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Exam 9: Performance Measurement and Responsibility Accounting

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Question 1

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Departmental contribution to overhead is calculated as the amount of sales of the department less:

A) Controllable costs.
B) Product and period costs.
C) Direct expenses.
D) Direct and indirect costs.
E) Joint costs.

F) A) and B)
G) A) and D)

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Question 2

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Boiano Corp. operates a retail store and has two service departments and two operating departments, Hardware and Automotive. During the current year, the departments had the following direct expenses and occupied the following amount of floor space. $\begin{array} { | l | c | c | } \hline \text { Department } & \text { Direct Expenses } & \text { Square Feet } \\\hline \text { Advertising } & \$ 50,000 & 750 \\\hline \text { Administrative } & 100,000 & 1,500 \\\hline \text { Hardware } & 150,000 & 3,000 \\\hline \text { Automotive } & 200,000 & 9,750 \\\hline\end{array}$ The advertising department developed and aired 150 spots. Of these spots, 60 spots were for Hardware and 90 spots were for Automotive. The store sold $1,500,000 of merchandise during the year; $675,000 in Hardware and $825,000 in Automotive. Indirect expenses include rent, utilities, and insurance expense. Total indirect expenses of $220,000 are allocated to all departments. Prepare a departmental expense allocation spreadsheet for Boiano. The spreadsheet should assign (1) direct expenses to each of the four departments, (2) allocate the indirect expenses to each department on the basis of floor space occupied, (3) the advertising department's expenses to the two operating departments on the basis of ad spots placed promoting each department's products, (4) the administrative department's expenses based on the amount of sales. Complete the departmental expense allocation spreadsheet below. Provide supporting computations for the expense allocations below the spreadsheet.

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Indirect expense allocation:
750/15,000...

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Question 3

Multiple Choice

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Rent and maintenance expenses would most likely be allocated based on:

Use the Hamilton Company's investment center information below to calculate (a) return on total investment and (b) investment center residual income. Net Income…………………… $315,900 Average Invested Assets…….. $2,100,000 Target Net Income…………… 6% of division assets

An example of a controllable cost is equipment depreciation expense.

Pepper Department store allocates its service department expenses to its various operating (sales) departments. The following data is available for its service departments: The following information is available for its three operating (sales) departments: What is the total expense allocated to Department B?

Return on investment is a useful measure to evaluate the performance of a cost center manager.

Fallow Corporation has two separate profit centers. The following information is available for the most recent year: The West Division occupies 5,000 square feet in the plant. The East Division occupies 3,000 square feet. Rent, which was $40,000 for the year, is an indirect expense and is allocated based on square footage. Compute operating income for the West Division.

Investment center managers are usually evaluated using performance measures

Using the information below, compute the cycle efficiency: $\begin{array} { l l } \text { Days' sales in accourts receivable } & 15 \text { days } \\\text { Days' sales in irvertory } & 72 \text { days } \\\text { Days' payable outstarding } & 35 \text { days }\end{array}$

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

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

Decentralization refers to companies that have multiple locations.

Division P of Launch Corporation has the capacity for making 75,000 wheel sets per year and regularly sells 60,000 each year on the outside market. The regular sales price is $100 per wheel set, and the variable production cost per unit is $65. Division Q of Launch Corporation currently buys 30,000 wheel sets (of the kind made by Division P) yearly from an outside supplier at a price of $90 per wheel set. If Division Q were to buy the 30,000 wheel sets it needs annually from Division P at $87 per wheel set, the change in annual net operating income for the company as a whole, compared to what it is currently, would be:

Marks Corporation has two operating departments, Drilling and Grinding, and an office. The three categories of office expenses are allocated to the two departments using different allocation bases. The following information is available for the current period: The amount of the advertising cost that should be allocated to Drilling for the current period is:

Advertising expense can be reasonably allocated to departments on the basis of each department's proportion of sales.

Riemer, Inc. has four departments. Information about these departments is listed below. Maintenance is a service department. If allocated maintenance cost is based on floor space occupied by each of the other departments, compute the amount of maintenance cost allocated to the Cutting 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 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:

Pleasant Hills Properties is developing a golf course subdivision that includes 250 home lots; 100 lots are golf course lots and will sell for $95,000 each; 150 are street frontage lots and will sell for $65,000. The developer acquired the land for $1,800,000 and spent another $1,400,000 on street and utilities improvement. Compute the amount of joint cost to be allocated to the street frontage lots using value basis. (Round your intermediate percentages to 2 decimal places.)

Williams Co. operates three separate departments (R, S, T). The data below is provided for the current year: Total Sales…………………. $120,000 ($40,000 from each department) Cost of Goods Sold………… $ 80,000 (50% from R; 25% from S; 25% from T) Direct Expense……………… $ 26,000 ($6,000 from R; $12,000 from S; $8,000 from T) Indirect Expenses…………… $ 9,000 Required: Prepare an income statement showing the departmental contributions to overhead for the current year.