Chapter 22: Exercises

Exercise 22-1: Responsibility Accounting Performance Report (P1) Arctica manufactures snowmobiles and ATVs, with separate departments for each product. Managers of each department are responsible only for costs they can control, such as direct materials, direct labor, supplies, and utilities. The task is to prepare a responsibility accounting performance report for the Snowmobile department, listing its controllable costs and comparing them to budgeted amounts to assess performance. Exercise 22-2: Responsibility Accounting Performance Report for ATV Department (P1) Similar to Exercise 22-1, this exercise focuses on preparing a responsibility accounting performance report for the ATV department. The goal is to summarize the controllable costs (direct materials, labor, supplies, utilities) and evaluate the department's performance against the set budget. Exercise 22-3: Service Department Expenses Allocated to Operating Departments (P2) Lucia Company has two service departments—Office and Purchasing. Their expenses must be allocated to three operating departments using specific bases: • • Office Expenses: Allocated based on sales. Purchasing Expenses: Allocated based on the number of purchase orders. The exercise involves calculating the share of expenses for each department. Exercise 22-4: Payroll Expense Allocated to Departments (P2) Mia works in both the Jewelry and Cosmetics departments. Her wages ($1,200) need to be allocated between these departments based on the hours worked in each over a two-week period. The exercise involves calculating the proportion of time spent in each department and allocating her wages accordingly. Exercise 22-5: Departmental Expense Allocations (P2) Renata Co. has four departments (Materials, Personnel, Manufacturing, Packaging) that share indirect expenses like supervision, utilities, and insurance. These expenses are allocated to the departments based on appropriate bases (e.g., number of employees, square footage). The exercise requires calculating each department’s share of the total indirect expenses. Exercise 22-6: Allocating Utilities, Personnel, and Office Expenses (P2) Gomez Company has two service departments (Personnel, Office) and two operating departments (Shoes, Clothing). The tasks include: 1. Allocating utilities expenses based on square footage. 2. Allocating personnel expenses based on the number of employees in each department. 3. Allocating office expenses based on sales. The goal is to distribute the indirect expenses fairly among the departments. Exercise 22-7: Departmental Contribution to Overhead (P3) This exercise provides income statements for a guitar manufacturer’s departments, including advertising, rent, and utilities as indirect expenses. The manufacturer is considering eliminating its Electric Guitar department due to losses. The task is to prepare a departmental contribution to overhead report to determine whether the department covers its variable costs and contributes to fixed costs. Exercise 22-8: Departmental Income Statement and Contribution to Overhead (P3) For the Ski department, this exercise involves: 1. Preparing a departmental income statement based on sales, cost of goods sold, and other expenses. 2. Calculating the department’s contribution to overhead. 3. Assessing whether the Ski department should be eliminated based on its contribution to fixed costs. Exercise 22-9: Return on Investment Analysis (A1) A company is choosing between opening a store at two locations (West and East). Each has different investment levels and expected annual income. The exercise involves: 1. Calculating the Return on Investment (ROI) for each location using the formula: ROI = Income / Average Assets. 2. Recommending the location with the higher ROI as the better investment. Exercise 22-10: Computing ROI and Residual Income (A1) Megamart has two investment centers, and the exercise requires: 1. Calculating ROI for each center. 2. Computing Residual Income using a target income of 12% of average assets. 3. Evaluating if a new investment opportunity with a 15% return should be accepted, given a target return of 12%. Exercise 22-11: Computing Profit Margin and Investment Turnover (A2) Using the information from Exercise 22-10, this problem requires: 1. Calculating the profit margin and investment turnover for each center. 2. Determining which center generates more income per dollar of sales. 3. Identifying which center has better investment turnover. Exercise 22-12: Computing ROI, Profit Margin, and Investment Turnover (A1, A2) For two divisions of a manufacturer, the exercise involves calculating: 1. Return on Investment (ROI) 2. Profit Margin: Income / Sales 3. Investment Turnover: Sales / Average Assets This analysis helps evaluate each division’s efficiency in generating income. Exercise 22-13: Residual Income (A1) Building on Exercise 22-12, this task requires computing Residual Income for each division using a target income rate of 7% of average assets. This measure indicates how much each division earns above the expected return. Exercise 22-14: Return on Investment Forecast (A1) This problem requires computing ROI for both the past year and the next year based on forecasted income and consistent asset levels. It helps evaluate the expected improvement in performance. Exercise 22-15: Profit Margin Calculation (A2) A retailer's geographic divisions report their income and sales. The task is to compute Profit Margin for each division to identify which one performs best in terms of profitability. Exercise 22-16: Strategy Evaluation for Profit Margin (A2) Garcia Company's Food division aims to achieve a 10% profit margin. Two strategies are evaluated: 1. Increase advertising expenses with expected sales growth. 2. Reduce the cost of goods sold through a more efficient process. The task involves calculating the expected profit margin for each strategy and recommending the better option. Exercise 22-17: Balanced Scorecard Performance Measures (A3) USA Airlines uses various performance metrics, which need to be classified into the four balanced scorecard perspectives: • • • • Customer: E.g., customer complaints. Internal Process: E.g., time on the ground between flights. Innovation and Learning: E.g., training sessions. Financial: E.g., return on investment. Exercise 22-18: Sustainability in a Balanced Scorecard (A3) Midwest Mfg. integrates sustainability into its balanced scorecard. The task involves categorizing performance measures, such as CO2 emissions and customer feedback on sustainability, into the appropriate balanced scorecard perspectives. Exercise 22-19: Determining Transfer Prices (C1) Baxter Bicycles' Trailer division needs to determine the transfer price for selling trailers to its Assembly division. The exercise explores two scenarios: 1. Full capacity, where the transfer price is market-based. 2. Excess capacity, where a range of acceptable prices is identified. Exercise 22-20 and 22-21: Cash Conversion Cycle (A4) The exercises involve computing the cash conversion cycle, which measures the time it takes for a company to convert investments in inventory into cash. Comparing the cycle year-over-year or with competitors helps assess cash management efficiency. Exercise 22-22A: Assigning Joint Costs (C2) A real estate developer needs to allocate joint costs of land and improvements between two sections (Canyon and Hilltop) based on the expected sales value of each section. The exercise involves using the value basis of allocation. Exercise 22-23A: Assigning Joint Product Costs (C2) A dairy company processes raw milk into various types with different sales values. The task is to allocate the cost of raw milk to each type of milk based on their sales value and then determine the gross profit for each. These exercises focus on key topics in responsibility accounting, performance evaluation, and cost allocation, providing practical application of concepts like ROI, residual income, and balanced scorecard metrics.