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Exam 24: Performance Measurement and Responsibility Accounting

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Question 21

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Pepper Department store allocates its service department expenses to its various operating (sales) departments. The following data is available for its service departments: $\begin{array}{l}\begin{array} { l l l } \text { Expense } & \text { Basis for allocation } & \text { Amount } \\\text { Rent } & \text { Square feet of floor space } & \$ 24,000 \\\text { Advertising } & \text { Amount of dollar sales } & \$ 30,000 \\\text { Administrative } & \text { Number of employees } & \$ 45,000\end{array}\\\\\text { The following information is available for its three operating (sales) departments: }\\\\\begin{array} { l c c r c } \text { Department } & \begin{array} { c } \text { Square } \\\text { Feet }\end{array} & \text { Dollar Sales } & \begin{array} { c } \text { Number of } \\\text { employees }\end{array} \\\text { A } & 3,000 & \$280,000 & 6 \\\text { B } & 3,400 & \$300,000 & 8 \\\text { C } & 3,600 & \$420,000 & 10 \\\text { Totals } & \underline { 10,000 } &\$1,000,000 &24 \\\hline\end{array}\end{array}$ -What is the total advertising expense allocated to Department B?

A) $12,500.
B) $10,800.
C) $30,000.
D) $ 9,000.
E) $7,500.

F) B) and C)
G) A) and E)

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Question 22

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Investment center is another name for profit center.

A) True
B) False

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Question 23

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A retail store has three departments, A, B, and C, each of which has four full-time employees. The store does general advertising that benefits all departments. Advertising expense totaled $90,000 for the current year, and departmental sales were: $\begin{array}{llr} \text {Department A } &\$308,000\\ \text {Department B } &644,000\\ \text { Department C } &448,000\end{array}$ Total sales…………………. $1,400,000 Calculate the amount of advertising expense that should be allocated to each department?

Super Grocery store allocates its service department expenses to its various operating (sales) departments. The following data is available for its service departments: $\begin{array}{llc}\text { Expense } & \text { Basis for allocation } & \text { Amount } \\\text { Administrative } & \text { Square feet of floor space } & \$ 15,000 \\\text { Advertising } & \text { Amount of dollar sales } & \$ 8,000\end{array}$ The following information is available for its three operating (sales) departments: $\begin{array}{lcc}\text { Department } &\text { Square }&\text { Dollar Sales } \\&\text { Feet }\\ \text { Produce } & 1,000 & \$ 80,000 \\ \text { Bakery } & 800 & \$ 30,000 \\ \text { Meats } & 1,200 & \$ 42,000 \\ \text { Totals } & 3.000 & \$ 152,000 \\\end{array}$ What is the total administrative expense allocated to the Meats department?

A department that incurs costs without directly generating revenues is a:

Ultimo Co. operates three production departments as profit centers. The following information is available for its most recent year. Department 1's contribution to overhead as a percent of sales is: $\begin{array}{ccccc}\text{Dept.}&\text {Sales}&\text {Cost of Goods Sold}&\text {Direct Expenses}&\text {Indirect Expenses}\\1&\$ 1,000,000 &\$ 700,000 & \$ 100,000 &\$80,000 \\2 & 400,000 & 150,000 & 40,000 & 100,000 \\ 3 & 700,000 & 300,000 & 150,000 & 20,000 \\\end{array}$

What is an investment center and how is its performance evaluated?

Match the appropriate definition a through h with the following terms: (a) A department whose manager is judged on the ability to generate revenues in excess of the department's costs. (b) A department or unit that generates revenues and incurs costs, in which the manager is also responsible for investments made in operating assets. (c) Set up to control costs and evaluate managers' performances by assigning costs to the managers responsible for controlling them. (d) Compares actual and budgeted costs and expenses under the control of a manager. (e) A department whose manager is judged on the ability to control costs by keeping them within a satisfactory range. (f) A measure of departmental sales less direct expenses. (1) Investment center (2) Performance report ________ (3) Cost center ________ (4) Departmental contribution to overhead ________ (5) Profit center ________ (6) Responsibility accounting system

Direct expenses are incurred for the joint benefit of more than one department; they cannot be readily traced to only one department.

Ready Company has two operating (production) departments: Assembly and Painting. Assembly has 150 employees and occupies 44,000 square feet; Painting has 100 employees and occupies 36,000 square feet. Indirect factory expenses for the current period are as follows: Administration $ 80,000 Maintenance $ 100,000 - Administration is allocated based on workers in each department; maintenance is allocated based on square footage. The total amount of indirect factory expenses that should be allocated to the Assembly Department for the current period is:

Measures used to evaluate the manager of an investment center include investment turnover and profit margin.

A company has two departments, Y and Z that incur wage expenses. An analysis of the total wage expense of $19,000 indicates that Dept. Y had a direct wage expense of $2,000 and Dept. Z had a direct wage expense of $3,500. The remaining expenses are indirect and analysis indicates they should be allocated evenly between the two departments. Departmental wage expenses for Dept. Y and Dept. Z, respectively, are:

Ready Company has two operating (production) departments: Assembly and Painting. Assembly has 150 employees and occupies 44,000 square feet; Painting has 100 employees and occupies 36,000 square feet. Indirect factory expenses for the current period are as follows: Administration $ 80,000 Maintenance $ 100,000 - Administration is allocated based on workers in each department; maintenance is allocated based on square footage. The amount of administration expenses that should be allocated to the Assembly Department for the current period is:

A ________ provides information for managers to use to evaluate the profitability or cost effectiveness of each department's activities.

A firm produces and sells two products, Plus and Max. The following information is available relating to setup costs (a part of factory overhead) : $\begin{array} { | l | r | r | } \hline & \text { Plus } & \text { Max } \\\text { Units produced } & 200 & 16,000\\\hline \text { Batch stze (units) }& 10 & 400 \\\hline \text { Number of setups } & 20 & 40 \\\hline \text { Direct labor hours per unit }& 5 & 5 \\\hline \text { Total direct labor hours }& \$ 1,000 & 80,000 \\\hline \text { Cost per setup }&\$1,080 \\\hline \text { Total setup cost } & \$ 64,800 & \\\hline\end{array}$ - With traditional allocation of overhead costs, using direct labor hours as the allocation base, the setup cost portion of overhead that is allocated to each unit of product for Plus and Max, respectively is:

Kragle Corporation reported the following financial data for one of its divisions for the year; average invested assets of $470,000; sales of $930,000; and income of $105,000. The investment turnover is:

A company has two departments, Y and Z that incur delivery expenses. An analysis of the total delivery expense of $9,000 indicates that Dept. Y had a direct expense of $1,000 for deliveries and Dept. Z had no direct expense. The indirect expenses are $8,000. The analysis also indicates that 40% of regular delivery requests originate in Dept. Y and 60% originate in Dept. Z. Departmental delivery expenses for Dept. Y and Dept. Z, respectively, are:

The following is a partially completed departmental expense allocation spreadsheet for Brickland. It reports the total amounts of direct and indirect expenses for its four departments. Purchasing department expenses are allocated to the operating departments on the basis of purchase orders. Maintenance department expenses are allocated based on square footage. Compute the amount of Maintenance department expense to be allocated to Fabrication. $\begin{array}{lcccc}&\text { Purchasing }& \text { Maintenance }&\text { Fabrication }& \text { Assembly }\\ \text { Operating costs } & \$ 32,000 & \$ 18,000 & \$ 96,000 & \$ 62,000 \\\text { No. of purchase orders } && & 16 & 4 \\\text { Sq. ft. of space } & & &3,300 & 2,700\end{array}$

The process of preparing departmental income statements begins with allocating service department expenses.

Karl and Grady are managers of two product lines for Brewster Company. One of them is a candidate for promotion based on performance. Using the data below, determine who had the better performance using performance measures such as net income, profit margin, and return on investment. Show your calculations and support your answer. $\begin{array}{|l|c|c|}\hline & \text { Karl } & \text { Grady } \\\hline \text { Revenue } & \$ 412,000 & \$ 450,000 \\\hline \text { Costs } & 380,000 & 411,000 \\\hline \text { Average Assets } & 400,000 & 600,000 \\\hline\end{array}$