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REVIEW QUESTIONS ON RESPONSIBILITY ACCOUNTING
1. Explain the purpose of a management control system in an organization.
2. Good performance measures are useful in an organization in several ways.
Explain how they can be useful.
3. Distinguish between a cost center, a profit center and an investment center.
4. The Bottlebrush Company has income from operations of $60,000, invested assets of
$345,000, and sales of $786,000. Use the DuPont formula to calculate the rate of return on
investment, and show (a) the profit margin, (b) the investment turnover, and (c) rate of
return on investment.
5. Jupiter design Limited specializes in providing design services to residential developers.
Last year the company had net operating income of $600,000 on sales of $3,000,000. The
company’s average operating assets for the year were $2,800,000 and its minimum
required rate of return was 18%.
Required: Compute the company’s residual income for the year.
6. The Magnolia Company Division A has income from operations of $80,000 and assets of $400,000.
The minimum acceptable rate of return on assets is 14%. What is the residual income for the
division?
7. Using the data from the Tomato Industries, determine the divisional income from operations for
Districts 1 & 2. Allocate service department expenses proportional to the sales of each district.
District 1
District 2
Sales
$300,000
$600,000
Cost of goods sold
120,000
150,000
Selling expenses
55,000
75,000
Service department expenses
Purchasing
$70,000
Payroll accounting
80,000
8. Bentz Co. has two divisions, A and B. Invested assets and condensed income statement data for
each division for the past year ended December 31 are as follows:
Division A Division B
Revenues $190,000 $125,500
Operating expenses 112,500 92,750
Service department charges 29,500 12,625
Invested assets 225,000 99,000
Required:
a) Prepare condensed income statements for the past year for each division.
b) Using the expanded expression, determine the profit margin, investment turnover, and rate of
return on investment for each division.
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SOLUTIONS TO REVIEW QUESTIONS ON RESPONSIBILITY ACCOUNTING
1. A management control system aids and coordinates the process of making decisions and motivates
individuals throughout the organization to act in the best interests of the organization. A major
purpose is to motivate managers. To provide proper motivation, accountants must predict the
effect of the system on managers, which is essentially a behavioral exercise.
2. Good performance measures should:
a) Relate to the organization’s goals.
b) Balance long-term and short-term considerations
c) Reflect key activities of an organization
d) Be easily understood by managers
e) Be affected by manager’s actions
f) Be used in evaluating and rewarding managers
g) Be reasonably objective and easily measured
h) Be used consistently
3. Cost Center A responsibility center that incurs costs but does not generate revenue. It is
responsible for the control of costs.
Profit Center A responsibility center that generates revenue and incurs costs. It is responsible
for both costs and revenues.
Investment Center A responsibility center whose manager is responsible for revenues and costs
as well as the assets invested in that center (capital Investment). An investment center goes a step
farther than a profit center because it compares its profit to investment using measures such as
return on investment (ROI) or residual income (RI).
4. a) Profit margin = $60,000 / $786,000 = 7.63%
b) Investment turnover = $786,000 / $345,000 = 2.278
c) Rate of return on investment = 7.63% x 2.278 = 17.38%
5. Juniper Design Ltd.
Residual Income is computed as follows:
Net Operating Income 600,000
Minimum required return (18% * 2.8 m) 504,000
Residual Income 96,000
6. Magnolia Company Division A
Income from operations $80,000
Minimum acceptable income from operations as a percent of assets
($400,000 x 14%) 56,000
Residual income $24,000
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7. Percentage (%) of Sales Allocation:
A Region = $300,000 / $900,000 = 33.3%
B Region = $600,000 / $900,000 = 66.7%
District 1 = 33.3% x $150,000 = $50,000 allocation of service costs
District 1 Income = $300,000 - $120,000 - $55,000 - $50,000 = $75,000
District 2 = 66.7% x $150,000 = $100,000 allocation of service costs
District 2 Income = $600,000 - $150,000 - $75,000 - $100,000 = $275,000
8. Bentz Co.
a) Divisional Income Statements For the Year Ended December 31, 2020
Division A
Division B
Revenues
$190,000
$125,500
Operating expenses
112,500
92,750
Income from operations before
service department charges
$ 77,500
$ 32,750
Service department charges
29,500
12,625
Income from operations
$ 48,000
$ 20,125
b) Rate of return on investment (ROI) = Profit margin x investment turnover
ROI = Income From Operations x Revenues
Revenues Invested Assets
Division A = $48,000 x $190,000
$190,000 $225,000
ROI = 25.26% x .8444
ROI = 21.3%
Division B = $20,125 x $125,500
$125,500 $99,000
ROI = 16.04% x 1.2677
ROI = 20.3%

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REVIEW QUESTIONS ON RESPONSIBILITY ACCOUNTING 1. Explain the purpose of a management control system in an organization. 2. Good performance measures are useful in an organization in several ways. Explain how they can be useful. 3. Distinguish between a cost center, a profit center and an investment center. 4. The Bottlebrush Company has income from operations of $60,000, invested assets of $345,000, and sales of $786,000. Use the DuPont formula to calculate the rate of return on investment, and show (a) the profit margin, (b) the investment turnover, and (c) rate of return on investment. 5. Jupiter design Limited specializes in providing design services to residential developers. Last year the company had net operating income of $600,000 on sales of $3,000,000. The company’s average operating assets for the year were $2,800,000 and its minimum required rate of return was 18%. Required: Compute the company’s residual income for the year. 6. The Magnolia Company Division A has income from operations of $80,000 and assets of $400,000. The minimum acceptable rate of return on assets is 14%. What is the residual income for the division? 7. Using the data from the Tomato Industries, determine the divisional income from operations for Districts 1 & 2. Allocate service department expenses proportional to the sales of each district. District 1 District 2 Sales $300,000 $600,000 Cost of goods sold 120,000 150,000 Selling expenses 55,000 75,000 Service department expenses Purchasing Payroll accounting $70,000 80,000 8. Bentz Co. has two divisions, A and B. Invested assets and condensed income statement data for each division for the past year ended December 31 are as follows: Division A Division B Revenues $190,000 $125,500 Operating expenses 112,500 92,750 Service department charges 29,500 12,625 Invested assets 225,000 99,000 Required: a) Prepare condensed income statements for the past year for each division. b) Using the expanded expression, determine the profit margin, investment turnover, and rate of return on investment for each division. SOLUTIONS TO REVIEW QUESTIONS ON RESPONSIBILITY ACCOUNTING 1. A management control system aids and coordinates the process of making decisions and motivates individuals throughout the organization to act in the best interests of the organization. A major purpose is to motivate managers. To provide proper motivation, accountants must predict the effect of the system on managers, which is essentially a behavioral exercise. 2. Good performance measures should: a) Relate to the organization’s goals. b) Balance long-term and short-term considerations c) Reflect key activities of an organization d) Be easily understood by managers e) Be affected by manager’s actions f) Be used in evaluating and rewarding managers g) Be reasonably objective and easily measured h) Be used consistently 3. Cost Center – A responsibility center that incurs costs but does not generate revenue. It is responsible for the control of costs. Profit Center – A responsibility center that generates revenue and incurs costs. It is responsible for both costs and revenues. Investment Center – A responsibility center whose manager is responsible for revenues and costs as well as the assets invested in that center (capital Investment). An investment center goes a step farther than a profit center because it compares its profit to investment using measures such as return on investment (ROI) or residual income (RI). 4. a) Profit margin = $60,000 / $786,000 = 7.63% b) Investment turnover = $786,000 / $345,000 = 2.278 c) Rate of return on investment = 7.63% x 2.278 = 17.38% 5. Juniper Design Ltd. Residual Income is computed as follows: Net Operating Income 600,000 Minimum required return (18% * 2.8 m) 504,000 Residual Income 96,000 6. Magnolia Company Division A Income from operations Minimum acceptable income from operations as a percent of assets ($400,000 x 14%) Residual income $80,000 56,000 $24,000 7. Percentage (%) of Sales Allocation: A Region = $300,000 / $900,000 = 33.3% B Region = $600,000 / $900,000 = 66.7% District 1 = 33.3% x $150,000 = $50,000 allocation of service costs District 1 Income = $300,000 - $120,000 - $55,000 - $50,000 = $75,000 District 2 = 66.7% x $150,000 = $100,000 allocation of service costs District 2 Income = $600,000 - $150,000 - $75,000 - $100,000 = $275,000 8. Bentz Co. a) Divisional Income Statements For the Year Ended December 31, 2020 Revenues Operating expenses Income from operations before service department charges Service department charges Income from operations Division A $190,000 112,500 Division B $125,500 92,750 $ 77,500 29,500 $ 48,000 $ 32,750 12,625 $ 20,125 b) Rate of return on investment (ROI) = Profit margin x investment turnover ROI = Income From Operations x Revenues Revenues Invested Assets Division A = $48,000 x $190,000 $190,000 $225,000 ROI = 25.26% x .8444 ROI = 21.3% Division B = $20,125 x $125,500 $125,500 $99,000 ROI = 16.04% x 1.2677 ROI = 20.3% Name: Description: ...
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