson average a fee of $75,000 per audit engagement, and $15,750 pertax engagement.
The company has its own Payroll Office, which provides payrollservices to both divisions and will allocate its total expenses tothe two divisions as service department charges.
The following chart shows some basic data for the company:
| Hourly market rate for staff (theprice the company would have to pay from an outside contractor forstaff services) | $110.00 |
| Average hourly cost rate for staff(the average price the company pays to its staff) | $50.00 |
| Number of paychecks issued by AuditDivision | 110 |
| Number of paychecks issued by TaxDivision | 340 |
| Total expense for PayrollOffice | $29,250 |
| Amount of assets invested in AuditDivision by BOR CPAs, Inc. | $10,000,000 |
| Amount of assets invested in TaxDivision by BOR CPAs, Inc. | $4,000,000 |
Given that Mr. Bailey is evaluating BOR CPAs, Inc., which is aninvestment center, what transfer pricing option(s) would he mostprefer that the divisions use? Check all that apply.
No transfer between divisions
Market transfer price of $110.00 per hour
Variable standard cost transfer price of $50.00 per hour
Negotiated transfer price of $80.00 per hour
2. Which transfer pricing option(s) would the manager of theAudit Division prefer? Check all that apply.
Variable standard cost transfer price of $50.00 per hour
Market transfer price of $110.00 per hour
No transfer between divisions
Negotiated transfer price of $80.00 per hour
3. Which transfer pricing option(s) would the manager of the TaxDivision prefer? Check all that apply.
Market transfer price of $110.00 per hour
Negotiated transfer price of $80.00 per hour
No transfer between divisions
Variable standard cost transfer price of $50.00 per hour
4. Given the preferences of the managers of the Audit and TaxDivisions, and also considering the preferences of BOR CPAs, Inc.,what might be the decision that provides the best outcome for alllevels and entities within the company?
The company should use the market transfer price, since it’simportant for the divisions to operate under real marketconditions.
If the divisional managers cannot come to an agreement, it’sbest to forgo any transfers between divisions in order to reduceconflict within the company.
Use the negotiated transfer price, so that each entity is betteroff than it would be without any transfers between divisions.
The company should use the variable standard cost transferprice, because it would be unfair for the Tax Division to make aprofit in dealing with the Audit Division, since they’re in thesame company.
BOR CPAs, Inc. is a closely held corporation owned by threestockholders who used the initials of their last names to form thecorporation’s name: Cyrus Bailey, John Ogden, and Samuel Rogers.The firm’s Certified Public Accountants (CPAs) perform audits ofboth public companies and privately owned companies. BOR’s CPAsalso provide tax services to both individuals and businesses.
The corporation is divided into two profit centers: the AuditDivision and the Tax Division. Each division is composed of twocost centers. The Audit Division is composed of two cost-centerdepartments: Public Company Audits and Private Company Audits. TheTax Division is composed of two cost-center departments also:Individual Tax and Business Tax.
BOR, a decentralized organization, is interested in evaluatingthe performance of the two divisions. The stockholders areresponsible for deciding on investment in the two divisions. CyrusBailey is in charge of the performance evaluation, and turns to youfor assistance. Mr. Bailey is only interested in evaluatingoperations at the profit center (division) level, and not at thecost center (department) level.
Mr. Bailey is considering temporarily using some of the stafffrom the Tax Division to assist the Audit Division during theupcoming busy audit season, and would like to evaluate the effectof this on net income. The Tax Division is estimated to have 800hours of excess capacity.
The unit for determining sales revenue in both divisions is the"engagement", which means the total agreed-upon work for a givenclient in either audit or tax for a given year. The company chargeson average a fee of $75,000 per audit engagement, and $15,750 pertax engagement.
The company has its own Payroll Office, which provides payrollservices to both divisions and will allocate its total expenses tothe two divisions as service department charges.
The following chart shows some basic data for the company:
| Hourly market rate for staff (theprice the company would have to pay from an outside contractor forstaff services) | $110.00 |
| Average hourly cost rate for staff(the average price the company pays to its staff) | $50.00 |
| Number of paychecks issued by AuditDivision | 110 |
| Number of paychecks issued by TaxDivision | 340 |
| Total expense for PayrollOffice | $29,250 |
| Amount of assets invested in AuditDivision by BOR CPAs, Inc. | $10,000,000 |
| Amount of assets invested in TaxDivision by BOR CPAs, Inc. | $4,000,000 |
Mr. Bailey asks that you prepare Divisional Income Statementsshowing what 20Y1 results would have been had the Audit Divisionpurchased all the excess capacity of the Tax Division, using a costtransfer price. The divisional managers tell you that, with theexcess capacity of the Tax Division of 800 hours, the AuditDivision can perform 4 more audits during the year, and the AuditDivision would pay the Tax Division's internal hourly rate of$50.00 per hour for the additional hours required, with the TaxDivision selling all its excess capacity to the Audit Division. TheTax Division would still be responsible for paying the salaries oftheir employees.
Complete the following Income Statements. Enter all amounts aspositive numbers. If there is no amount or an amount is zero, enter“0”.
BOR CPAs, Inc. |
Income Statements |
For the Year Ended December 31, 20Y1 |
1 | Audit Division | Tax Division | Total Company | |
2 | Fees earned: | |||
3 | Audit fees (16 engagements) | $1,200,000.00 | $1,200,000.00 | |
4 | Tax fees (45 engagements) | $708,750.00 | 708,750.00 | |
5 | Transfer-pricing fees | |||
6 | Expenses: | |||
7 | Variable: | |||
8 | Audit hours provided by Audit Division | 180,000.00 | 180,000.00 | |
9 | Tax hours provided by Tax Division | 236,250.00 | 236,250.00 | |
10 | Excess capacity hours paid to salaried staff | |||
11 | Audit hours provided by Tax Division | |||
12 | Fixed expenses | 50,000.00 | 65,500.00 | 115,500.00 |
13 | Income from operations before service department charges | |||
14 | Service department charges for payroll | |||
15 | Income from operations |
