Chapter 12 Segment Reporting and Decentralization
True/False Questions
1. Allocating common fixed costs to segments on segmented income statements reduces
the usefulness of such statements.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Easy
2. A segment is any part or activity of an organization about which a manager seeks cost,
revenue, or profit data.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Easy
3. A responsibility center is a business segment whose manager has control over costs,
revenues, or investments in operating assets.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Easy
4. Residual income is used in the numerator to compute turnover in an ROI analysis.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
5. Net operating income is earnings before interest and taxes.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 2 Level: Easy
6. Land held for possible plant expansion would be included as an operating asset in the
ROI calculation.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
7. Margin equals Stockholders' Equity divided by Sales.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-5
Chapter 12 Segment Reporting and Decentralization
8. The use of return on investment (ROI) as a performance measure may lead managers to
reject a project that would be favorable for the company as a whole.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
9. Residual income is equal to the difference between total revenues and operating
expenses.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
10. When using residual income as a measure of performance, it is not meaningful to
compare the residual incomes of divisions of different sizes.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
11. The transfer price used for internal transfers between divisions of the same company
can increase or decrease each division's reported profits.
Ans: True AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 12A LO: 4 Level: Medium
12. For performance evaluation purposes, the lump-sum amount of fixed service
department costs charged to an operating department should usually be based on either
the operating department's peak-period or long-run average needs.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy
13. In service department cost allocations, sales dollars should be used as an allocation base
whenever possible.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy
14. A cost center is also a responsibility center.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 6 Level: Easy
12-6
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
15. The basic objective of responsibility accounting is to charge each manager with those
costs and/or revenues over which he has control.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 6 Level: Easy
Multiple Choice Questions
16. The impact on net operating income of short-run changes in sales for a segment can be
most clearly predicted by analyzing:
A) the contribution margin ratio.
B) the segment margin.
C) the ratio of the segment margin to sales.
D) net sales less segment fixed costs.
Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
17. In a segmented contribution format income statement, what is the best measure of the
long-run profitability of a segment?
A) its gross margin
B) its contribution margin
C) its segment margin
D) its segment margin minus an allocated portion of common fixed expenses
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Medium
18. In order to properly report segment margin as a guide to long-run segment profitability
and performance, fixed costs must be separated into two broad categories. One category
is common fixed costs. What is the other category?
A) discretionary fixed costs
B) committed fixed costs
C) traceable fixed costs
D) specialized fixed costs
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-7
Chapter 12 Segment Reporting and Decentralization
19. Which of the following segment performance measures will decrease if there is an
increase in the interest expense for that segment?
A)
B)
C)
D)
Return on Investment Residual Income
Yes
Yes
No
Yes
Yes
No
No
No
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2; 3 Level: Hard
20. Which of the following segment performance measures will increase if there is a
decrease in the selling expenses for that segment?
A)
B)
C)
D)
Return on Investment Residual Income
Yes
Yes
No
Yes
Yes
No
No
No
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2; 3 Level: Medium
21. Some investment opportunities that should be accepted from the viewpoint of the entire
company may be rejected by a manager who is evaluated on the basis of:
A) return on investment.
B) residual income.
C) contribution margin.
D) segment margin.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
12-8
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
22. Consider the following three conditions:
I. An increase in sales
II. An increase in operating assets
III. A reduction in expenses
Which of the above conditions provide a way in which a manager can improve return on
investment?
A) Only I
B) Only I and II
C) Only I and III
D) Only II and III
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
23. When calculating a segment's return on investment (ROI), which of the following assets
of that segment would be considered a part of average operating assets?
A) cash
B) accounts receivable
C) plant and equipment
D) all of the above
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
24. Which of the following measures of performance encourages continued expansion by
an investment center so long as it is able to earn a return in excess of the minimum
required return on average operating assets?
A) return on investment
B) transfer pricing
C) the contribution approach
D) residual income
Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-9
Chapter 12 Segment Reporting and Decentralization
25. Residual income is:
A) Net operating income plus the minimum required return on average operating
assets.
B) Net operating income less the minimum required return on average operating
assets.
C) Contribution margin plus the minimum required return on average operating
assets.
D) Contribution margin less the minimum required return on average operating
assets.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
26. Which of the following is NOT a common approach used to set transfer prices?
A) market price
B) variable cost
C) negotiation
D) suboptimization
Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 12A LO: 4 Level: Easy
27. For performance evaluation purposes, the variable costs of a service department should
be charged to operating departments using:
A) the actual variable rate and the budgeted level of activity for the period.
B) the budgeted variable rate and the actual level of activity for the period.
C) the budgeted variable rate and the budgeted level of activity for the period.
D) the actual variable rate and the peak-period or long-run average servicing
capacity.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium
12-10
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
28. Which of the following companies is following a policy with respect to the costs of
service departments that is not recommended?
A) To charge operating departments with the depreciation of forklifts used at its
central warehouse, Shalimar Electronics charges predetermined lump-sum
amounts calculated on the basis of the long-term average use of the services
provided by the warehouse to the various segments.
B) Manhattan Electronics uses the sales revenue of its various divisions to allocate
costs connected with the upkeep of its headquarters building.
C) Rainier Industrial does not allow its service departments to pass on the costs of
their inefficiencies to the operating departments.
D) Golkonda Refinery separately allocates fixed and variable costs incurred by its
service departments to its operating departments.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium
Source: CMA; adapted
29. A segment of a business responsible for both revenues and expenses would be called:
A) a cost center.
B) an investment center.
C) a profit center.
D) residual income.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 6 Level: Easy
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-11
Chapter 12 Segment Reporting and Decentralization
30. Devlin Company has two divisions, C and D. The overall company contribution margin
ratio is 30%, with sales in the two divisions totaling $500,000. If variable expenses are
$300,000 in Division C, and if Division C's contribution margin ratio is 25%, then sales
in Division D must be:
A) $50,000
B) $100,000
C) $150,000
D) $200,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Hard
Solution:
Total company contribution margin = $500,000 × 30% = $150,000
Total company variable expenses = $500,000 − $150,000 = $350,000
Division C contribution margin ratio = (Sales − $300,000) ÷ Sales = 0.25
Sales − $300,000 = 0.25 × Sales
(0.75 × Sales) ÷ 0.75 = $300,000 ÷ 0.75
Sales = $400,000
Division D sales = Total company sales − Division C sales
= $500,000 − $400,000 = $100,000
Divisions
Total
Company Division C Division D
Sales................................... $500,000
$400,000
$100,000
Less variable expenses.......
350,000
300,000
50,000
Contribution margin........... $150,000
$100,000
$ 50,000
Contribution margin ratio..
0.30
0.25
0.50
12-12
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
31. Toxemia Salsa Company manufactures five flavors of salsa. Last year, Toxemia
generated net operating income of $40,000. The following information was taken from
last year's income statement segmented by flavor (brackets indicate a negative amount):
Wimpy
Mild
Medium
Hot
Atomic
Contribution margin.. $(2,000)
$45,000 $35,000 $50,000 $162,000
Segment margin........ $(16,000) $(5,000)
$7,000 $10,000 $94,000
Segment margin less
allocated common
fixed expenses....... $(26,000) $(15,000) $(3,000)
$0 $84,000
Toxemia expects similar operating results for the upcoming year. If Toxemia wants to
maximize its profitability in the upcoming year, which flavor or flavors should Toxemia
discontinue?
A) no flavors should be discontinued
B) Wimpy
C) Wimpy and Mild
D) Wimpy, Mild, and Medium
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; LO: 1 Level: Medium
Solution:
The segment margin is a better indication of profitability of individual products than the
segment margin less allocated common fixed expenses. The products with negative
segment margins should be discontinued to maximize profit: Wimpy and Mild.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-13
Chapter 12 Segment Reporting and Decentralization
32. Uchimura Corporation has two divisions: the AFE Division and the GBI Division. The
corporation's net operating income is $42,000. The AFE Division's divisional segment
margin is $15,700 and the GBI Division's divisional segment margin is $175,400. What
is the amount of the common fixed expense not traceable to the individual divisions?
A) $149,100
B) $57,700
C) $217,400
D) $191,100
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Total
Company
Divisional segment margin..............................
$191,100
Less common fixed costs not traceable
to the individual divisions............................
X
Net operating income.......................................
$ 42,000
($15,700 + $175,400)
Common fixed costs not traceable to the individual divisions
= $191,100 − $42,000 = $149,100
12-14
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
33. Younie Corporation has two divisions: the South Division and the West Division. The
corporation's net operating income is $26,900. The South Division's divisional segment
margin is $42,800 and the West Division's divisional segment margin is $29,900. What
is the amount of the common fixed expense not traceable to the individual divisions?
A) $56,800
B) $69,700
C) $72,700
D) $45,800
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Total
Company
Divisional segment margin..............................
$72,700
Less common fixed costs not traceable
to the individual divisions............................
X
Net operating income.......................................
$26,900
($42,800 + $29,900)
Common fixed costs not traceable to the individual divisions
= $72,700 − $26,900 = $45,800
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-15
Chapter 12 Segment Reporting and Decentralization
34. Dukelow Corporation has two divisions: the Governmental Products Division and the
Export Products Division. The Governmental Products Division's divisional segment
margin is $255,000 and the Export Products Division's divisional segment margin is
$59,800. The total amount of common fixed expenses not traceable to the individual
divisions is $163,700. What is the company's net operating income?
A) $314,800
B) ($314,800)
C) $151,100
D) $478,500
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Solution:
Total
Company
Divisional segment margin..............................
$314,800 *
Less common fixed costs not traceable
to the individual divisions............................163,700
Net operating income.......................................
$151,100
*$255,000 + $59,800 = $314,800
12-16
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
35. Miscavage Corporation has two divisions: the Beta Division and the Alpha Division.
The Beta Division has sales of $580,000, variable expenses of $301,600, and traceable
fixed expenses of $186,500. The Alpha Division has sales of $510,000, variable
expenses of $178,500, and traceable fixed expenses of $222,100. The total amount of
common fixed expenses not traceable to the individual divisions is $235,500. What is
the company's net operating income?
A) $374,400
B) $201,300
C) $609,900
D) ($34,200)
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Solution:
Sales...............................................
Less: variable expenses..................
Contribution margin.......................
Less: traceable fixed expenses.......
Divisional segment margin............
Less common fixed expenses.........
Net operating income.....................
Divisions
Total
Alpha
Beta
Company Division
Division
$1,090,000 $510,000
$580,000
480,100 178,500
301,600
609,900 331,500
278,400
408,600 222,100
186,500
201,300 $109,400
$91,900
235,500
($34,200)
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-17
Chapter 12 Segment Reporting and Decentralization
36. J Corporation has two divisions. Division A has a contribution margin of $79,300 and
Division B has a contribution margin of $126,200. If total traceable fixed costs are
$72,400 and total common fixed costs are $34,900, what is J Corporation's net operating
income?
A) $168,000
B) $170,600
C) $133,100
D) $98,200
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Solution:
Total Company
Contribution margin.......................
$205,500 *
Less: traceable fixed expenses.......
72,400
Divisional segment margin............
133,100
Less common fixed expenses.........
34,900
Net operating income.....................
$ 98,200
*$79,300 + $126,200 = $205,500
37. Kop Corporation has provided the following data:
Return on investment (ROI).................
15%
Sales..................................................... $120,000
Average operating assets...................... $60,000
Minimum required rate of return.........
12%
Margin on sales....................................
7.5%
Kop Corporation's residual income is:
A) $1,800
B) $5,400
C) $2,700
D) $3,600
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2; 3 Level: Medium
12-18
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
Solution:
Net operating income = Sales × Margin on sales = $120,000 × 7.5% = $9,000
Residual income = Net operating income − (Average operating assets × Minimum
required rate of return) = $9,000 − ($60,000 × 12%) = $9,000 − $7,200 = $1,800
38. Spar Company has calculated the following ratios for one of its investment centers:
Margin.................... 25%
Turnover................. 0.5 times
What is Spar's return on investment for this investment center?
A) 50.0%
B) 12.5%
C) 15.0%
D) 25.0%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy Source: CPA; adapted
Solution:
Return on investment = Margin × Turnover = 25% × 0.5 times = 12.5%
39. Mike Corporation uses residual income to evaluate the performance of its divisions. The
company's minimum required rate of return is 14%. In January, the Commercial
Products Division had average operating assets of $970,000 and net operating income
of $143,700. What was the Commercial Products Division's residual income in
January?
A) $7,900
B) -$20,118
C) $20,118
D) -$7,900
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Residual income = Net operating income − (Average operating assets × Minimum
required rate of return) = $143,700 − ($970,000 × 14%) = $143,700 − $135,800 =
$7,900
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-19
Chapter 12 Segment Reporting and Decentralization
40. In November, the Universal Solutions Division of Keaffaber Corporation had average
operating assets of $480,000 and net operating income of $46,200. The company uses
residual income, with a minimum required rate of return of 11%, to evaluate the
performance of its divisions. What was the Universal Solutions Division's residual
income in November?
A) -$6,600
B) $5,082
C) $6,600
D) -$5,082
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Residual income = Net operating income − (Average operating assets × Minimum
required rate of return) = $46,200 − ($480,000 × 11%) = $46,200 − $52,800 = -$6,600
41. If operating income is $60,000, average operating assets are $240,000, and the
minimum required rate of return is 20%, what is the residual income?
A) 40%
B) 25%
C) $12,000
D) $48,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Residual income = Net operating income − (Average operating assets × Minimum
required rate of return) = $60,000 − ($240,000 × 20%) = $60,000 − $48,000 = $12,000
12-20
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
42. Division A makes a part that it sells to customers outside of the company. Data
concerning this part appear below:
Selling price to outside customers.............
$40
Variable cost per unit.................................
$30
Total fixed costs......................................... $10,000
Capacity in units........................................
20,000
Division B of the same company would like to use the part manufactured by Division A
in one of its products. Division B currently purchases a similar part made by an outside
company for $38 per unit and would substitute the part made by Division A. Division B
requires 5,000 units of the part each period. Division A is already selling all of the units
it can produce to outside customers. If Division A sells to Division B rather than to
outside customers, the variable cost per unit would be $1 lower. What is the lowest
acceptable transfer price from the standpoint of the selling division?
A) $40
B) $39
C) $38
D) $37
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4
Level: Hard
Solution:
Transfer price ≥ Variable cost per unit + (Total contribution margin on lost sales ÷
Number of units transferred) = ($30 − $1) + [($40 − $30) × 5,000] ÷ 5,000 = $29 + $10
= $39
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-21
Chapter 12 Segment Reporting and Decentralization
43. Product A, which is produced by the Parts Division of BYP Corporation, sells for
$14.25 on the outside market. The costs to make Product A as recorded by the
company's cost accounting system are:
Direct materials..........................................
Direct labor................................................
Variable manufacturing overhead..............
Fixed manufacturing overhead..................
$7.25
$2.25
$1.50
$2.50
The Assembly Division of BYP Corporation requires a part much like Product A to
make one of its products. The Assembly Division can buy this part from an outside
supplier for $14.15. However, the Assembly Division could use Product A instead of
this part purchased from an outside supplier. What is the most the Assembly Division
would be willing to pay the Parts Division for Product A?
A) $13.50
B) $14.25
C) $14.15
D) $14.00
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4
Level: Easy
Solution:
Transfer price ≤ Cost of buying from outside supplier = $14.15
12-22
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
44. Macumber Corporation has two operating divisions-an Atlantic Division and a Pacific
Division. The company's Logistics Department services both divisions. The variable
costs of the Logistics Department are budgeted at $36 per shipment. The Logistics
Department's fixed costs are budgeted at $234,000 for the year. The fixed costs of the
Logistics Department are determined based on peak-period demand.
Percentage of Peak
Period Capacity Required
Atlantic Division..........
30%
Pacific Division............
70%
Actual
Shipments
1,100
3,400
How much Logistics Department cost should be charged to the Altlantic Division at the
end of the year for performance evaluation purposes?
A) $198,000
B) $109,800
C) $118,800
D) $96,800
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy
Solution:
Labor department cost charged to Atlantic Division
= (1,100 shipments × $36 per shipment) + ($234,000 × 30%)
= $39,600 + $70,200 = $109,800
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-23
Chapter 12 Segment Reporting and Decentralization
45. Erholm Corporation has two operating divisions-an Atlantic Division and a Pacific
Division. The company's Logistics Department services both divisions. The variable
costs of the Logistics Department are budgeted at $31 per shipment. The Logistics
Department's fixed costs are budgeted at $411,800 for the year. The fixed costs of the
Logistics Department are determined based on peak-period demand.
Atlantic Division................
Pacific Division..................
Percentage of Peak Period
Capacity Required
35%
65%
Budgeted
Shipments
1,900
5,200
At the end of the year, actual Logistics Department variable costs totaled $290,700 and
fixed costs totaled $431,950. The Atlantic Division had a total of 3,900 shipments and
the Pacific Division had a total of 5,100 shipments for the year. How much Logistics
Department cost should be charged to the Pacific Division at the END of the year for
performance evaluation purposes?
A) $391,453
B) $425,770
C) $445,498
D) $409,502
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium
Solution:
Logistics department cost charged to Pacific Division
= (5,100 shipments × $31 per shipment) + ($411,800 × 65%)
= $158,100 + $267,670 = $425,770
12-24
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
46. Gretter Corporation has two operating divisions-an Atlantic Division and a Pacific
Division. The company's Logistics Department services both divisions. The variable
costs of the Logistics Department are budgeted at $36 per shipment. The Logistics
Department's fixed costs are budgeted at $399,600 for the year. The fixed costs of the
Logistics Department are determined based on peak-period demand.
Atlantic Division..........
Pacific Division............
Percentage of Peak Period
Capacity Required
25%
75%
Budgeted
Shipments
1,600
5,800
At the end of the year, actual Logistics Department variable costs totaled $305,040 and
fixed costs totaled $418,680. The Atlantic Division had a total of 2,600 shipments and
the Pacific Division had a total of 5,600 shipments for the year. For performance
evaluation purposes, how much actual Logistics Department cost should NOT be
charged to the operating divisions at the END of the year?
A) $28,920
B) $9,840
C) $19,080
D) $0
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium
Solution:
Actual Logistics Department cost incurred = $305,040 + $418,680 = $723,720
Logistics Department charged to operating divisions
= [$36 per shipment × (2,600 shipments + 5,600 shipments)] + $399,600
= [$36 per shipment × 8,200 shipments] + $399,600
= $295,200 + $399,600 = $694,800
Actual Logistics Department cost not charged to operating divisions
= $723,720 − $694,800 = $28,920
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-25
Chapter 12 Segment Reporting and Decentralization
47. Bockoven Corporation has two operating divisions-a Consumer Division and a
Commercial Division. The company's Customer Service Department provides services
to both divisions. The variable costs of the Customer Service Department are budgeted
at $46 per order. The Customer Service Department's fixed costs are budgeted at
$181,500 for the year. The fixed costs of the Customer Service Department are
determined based on the peak period orders.
Consumer Division............
Commercial Division.........
Percentage of Peak Period
Capacity Required
40%
60%
Actual
Orders
1,100
2,200
How much Customer Service Department cost should be charged to the Consumer
Division at the beginning of the year for performance evaluation purposes?
A) $123,200
B) $166,650
C) $111,100
D) $133,320
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy
Solution:
Customer Service Department cost charged to Consumer Division
= ($46 per order × 1,100 orders) + ($181,500 × 40%)
= $50,600 + $72,600 = $123,200
12-26
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
48. Levar Corporation has two operating divisions-a Consumer Division and a Commercial
Division. The company's Order Fulfillment Department provides services to both
divisions. The variable costs of the Order Fulfillment Department are budgeted at $73
per order. The Order Fulfillment Department's fixed costs are budgeted at $470,400 for
the year. The fixed costs of the Order Fulfillment Department are determined based on
the peak period orders.
Consumer Division............
Commercial Division.........
Percentage of Peak Period
Capacity Required
25%
75%
Budgeted
Orders
1,800
6,600
At the end of the year, actual Order Fulfillment Department variable costs totaled
$621,600 and fixed costs totaled $473,970. The Consumer Division had a total of 1,840
orders and the Commercial Division had a total of 6,560 orders for the year. For
purposes of evaluation performance, how much Order Fulfillment Department cost
should be charged to the Commercial Division at the END of the year?
A) $831,680
B) $855,588
C) $840,918
D) $846,240
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy
Solution:
Order Fulfillment Department cost charged to Commercial Division
= ($73 per order × 6,560 orders) + ($470,400 × 75%)
= $478,880 + $352,800 = $831,680
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-27
Chapter 12 Segment Reporting and Decentralization
49. Schabel Corporation has two operating divisions-a Consumer Division and a
Commercial Division. The company's Customer Service Department provides services
to both divisions. The variable costs of the Customer Service Department are budgeted
at $72 per order. The Customer Service Department's fixed costs are budgeted at
$695,400 for the year. The fixed costs of the Customer Service Department are
determined based on the peak period orders.
Consumer Division............
Commercial Division.........
Percentage of Peak Period
Capacity Required
25%
75%
Budgeted
Orders
2,600
9,600
At the end of the year, actual Customer Service Department variable costs totaled
$891,089 and fixed costs totaled $709,820. The Consumer Division had a total of 2,610
orders and the Commercial Division had a total of 9,580 orders for the year. For
performance evaluation purposes, how much actual Customer Service Department cost
should NOT be charged to the operating divisions at the END of the year?
A) $13,409
B) $0
C) $14,420
D) $27,829
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium
Solution:
Actual Customer Service Department cost incurred
= $891,089 + $709,820 = $1,600,909
Customer Service Department cost charged to operating divisions
= [$72 per order × (2,610 orders + 9,580 orders)] + $695,400
= [$72 per order × 12,190 orders] + $695,400
= $877,680 + $695,400 = $1,573,080
Actual Customer Service Department cost not charged to operating divisions
= $1,600,909 − $1,573,080 = $27,829
12-28
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
50. Mangiamele Corporation's Maintenance Department provides services to the company's
two operating divisions-the Paints Division and the Stains Division. The variable costs
of the Maintenance Department are budgeted based on the number of cases produced by
the operating departments. The fixed costs of the Maintenance Department are budgeted
based on the number of cases produced by the operating departments during the peak
period. Data appear below:
Maintenance Department
Budgeted variable cost........................................ $4 per case
Budgeted total fixed cost....................................
$693,000
Paints Division
Percentage of peak period capacity required......
Actual cases........................................................
30%
18,000
Stains Division
Percentage of peak period capacity required......
Actual cases........................................................
70%
59,000
For performance evaluation purposes, how much Maintenance Department cost should
be charged to the Paints Division at the end of the year?
A) $234,000
B) $500,500
C) $279,900
D) $300,300
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium
Solution:
Maintenance Department cost charged to Paints Division
= ($4 per case × 18,000 cases) + ($693,000 × 30%)
= $72,000 + $207,900 = $279,900
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-29
Chapter 12 Segment Reporting and Decentralization
51. Tabarez Corporation's Maintenance Department provides services to the company's two
operating divisions-the Paints Division and the Stains Division. The variable costs of
the Maintenance Department are budgeted based on the number of cases produced by
the operating departments. The fixed costs of the Maintenance Department are budgeted
based on the number of cases produced by the operating departments during the peak
period. Data appear below:
Maintenance Department
Budgeted variable cost........................................
Budgeted total fixed cost....................................
Actual total variable cost....................................
Actual total fixed cost.........................................
$2 per case
$1,140,000
$239,400
$1,157,980
Paints Division
Percentage of peak period capacity required......
Budgeted cases....................................................
Actual cases........................................................
30%
29,000
29,040
Stains Division
Percentage of peak period capacity required......
Budgeted cases....................................................
Actual cases........................................................
70%
85,000
84,960
For performance evaluation purposes, how much Maintenance Department cost should
be charged to the Stains Division at the END of the year?
A) $989,002
B) $1,041,416
C) $967,920
D) $1,019,520
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium
Solution:
Maintenance Department cost charged to Stains Division
= ($2 per case × 84,960 cases) + ($1,140,000 × 70%)
= $169,920 + $798,000 = $967,920
12-30
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
Use the following to answer questions 52-56:
O'Neill, Incorporated's income statement for the most recent month is given below.
Sales......................................
Variable expenses.................
Contribution margin..............
Traceable fixed expenses......
Segment margin....................
Common fixed expenses.......
Net operating income............
Total
Store A
Store B
$300,000 $100,000 $200,000
192,000
72,000 120,000
108,000
28,000
80,000
76,000
21,000
55,000
32,000 $ 7,000 $ 25,000
27,000
$ 5,000
For each of the following questions, refer back to the original data.
52. If Store B sales increase by $20,000 with no change in traceable fixed expenses, the
overall company net operating income should:
A) increase by $2,500
B) increase by $5,000
C) increase by $8,000
D) increase by $12,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Medium
Solution:
Store B contribution margin ratio = $80,000 ÷ $200,000 = 40%
Additional net operating income = $20,000 × 40% = $8,000
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-31
Chapter 12 Segment Reporting and Decentralization
53. The marketing department believes that a promotional campaign at Store A costing
$5,000 will increase sales by $15,000. If its plan is adopted, overall company net
operating income should:
A) decrease by $800
B) decrease by $5,800
C) increase by $5,800
D) increase by $10,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Medium
Solution:
Store A contribution margin ratio = $28,000 ÷ $100,000 = 28%
Change in net operating income = ($15,000 × 28%) − $5,000
= $4,200 − $5,000 = $800 decrease
54. A proposal has been made that will lower variable expenses in Store A to 62% of sales.
However, this reduction can only be accomplished by an increase in fixed expenses of
$8,000. If this proposal is implemented and sales remain constant, overall company net
operating income should:
A) remain the same
B) decrease by $4,200
C) increase by $2,000
D) increase by $8,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Medium
Solution:
New amount for Store A variable expenses = $100,000 × 62% = $62,000
Change in net operating income = ($72,000 − $62,000) − $8,000
= $10,000 − $8,000 = $2,000 increase
12-32
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
55. If sales in Store B increase by $30,000 as a result of a $7,000 expenditure in fixed
expenses:
A) the contribution margin should increase by $18,000
B) the segment margin should increase by $12,000
C) the contribution margin should increase by $11,000
D) the segment margin should increase by $5,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Hard
Solution:
Store B contribution margin ratio = $80,000 ÷ $200,000 = 40%
Change in segment margin = ($30,000 × 40%) − $7,000
= $12,000 − $7,000 = $5,000 increase
56. Currently the sales clerks receive a salary of $7,000 per month in Store B. A proposal
has been made to change from a fixed salary to a sales commission of 5%. Assume that
this proposal is adopted, and that as a result sales increase by $20,000. The new segment
margin for Store B should be:
A) $29,000
B) $32,000
C) $39,000
D) $45,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Hard
Solution:
Sales...................................... $220,000 ($200,000 + $20,000)
Sales commissions................
11,000
($220,000 × 5%)
Other variable expenses........
132,000
($220,000 × 60%*)
Contribution margin..............
77,000
Traceable fixed expenses......
48,000
($55,000 − $7,000)
Segment margin.................... $ 29,000
*Variable expenses ÷ Sales = $120,000 ÷ $200,000 = 60%
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-33
Chapter 12 Segment Reporting and Decentralization
Use the following to answer questions 57-59:
Higgins Company sells three products, Product A, Product B, and Product C. Sales during June
totaled $1,500,000 in the company. The company's overall contribution margin ratio was 38%,
and its fixed expenses totaled $525,000 for the year. Sales by product were: Product A,
$750,000; Product B, $450,000; and Product C, $300,000. Traceable fixed expenses were:
Product A, $180,000; Product B, $150,000; and Product C, $90,000. The variable expenses
were: Product A, $450,000; Product B, $270,000; and Product C, $___?___.
57. The net operating income for the company as a whole for June was:
A) $45,000
B) $105,000
C) $150,000
D) $570,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Medium
Solution:
Sales...................................... $1,500,000
Contribution margin ratio..... ×
38%
Contribution margin..............
$570,000
Fixed expenses......................
525,000
Net operating income............
$ 45,000
58. The contribution margin ratio for Product C for June was:
A) 0%
B) 30%
C) 38%
D) 70%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Hard
Solution:
Company variable expenses = $1,500,000 × (100% − 38%)
= $1,500,000 × 62% = $930,000
Product C variable expenses = $930,000 − $450,000 − $270,000 = $210,000
Product C contribution margin = $300,000 − $210,000 = $90,000
Product C contribution margin ratio = $90,000 ÷ $300,000 = 30%
12-34
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
59. Common fixed expenses for Higgins Company for June were:
A) $45,000
B) $420,000
C) $150,000
D) $105,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Hard
Solution:
Common fixed expenses = Total fixed expenses – Traceable fixed expenses
= $525,000 – ($180,000 + $150,000 + $90,000)
= $525,000 – $420,000 = $105,000
Use the following to answer questions 60-62:
Azuki Corporation operates in two sales territories, urban and rural. Shown below is last year's
income statement segmented by territory:
Urban
Sales............................................... $320,000
Variable expenses..........................
208,000
Contribution margin....................... 112,000
Traceable fixed expenses...............
48,000
Segment margin.............................
$64,000
Rural
$80,000
56,000
24,000
30,000
$(6,000)
Azuki's common fixed expenses were $25,000 last year.
60. What was Azuki Corporation's overall net operating income for last year?
A) $33,000
B) $45,000
C) $58,000
D) $83,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Solution:
Segment margin.............................
Common fixed expenses................
Net operating income.....................
$58,000 ($64,000 + -$6,000)
25,000
$33,000
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-35
Chapter 12 Segment Reporting and Decentralization
61. If urban sales were 10% higher last year, by approximately how much would Azuki's
net operating income have increased? (Assume no change in the revenue or cost
structure.)
A) $4,400
B) $6,400
C) $11,200
D) $32,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Urban contribution margin ratio = $112,000 ÷ $320,000 = 35%
Increase in net operating income = $320,000 × 10% × 35% = $11,200
62. If operations in rural areas would have been discontinued at the beginning of last year,
how would this have changed the net operating income of Azuki Company as a whole?
A) $5,000 increase
B) $6,000 increase
C) $11,000 increase
D) $24,000 decrease
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Rural segment margin = Contribution margin − Traceable fixed expenses
= $24,000 − $30,000 = ($6,000)
Net operating income would have increased by $6,000 if operations in rural areas would
have been discontinued at the beginning of last year.
12-36
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
Use the following to answer questions 63-65:
Tubaugh Corporation has two major business segments—East and West. In December, the East
business segment had sales revenues of $690,000, variable expenses of $352,000, and traceable
fixed expenses of $104,000. During the same month, the West business segment had sales
revenues of $140,000, variable expenses of $56,000, and traceable fixed expenses of $24,000.
The common fixed expenses totaled $162,000 and were allocated as follows: $89,000 to the
East business segment and $73,000 to the West business segment.
63. The contribution margin of the West business segment is:
A) $84,000
B) $234,000
C) $422,000
D) $145,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
West contribution margin = Sales − Variable expenses
= $140,000 − $56,000 = $84,000
64. A properly constructed segmented income statement in a contribution format would
show that the segment margin of the East business segment is:
A) $352,000
B) $145,000
C) $234,000
D) $249,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Solution:
Sales............................................... $690,000
Variable expenses..........................
352,000
Contribution margin....................... 338,000
Traceable fixed expenses............... 104,000
Segment margin............................. $234,000
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-37
Chapter 12 Segment Reporting and Decentralization
65. A properly constructed segmented income statement in a contribution format would
show that the net operating income of the company as a whole is:
A) $294,000
B) $422,000
C) $132,000
D) -$30,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Solution:
Sales...................................
Variable expenses..............
Contribution margin...........
Traceable fixed expenses...
Segment margin.................
Common fixed expenses....
Net operating income.........
Total
Company
$830,000
408,000
422,000
128,000
294,000
162,000
$132,000
East
West
$690,000 $140,000
352,000
56,000
338,000
84,000
104,000
24,000
$234,000 $60,000
Use the following to answer questions 66-68:
Data for January for Bondi Corporation and its two major business segments, North and South,
appear below:
Sales revenues, North...........................
Variable expenses, North.....................
Traceable fixed expenses, North..........
Sales revenues, South...........................
Variable expenses, South.....................
Traceable fixed expenses, South..........
$660,000
$383,000
$79,000
$510,000
$291,000
$66,000
In addition, common fixed expenses totaled $179,000 and were allocated as follows: $93,000 to
the North business segment and $86,000 to the South business segment.
12-38
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
66. The contribution margin of the South business segment is:
A) $198,000
B) $496,000
C) $219,000
D) $105,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Sales............................................... $510,000
Variable expenses..........................
291,000
Contribution margin....................... $219,000
67. A properly constructed segmented income statement in a contribution format would
show that the segment margin of the North business segment is:
A) $105,000
B) $383,000
C) $198,000
D) $184,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Solution:
Sales...................................
Variable expenses..............
Contribution margin...........
Traceable fixed expenses...
Segment margin.................
North
$660,000
383,000
277,000
79,000
$198,000
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-39
Chapter 12 Segment Reporting and Decentralization
68. A properly constructed segmented income statement in a contribution format would
show that the net operating income of the company as a whole is:
A) -$7,000
B) $172,000
C) $351,000
D) $496,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Solution:
Total
Company
Sales................................... $1,170,000
Variable expenses..............
674,000
Contribution margin...........
496,000
Traceable fixed expenses...
145,000
Segment margin.................
351,000
Common fixed expenses....
179,000
Net operating income.........
$172,000
North
South
$660,000 $510,000
383,000 291,000
277,000 219,000
79,000
66,000
$198,000 $153,000
Use the following to answer questions 69-71:
Ferrar Corporation has two major business segments-Consumer and Commercial. Data for the
segment and for the company for March appear below:
Sales revenues, Consumer.........................
Sales revenues, Commercial......................
Variable expenses, Consumer....................
Variable expenses, Commercial.................
Traceable fixed expenses, Consumer.........
Traceable fixed expenses, Commercial.....
$680,000
$280,000
$394,000
$143,000
$102,000
$45,000
In addition, common fixed expenses totaled $210,000 and were allocated as follows: $122,000
to the Consumer business segment and $88,000 to the Commercial business segment.
12-40
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
69. The contribution margin of the Commercial business segment is:
A) $137,000
B) $184,000
C) $62,000
D) $423,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Sales...................................
Variable expenses..............
Contribution margin...........
$280,000
143,000
$137,000
70. A properly constructed segmented income statement in a contribution format would
show that the segment margin of the Consumer business segment is:
A) $164,000
B) $62,000
C) $394,000
D) $184,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Solution:
Sales...................................
Variable expenses..............
Contribution margin...........
Traceable fixed expenses...
Segment margin.................
Consumer
$680,000
394,000
286,000
102,000
$184,000
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-41
Chapter 12 Segment Reporting and Decentralization
71. A properly constructed segmented income statement in a contribution format would
show that the net operating income of the company as a whole is:
A) $66,000
B) -$144,000
C) $423,000
D) $276,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Solution:
Segments
Sales...................................
Variable expenses..............
Contribution margin...........
Traceable fixed expenses...
Segment margin.................
Common fixed expenses....
Net operating income.........
Total
Company Consumer Commercial
$960,000 $680,000
$280,000
537,000
394,000
143,000
423,000
286,000
137,000
147,000
102,000
45,000
276,000 $184,000
$92,000
210,000
$66,000
Use the following to answer questions 72-73:
The Tipton Division of Dudley Company reported the following data last year:
Return on investment........................
20%
Minimum required rate of return......
12%
Residual income................................ $50,000
12-42
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
72. Tipton Division's average operating assets last year were:
A) $625,000
B) $250,000
C) $416,677
D) $333,333
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2; 3 Level: Hard
Solution:
Residual income = Average operating assets × (ROI − Minimum required rate of return)
Average operating assets = Residual income ÷ (ROI − Minimum required rate of return)
= $50,000 ÷ (20% − 12%) = $50,000 ÷ 8% = $625,000
73. The division's net operating income last year was:
A) $250,000
B) $125,000
C) $100,000
D) $75,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2; 3 Level: Hard
Solution:
ROI = Net operating income ÷ Average operating assets
Net operating income = ROI × Average operating assets
= 20% × $625,000 = $125,000
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-43
Chapter 12 Segment Reporting and Decentralization
Use the following to answer questions 74-75:
The following data pertain to Turk Company's operations last year:
Sales...............................................
Net operating income.....................
Contribution margin.......................
Average operating assets................
Stockholders’ equity......................
Plant, property, & equipment.........
$900,000
$36,000
$150,000
$180,000
$100,000
$120,000
74. Turk's return on investment for the year was:
A) 4%
B) 15%
C) 36%
D) 20%
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
ROI = Net operating income ÷ Average operating assets
= $36,000 ÷ $180,000 = 20%
75. If the residual income for the year was $9,000, the minimum required rate of return must
have been:
A) 15%
B) 4%
C) 20%
D) 36%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Hard
Solution:
Residual income = Net operating income − (Average operating assets × Minimum
required rate of return)
= $9,000 = $36,000 − ($180,000 × Minimum required rate of return)
= $27,000 ÷ $180,000
Minimum required rate of return = 15%
12-44
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
Use the following to answer questions 76-77:
The Hum Division of the Ho Company reported the following data for last year:
Sales.....................................................
Operating expenses..............................
Interest expense....................................
Tax expense.........................................
Stockholders’ equity............................
Average operating assets......................
Minimum required rate of return.........
$800,000
$650,000
$50,000
$30,000
$200,000
$600,000
12%
76. The residual income for the Hum Division last year was:
A) $126,000
B) $46,000
C) $78,000
D) $22,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Sales..................................................... $800,000
Operating expenses.............................. 650,000
Net operating income........................... $150,000
Residual income = Net operating income − (Average operating assets × Minimum
required rate of return) = $150,000 − ($600,000 × 12%) = $150,000 − $72,000 =
$78,000
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-45
Chapter 12 Segment Reporting and Decentralization
77. The return on investment last year for the Hum Division was:
A) 75%
B) 25%
C) 35%
D) 12%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
ROI = Net operating income ÷ Average operating assets
= $150,000 ÷ $600,000 = 25%
Use the following to answer questions 78-79:
The following selected data pertain to Beck Co.'s Beam Division for last year:
Sales........................................................
Variable expenses...................................
Traceable fixed expenses........................
Average operating assets.........................
Minimum required rate of return............
$2,000,000
$800,000
$900,000
$500,000
20%
Note: the traceable fixed expenses do not include any interest expense.
12-46
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
78. How much is the residual income?
A) $400,000
B) $200,000
C) $300,000
D) $500,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium Source: CPA; adapted
Solution:
Sales........................................................
Variable expenses...................................
Traceable fixed expenses........................
Net operating income..............................
$2,000,000
800,000
900,000
$ 300,000
Residual income = Net operating income − (Average operating assets × Minimum
required rate of return) = $300,000 − ($500,000 × 20%) = $300,000 − $100,000 =
$200,000
79. How much is the return on the investment?
A) 25%
B) 45%
C) 20%
D) 60%
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium Source: CPA; adapted
Solution:
ROI = Net operating income ÷ Average operating assets
= $300,000 ÷ $500,000 = 60%
Use the following to answer questions 80-81:
Edith Carolina is president of the Deed Corporation. The company is decentralized, and leaves
investment decisions up to the discretion of the division managers. Michael Sanders, manager
of the Cosmetics Division, has had a return on investment of 14% for his division for the past
three years and expects the division to have the same return in the coming year. Sanders has the
opportunity to invest in a new line of cosmetics which is expected to have a return on
investment of 12%.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-47
Chapter 12 Segment Reporting and Decentralization
80. Suppose Deed Corporation evaluates managerial performance using return on
investment. Edith Carolina, as president of the company, may view the opportunity for
taking on the cosmetics line differently from Michael Sanders, manager of the
Cosmetics Division. What action would each of them prefer with respect to the decision
of whether to take on the new cosmetics line?
A)
B)
C)
D)
Carolina Sanders
accept
reject
reject
accept
accept
accept
reject
reject
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 2 Level: Easy
81. If the Deed Corporation evaluates managerial performance using residual income based
on the corporate minimum required rate of return of 8%, what decision would be
preferred by Edith Carolina and Michael Sanders?
A)
B)
C)
D)
Carolina Sanders
accept
reject
reject
accept
accept
accept
reject
reject
Ans: C AACSB: Analytic AICPA BB: Decision Making
AICPA FN: Reporting LO: 3 Level: Easy
Use the following to answer questions 82-83:
The following information relates to the Quilt Division of TDS Corporation for last year:
Sales............................................... $200,000
Contribution margin....................... $90,000
Net operating income..................... $65,000
Average operating assets................ $500,000
Minimum desired rate of return.....
10%
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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
82. What was the Quilt Division's return on investment (ROI) for last year?
A) 13%
B) 18%
C) 40%
D) 45%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
ROI = Net operating income ÷ Average operating assets
= $65,000 ÷ $500,000 = 13%
83. Assume that Quilt was being evaluated solely on the basis of residual income. Which of
the following investment opportunities would Quilt want to invest in?
An investment that
generates a return of 12%
A)
Yes
B)
No
C)
Yes
D)
No
An investment that
generates a return of 16%
Yes
Yes
No
No
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 3 Level: Medium
Use the following to answer questions 84-87:
Cecille Products is a division of a major corporation. Last year the division had total sales of
$7,940,000, net operating income of $254,080, and average operating assets of $2,000,000. The
company's minimum required rate of return is 12%.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-49
Chapter 12 Segment Reporting and Decentralization
84. The division's margin is closest to:
A) 3.2%
B) 25.2%
C) 12.7%
D) 28.4%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting Level: Easy
Solution:
Margin = Net operating income ÷ Sales = $254,080 ÷ $7,940,000 = 3.2%
85. The division's turnover is closest to:
A) 0.13
B) 3.52
C) 3.97
D) 31.25
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Turnover = Sales ÷ Average operating assets = $7,940,000 ÷ $2,000,000 = 3.97
86. The division's return on investment (ROI) is closest to:
A) 2.6%
B) 12.7%
C) 0.4%
D) 50.4%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
ROI = Net operating income ÷ Average operating assets
= $254,080 ÷ $2,000,000 = 12.7%
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Chapter 12 Segment Reporting and Decentralization
87. The division's residual income is closest to:
A) $(698,720)
B) $494,080
C) $254,080
D) $14,080
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Residual income = Net operating income − (Average operating assets × Minimum
required rate of return) = $254,080 − ($2,000,000 × 12%) = $254,080 − $240,000 =
$14,080
Use the following to answer questions 88-91:
Deanda Products is a division of a major corporation. The following data are for the last year of
operations:
Sales.............................................................................
Net operating income...................................................
Average operating assets..............................................
The company’s minimum required rate of return........
$28,630,000
$1,145,200
$7,000,000
18%
88. The division's margin is closest to:
A) 4.0%
B) 16.4%
C) 24.4%
D) 28.4%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Margin = Net operating income ÷ Sales = $1,145,200 ÷ $28,630,000 = 4.0%
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
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Chapter 12 Segment Reporting and Decentralization
89. The division's turnover is closest to:
A) 4.09
B) 0.16
C) 25.00
D) 3.51
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Turnover = Sales ÷ Average operating assets = $28,630,000 ÷ $7,000,000 = 4.09
90. The division's return on investment (ROI) is closest to:
A) 16.4%
B) 3.2%
C) 67.1%
D) 0.6%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
ROI = Net operating income ÷ Average operating assets
= $1,145,200 ÷ $7,000,000 = 16.4%
91. The division's residual income is closest to:
A) $(4,008,200)
B) $2,405,200
C) $(114,800)
D) $1,145,200
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Residual income = Net operating income − (Average operating assets × Minimum
required rate of return) = $1,145,200 − ($7,000,000 × 18%) = $1,145,200 − $1,260,000
= $(114,800)
12-52
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Chapter 12 Segment Reporting and Decentralization
Use the following to answer questions 92-94:
Last year the Uptown Division of Gorcen Enterprises had sales of $300,000 and a net operating
income of $24,000. The average operating assets at Uptown last year amounted to $120,000.
92. Last year at Uptown the return on investment was:
A) 8%
B) 12%
C) 20%
D) 40%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
ROI = Net operating income ÷ Average operating assets
= $24,000 ÷ $120,000 = 20%
93. Last year at Uptown the margin amounted to:
A) 8%
B) 12%
C) 20%
D) 40%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Margin = Net operating income ÷ Sales = $24,000 ÷ $300,000 = 8%
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
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Chapter 12 Segment Reporting and Decentralization
94. At Uptown the turnover last year was:
A) 0.4
B) 2.5
C) 3.2
D) 5.0
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Turnover = Sales ÷ Average operating assets = $300,000 ÷ $120,000 = 2.5
Use the following to answer questions 95-97:
Ahartz Industries is a division of a major corporation. Data concerning the most recent year
appears below:
Sales...................................... $7,820,000
Net operating income............
$445,740
Average operating assets....... $2,000,000
95. The division's margin is closest to:
A) 22.3%
B) 25.6%
C) 5.7%
D) 31.3%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Margin = Net operating income ÷ Sales = $445,740 ÷ $7,820,000 = 5.7%
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Chapter 12 Segment Reporting and Decentralization
96. The division's turnover is closest to:
A) 3.20
B) 17.54
C) 0.22
D) 3.91
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Turnover = Sales ÷ Average operating assets = $7,820,000 ÷ $2,000,000 = 3.91
97. The division's return on investment (ROI) is closest to:
A) 18.2%
B) 4.5%
C) 22.3%
D) 1.3%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
ROI = Net operating income ÷ Average operating assets
= $445,740 ÷ $2,000,000 = 22.3%
Use the following to answer questions 98-100:
Beade Industries is a division of a major corporation. Last year the division had total sales of
$16,760,000, net operating income of $770,960, and average operating assets of $4,000,000.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
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Chapter 12 Segment Reporting and Decentralization
98. The division's margin is closest to:
A) 28.5%
B) 23.9%
C) 4.6%
D) 19.3%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Margin = Net operating income ÷ Sales = $770,960 ÷ $16,760,000 = 4.6%
99. The division's turnover is closest to:
A) 21.74
B) 4.19
C) 3.51
D) 0.19
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Turnover = Sales ÷ Average operating assets = $16,760,000 ÷ $4,000,000 = 4.19
100. The division's return on investment (ROI) is closest to:
A) 16.1%
B) 0.9%
C) 19.3%
D) 3.7%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
ROI = Net operating income ÷ Average operating assets
= $770,960 ÷ $4,000,000 = 19.3%
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Chapter 12 Segment Reporting and Decentralization
Use the following to answer questions 101-102:
The West Division of Cecchetti Corporation had average operating assets of $240,000 and net
operating income of $42,200 in August. The minimum required rate of return for performance
evaluation purposes is 19%.
101. What was the West Division's minimum required return in August?
A) $45,600
B) $42,200
C) $53,618
D) $8,018
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Minimum required return = Minimum required rate of return × Average operating
assets = 19% × $240,000 = $45,600
102. What was the West Division's residual income in August?
A) -$8,018
B) $3,400
C) -$3,400
D) $8,018
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Residual income = Net operating income − (Average operating assets × Minimum
required rate of return) = $42,200 − ($240,000 × 19%) = $42,200 − $45,600 = -$3,400
Use the following to answer questions 103-104:
The Consumer Products Division of Goich Corporation had average operating assets of
$800,000 and net operating income of $81,300 in May. The minimum required rate of return for
performance evaluation purposes is 10%.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-57
Chapter 12 Segment Reporting and Decentralization
103. What was the Consumer Products Division's minimum required return in May?
A) $81,300
B) $8,130
C) $88,130
D) $80,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Minimum required return = Minimum required rate of return × Average operating
assets = 10% × $800,000 = $80,000
104. What was the Consumer Products Division's residual income in May?
A) -$1,300
B) $8,130
C) $1,300
D) -$8,130
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Residual income = Net operating income − (Average operating assets × Minimum
required rate of return) = $81,300 − ($800,000 × 10%) = $81,300 − $80,000 = $1,300
12-58
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Chapter 12 Segment Reporting and Decentralization
Use the following to answer questions 105-108:
(Appendix 12A) Division P of the Nyers Company makes a part that can either be sold to
outside customers or transferred internally to Division Q for further processing. Annual data
relating to this part are as follows:
Annual production capacity...................................
Selling price of the item to outside customers.......
Variable cost per unit.............................................
Fixed cost per unit..................................................
80,000 units
$35
$23
$5
Division Q of the Nyers Company requires 15,000 units per year and is currently paying an
outside supplier $33 per unit. Consider each part below independently.
105. If outside customers demand only 50,000 units per year, then according to the formula
in the text, what is the lowest acceptable transfer price from the viewpoint of the selling
division?
A) $35
B) $33
C) $28
D) $23
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 4 Level: Medium
Solution:
Transfer price  Variable cost per unit + (Total contribution margin on lost sales ÷
Number of units transferred) = $23 + ($0 ÷ 15,000) = $23
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-59
Chapter 12 Segment Reporting and Decentralization
106. If outside customers demand 80,000 units, then according to the formula in the text,
what is the lowest acceptable transfer price from the viewpoint of the selling division?
A) $35
B) $33
C) $28
D) $23
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 4 Level: Medium
Solution:
Transfer price ≥ Variable cost per unit + (Total contribution margin on lost sales ÷
Number of units transferred) = $23 + [($35 − $23) × 15,000] ÷ 15,000 = $23 + $12 =
$35
107. If outside customers demand 80,000 units and if, by selling to Division Q, Division P
could avoid $4 per unit in variable selling expense, then according to the formula in the
text, what is the lowest acceptable transfer price from the viewpoint of the selling
division?
A) $35
B) $21
C) $31
D) $33
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 4 Level: Hard
Solution:
Transfer price ≥ Variable cost per unit + (Total contribution margin on lost sales ÷
Number of units transferred) = $23 + [($35 − $23 − $4) × 15,000] ÷ 15,000 = $23 + $8 =
$31
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Chapter 12 Segment Reporting and Decentralization
108. If outside customers demand 70,000 units, then according to the formula in the text,
what is the lowest acceptable transfer price from the viewpoint of the selling division for
each of the 15,000 units needed by Q?
A) $33
B) $27
C) $28
D) $29
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 4 Level: Hard
Solution:
Transfer price ≥ Variable cost per unit + (Total contribution margin on lost sales ÷
Number of units transferred)
= $23 + [($35 − $23) × 5,000*] ÷ 15,000 = $23 + ($12 ÷ 3)
= $23 + $4 = $27
*Lost sales units = 15,000 − (80,000 − 70,000) = 15,000 − 10,000 = 5,000
Use the following to answer questions 109-110:
(Appendix 12A) Two of the decentralized divisions of Gamberi Electronics Corporation are the
Plastics Division and the Components Division. The Plastics Division sells molded parts to
both the Components Division and to customers outside the corporation.
109. Assume that the Plastics Division is currently operating at full capacity. Also assume
that the Components Division wants to increase the number of parts it purchases from
Plastics. In order to maintain its current level of profitability, the Plastics Division
should not accept any transfer price on these additional parts that is below the:
A) variable cost of the additional parts.
B) full (absorption) cost of the additional parts.
C) variable cost of the additional parts plus the lost contribution margin on all units
that could no longer be sold to customers outside the corporation.
D) full (absorption) cost of the additional parts plus the lost contribution margin on
all units that could no longer be sold to customers outside the corporation.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 4 Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
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Chapter 12 Segment Reporting and Decentralization
110. Assume that the Plastics Division is currently operating with idle capacity. Also assume
that the Components Division wants to purchase from Plastics all of the additional parts
that could be made with this idle capacity. In order to increase its current level of
profitability, the Plastics Division should accept any transfer price on these additional
parts that is above the:
A) variable cost of the additional parts.
B) full (absorption) cost of the additional parts.
C) variable cost of the additional parts plus the lost contribution margin on all units
that could no longer be sold to customers outside the corporation.
D) full (absorption) cost of the additional parts plus the lost contribution margin on
all units that could no longer be sold to customers outside the corporation.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 4 Level: Medium
Use the following to answer questions 111-112:
(Appendix 12B) Ampulla Production Studios charges the Sound Effects Department's costs to
two operating departments, Audio and Video. Charges are made on the basis of labor-hours.
Information pertaining to the labor-hours for the year follow:
Audio Video
Budgeted labor-hours for the year............................... 18,000 27,000
Actual labor-hours for the year.................................... 14,700 27,300
Annual long-run average capacity in labor-hours........ 15,000 25,000
The following costs pertain to the Sound Effects Department:
Budgeted For Year Actual For Year
Variable costs.........
$315,000
$273,000
Fixed costs.............
$756,000
$819,000
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Chapter 12 Segment Reporting and Decentralization
111. How much of the Sound Effects Department's variable cost should be charged to the
Video Department at year-end for performance evaluation purposes?
A) $175,000
B) $175,500
C) $177,450
D) $191,100
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5 Level: Medium
Solution:
Variable cost charged to Video Department
= Budgeted variable cost per lab-hour × Actual labor-hours
= [$315,000 ÷ (18,000 + 27,000)] × 27,300 = ($315,000 ÷ 45,000) × 27,300
= $7 × 27,300 = $191,100
112. How much of the Sound Effects Department's fixed cost should be charged to the Audio
department at year-end for performance evaluation purposes?
A) $264,600
B) $283,500
C) $302,400
D) $307,125
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5 Level: Medium
Solution:
Fixed cost charged to Audio department
= Audio’s percent of total capacity × Budgeted fixed costs
= [15,000 ÷ (15,000 + 25,000)] × $756,000 = (15,000 ÷ 40,000) × $756,000
= 37.5% × $756,000 = $283,500
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
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Chapter 12 Segment Reporting and Decentralization
Use the following to answer questions 113-114:
(Appendix 12B) Wollan Corporation has two operating divisions-an East Division and a West
Division. The company's Logistics Department services both divisions. The variable costs of
the Logistics Department are budgeted at $44 per shipment. The Logistics Department's fixed
costs are budgeted at $237,600 for the year. The fixed costs of the Logistics Department are
determined based on peak-period demand.
Percentage of Peak
Period Capacity Required
East Division..........
40%
West Division.........
60%
Budgeted
Shipments
1,300
3,100
At the end of the year, actual Logistics Department variable costs totaled $332,880 and fixed
costs totaled $253,960. The East Division had a total of 4,300 shipments and the West Division
had a total of 3,000 shipments for the year.
113. How much Logistics Department cost should be allocated to the West Division at the
end of the year?
A) $289,176
B) $229,644
C) $241,167
D) $274,560
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Logistics Department cost allocated to West Division
= (Budgeted variable cost per unit × Actual shipments) + (Budgeted fixed costs ×
Percent of peak capacity required)
= ($44 per shipment × 3,000 shipments) + (($237,600 × 60%)
= $132,000 + $142,560 = $274,560
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Chapter 12 Segment Reporting and Decentralization
114. How much actual Logistics Department cost should not be allocated to the operating
divisions at the end of the year?
A) $28,040
B) $0
C) $16,360
D) $11,680
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Actual cost = $332,880 + $253,960 = $586,840
Cost allocated to operating divisions
= [$44 per shipment × (4,300 + 3,000 shipments)] + $237,600
= [$44 per shipment × 7,300 shipments] + $237,600 = $321,200 + $237,600
= $558,800
Actual Logistics Department cost not allocated to operating divisions
= $586,840 − $558,800 = $28,040
Use the following to answer questions 115-116:
(Appendix 12B) Azotea Corporation has two operating divisions-a Consumer Division and a
Commercial Division. The company's Order Fulfillment Department provides services to both
divisions. The variable costs of the Order Fulfillment Department are budgeted at $56 per order.
The Order Fulfillment Department's fixed costs are budgeted at $233,700 for the year. The
fixed costs of the Order Fulfillment Department are budgeted based on the peak period orders.
Percentage of Peak Period
Budgeted
Capacity Required
Orders
Consumer Division............
40%
1,200
Commercial Division.........
60%
2,900
At the end of the year, actual Order Fulfillment Department variable costs totaled $237,390 and
fixed costs totaled $239,140. The Consumer Division had a total of 1,240 orders and the
Commercial Division had a total of 2,860 orders for the year.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
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Chapter 12 Segment Reporting and Decentralization
115. How much Order Fulfillment Department cost should be allocated to the Commercial
Division at the end of the year?
A) $300,380
B) $309,078
C) $332,409
D) $323,180
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Order Fulfillment Department cost allocated to Commercial Division
= ($56 per order × 2,860 orders) + ($233,700 × 60%)
= $160,160 + $140,220 = $300,380
116. How much actual Order Fulfillment Department cost should not be allocated to the
operating divisions at the end of the year?
A) $7,790
B) $5,440
C) $13,230
D) $0
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Actual cost = $237,390 + $239,140 = $476,530
Cost allocated to operating divisions
= [$56 per order × (1,240 + 2,860 orders)] + $233,700
= [$56 per order × 4,100 orders] + $233,700
= $229,600 + $233,700 = $463,300
Actual Order Fulfillment cost not allocated to operating divisions
= $476,530 − $463,300 = $13,230
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Chapter 12 Segment Reporting and Decentralization
Use the following to answer questions 117-118:
(Appendix 12B) Frame Corporation's Maintenance Department provides services to the
company's two operating divisions-the Paints Division and the Stains Division. The variable
costs of the Maintenance Department are budgeted based on the number of cases produced by
the operating departments. The fixed costs of the Maintenance Department are determined by
the number of cases produced by the operating departments during the peak period. Data appear
below:
Maintenance Department
Budgeted variable cost........................................ $6 per case
Budgeted total fixed cost....................................
$328,000
Actual total variable cost....................................
$254,014
Actual total fixed cost.........................................
$331,940
Paints Division
Percentage of peak period capacity required......
Budgeted cases....................................................
Actual cases........................................................
35%
12,000
12,010
Stains Division
Percentage of peak period capacity required......
Budgeted cases....................................................
Actual cases........................................................
65%
29,000
28,960
117. How much Maintenance Department cost should be allocated to the Stains Division at
the end of the year?
A) $395,313
B) $414,187
C) $405,610
D) $386,960
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Maintenance Department cost allocated to Stains Division
= ($6 per case × 28,960 cases) + ($328,000 × 65%)
= $173,760 + $213,200 = $386,960
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-67
Chapter 12 Segment Reporting and Decentralization
118. How much actual Maintenance Department cost should not be allocated to the operating
divisions at the end of the year?
A) $12,134
B) $8,194
C) $0
D) $3,940
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Actual cost = $254,014 + $331,940 = $585,954
Maintenance Department cost allocated to operating divisions
= [$6 per case × (12,010 + 28,960 cases)] + $328,000
= [$6 per case × 40,970 cases] + $328,000
= $245,820 + $328,000 = $573,820
Maintenance Department cost not allocated to operating divisions
= $585,954 − $573,820 = $12,134
12-68
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
Essay Questions
119. Fausnaught Corporation has two major business segments—Retail and Wholesale. In
October, the Retail business segment had sales revenues of $730,000, variable expenses
of $409,000, and traceable fixed expenses of $117,000. During the same month, the
Wholesale business segment had sales revenues of $400,000, variable expenses of
$220,000, and traceable fixed expenses of $48,000. Common fixed expenses totaled
$218,000 and were allocated as follows: $122,000 to the Retail business segment and
$96,000 to the Wholesale business segment.
Required:
Prepare a segmented income statement in the contribution format for the company.
Omit percentages; show only dollar amounts.
Ans:
Sales...............................................
Variable expenses..........................
Contribution margin.......................
Traceable fixed expenses...............
Segment margin.............................
Common fixed expenses................
Net operating income.....................
Total
Retail
Wholesale
$1,130,000 $730,000 $400,000
629,000 409,000
220,000
501,000 321,000
180,000
165,000 117,000
48,000
336,000 $204,000 $132,000
218,000
$118,000
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-69
Chapter 12 Segment Reporting and Decentralization
120. Spiess Corporation has two major business segments—Apparel and Accessories. Data
concerning those segments for December appear below:
Sales revenues, Apparel.............................
Variable expenses, Apparel.......................
Traceable fixed expenses, Apparel............
Sales revenues, Accessories.......................
Variable expenses, Accessories.................
Traceable fixed expenses, Accessories......
$370,000
$185,000
$48,000
$670,000
$275,000
$114,000
Common fixed expenses totaled $309,000 and were allocated as follows: $142,000 to
the Apparel business segment and $167,000 to the Accessories business segment.
Required:
Prepare a segmented income statement in the contribution format for the company.
Omit percentages; show only dollar amounts.
Ans:
Sales...............................................
Variable expenses..........................
Contribution margin.......................
Traceable fixed expenses...............
Segment margin.............................
Common fixed expenses................
Net operating income.....................
Total
Apparel Accessories
$1,040,000 $370,000
$670,000
460,000 185,000
275,000
580,000 185,000
395,000
162,000
48,000
114,000
418,000 $137,000
$281,000
309,000
$109,000
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Easy
12-70
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
121. Data for September concerning Greenberger Corporation's two major business
segments—Fibers and Feedstocks—appear below:
Sales revenues, Fibers................................
Sales revenues, Feedstocks........................
Variable expenses, Fibers..........................
Variable expenses, Feedstocks...................
Traceable fixed expenses, Fibers...............
Traceable fixed expenses, Feedstocks.......
$750,000
$620,000
$368,000
$254,000
$98,000
$112,000
Common fixed expenses totaled $344,000 and were allocated as follows: $175,000 to
the Fibers business segment and $169,000 to the Feedstocks business segment.
Required:
Prepare a segmented income statement in the contribution format for the company.
Omit percentages; show only dollar amounts.
Ans:
Sales...................................
Variable expenses..............
Contribution margin...........
Traceable fixed expenses...
Segment margin.................
Common fixed expenses....
Net operating income.........
Total
Fibers
Feedstocks
$1,370,000 $750,000
$620,000
622,000 368,000
254,000
748,000 382,000
366,000
210,000
98,000
112,000
538,000 $284,000
$254,000
344,000
$194,000
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-71
Chapter 12 Segment Reporting and Decentralization
122. The following data pertains to Timmins Company's operations last year:
Return on investment (ROI)..............
Sales..................................................
Margin...............................................
Minimum required rate of return......
20%
$800,000
5%
16%
Required:
a. Compute the company's average operating assets.
b. Compute the company's residual income for the year.
Ans:
a. ROI = Margin × Turnover
20% = 5% × Turnover
Turnover = 20% ÷ 5% = 4
Turnover = Sales ÷ Average operating assets
4 = $800,000 ÷ Average operating assets
Average operating assets = $800,000 ÷ 4 = $200,000
b. Before the residual income can be computed, we must first compute the company’s
net operating income for the year:
Margin = Net operating income ÷ Sales
5% = Net operating income ÷ $800,000
Net operating income = 5% × $800,000 = $40,000
Average operating assets.................................. $200,000
Minimum required rate of return.....................
16%
Minimum required net operating income........
$32,000
Actual net operating income............................
Minimum required net operating income........
Residual income...............................................
AACSB: Analytic AICPA BB: Critical Thinking
LO: 2; 3 Level: Medium
12-72
$40,000
32,000
$8,000
AICPA FN: Reporting
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
123. Ebel Wares is a division of a major corporation. The following data are for the latest
year of operations:
Sales................................................................................
Net operating income......................................................
Average operating assets.................................................
The company’s minimum required rate of return...........
$29,120,000
$1,514,240
$8,000,000
18%
Required:
a.
b.
c.
d.
What is the division's margin?
What is the division's turnover?
What is the division's return on investment (ROI)?
What is the division's residual income?
Ans:
a. Margin = Net operating income ÷ Sales = $1,514,240 ÷ $29,120,000 = 5.2%
b. Turnover = Sales ÷ Average operating assets = $29,120,000 ÷ $8,000,000 = 3.6
c. ROI = Net operating income ÷ Average operating assets = $1,514,240 ÷ $8,000,000
= 18.9%
d. Residual income = Net operating income − Minimum required rate of return ×
Average operating assets = $1,514,240 − 18% × $8,000,000 = $74,240
AACSB: Analytic AICPA BB: Critical Thinking
LO: 2; 3 Level: Easy
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
AICPA FN: Reporting
12-73
Chapter 12 Segment Reporting and Decentralization
124. The Clipper Corporation had net operating income of $380,000 and average operating
assets of $2,000,000. The corporation requires a return on investment of 18%.
Required:
a. Calculate the company's return on investment (ROI) and residual income (RI).
b. Clipper Corporation is considering an investment of $70,000 in a project that will
generate annual net operating income of $12,950. Would it be in the best interests of
the company to make this investment?
c. Clipper Corporation is considering an investment of $70,000 in a project that will
generate annual net operating income of $12,950. If the division planning to make
the investment currently has a return on investment of 20% and its manager is
evaluated based on the division's ROI, will the division manager be inclined to
request funds to make this investment?
d. Clipper Corporation is considering an investment of $70,000 in a project that will
generate annual net operating income of $12,950. If the division planning to make
the investment currently has a residual income of $50,000 and its manager is
evaluated based on the division's residual income, will the division manager be
inclined to request funds to make this investment?
Ans:
a. Return on investment = Net operating income ÷ Average operating assets =
$380,000 ÷ $2,000,000 = 19%
Residual income = Net operating income − (Average operating assets × Minimum
required rate of return) = $380,000 − ($2,000,000 × 0.18) = $20,000
b. Return on investment = Net operating income ÷ Average operating assets = $12,950
÷ $70,000 = 18.5%. Since the return on investment of the project exceeds the
company’s minimum required rate of return, the project should be accepted. It
would increase both the company’s residual income and its return on investment.
c. The manager of the division would not be inclined to request funds to make the
investment in the new project since its return on investment is only 18.5%, which is
less than the division’s current return on investment of 20%. The new project would
drag down the division’s return on investment.
d. The manager of the division would be inclined to request funds for the new project.
The project’s return on investment of 18.5% exceeds the minimum required rate of
return of 18%, which would result in an increase in residual income if the project
were accepted.
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 2; 3
12-74
Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
125. Geballe Industries is a division of a major corporation. Last year the division had total
sales of $21,420,000, net operating income of $2,270,520, and average operating assets
of $6,000,000. The company's minimum required rate of return is 10%.
Required:
a. What is the division's margin?
b. What is the division's turnover?
c. What is the division's return on investment (ROI)?
Ans:
AACSB: Analytic
Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
LO: 2
126. Ide Industries is a division of a major corporation. The following data are for the latest
year of operations:
Required:
What is the division's residual income?
Ans:
Residual income = Net operating income − Minimum required rate of return × Average
operating assets = $1,743,000 - 18% × $7,000,000 = $483,000
AACSB: Analytic
Level: Easy
AICPA BB: Critical Thinking
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
AICPA FN: Reporting
LO: 3
12-75
Chapter 12 Segment Reporting and Decentralization
127. Brodrick Corporation uses residual income to evaluate the performance of its divisions.
The minimum required rate of return for performance evaluation purposes is 19%. The
Games Division had average operating assets of $140,000 and net operating income of
$25,900 in August.
Required:
What was the Games Division's residual income in August?
Ans:
Net operating income............................................. $25,900
Minimum required return (19% × $140,000)........
26,600
Residual income..................................................... ($700)
AACSB: Analytic
Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
LO: 3
128. The Casket Division of Saal Corporation had average operating assets of $950,000 and
net operating income of $135,200 in January. The company uses residual income to
evaluate the performance of its divisions, with a minimum required rate of return of
13%.
Required:
What was the Casket Division's residual income in January?
Ans:
Net operating income.............................................
Minimum required return (13% × $950,000)........
Residual income.....................................................
AACSB: Analytic
Level: Easy
12-76
AICPA BB: Critical Thinking
$135,200
123,500
$11,700
AICPA FN: Reporting
LO: 3
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
129. Ulrich Company has a Castings Division which does casting work of various types. The
company's Machine Products Division has asked the Castings Division to provide it
with 20,000 special castings each year on a continuing basis. The special casting would
require $12 per unit in variable production costs.
In order to have time and space to produce the new casting, the Castings Division would
have to cut back production of another casting - the RB4 which it presently is producing.
The RB4 sells for $40 per unit, and requires $18 per unit in variable production costs.
Boxing and shipping costs of the RB4 are $6 per unit. Boxing and shipping costs for the
new special casting would be only $1 per unit, thereby saving the company $5 per unit
in cost. The company is now producing and selling 100,000 units of the RB4 each year.
Production and sales of this casting would drop by 25 percent if the new casting is
produced. Some $240,000 in fixed production costs in the Castings Division are now
being covered by the RB4 casting; 25 percent of these costs would have to be covered
by the new casting if it is produced and sold to the Machine Products Division.
Required:
According to the formula in the text, what is the lowest acceptable transfer price from
the viewpoint of the selling division? Show all computations.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-77
Chapter 12 Segment Reporting and Decentralization
Ans:
Transfer Price = Variable cost + Lost contribution margin per unit on outside sales
Variable costs:
Variable production costs.............................
Boxing and shipping.....................................
Total..............................................................
$12
1
$13
Lost contribution margin on outside sales:
RB4 selling price per unit.............................
Variable costs per unit ($18 + $6)................
Contribution margin per unit........................
Loss in production (100,000 × 0.25).............
Total lost contribution margin......................
$40
24
$16
× 25,000
$400,000
$400,000 ÷ 20,000 new castings = $20 per casting.
Therefore, the lower limit on the transfer price should be:
Transfer price = $13 + $20 = $33 per casting.
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting Appendix: 12A
12-78
LO: 4
Level: Hard
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
130. Ishtaki Corporation has a Parts Division that does work for other Divisions in the
company as well as for outside customers. The company's Equipment Division has
asked the Parts Division to provide it with 20,000 special parts each year. The special
parts would require $16.00 per unit in variable production costs.
The Equipment Division has a bid from an outside supplier for the special parts at
$25.00 per unit. In order to have time and space to produce the special part, the Parts
Division would have to cut back production of another part-the PW27 that it presently is
producing. The PW27 sells for $38.00 per unit, and requires $29.00 per unit in variable
production costs. Packaging and shipping costs of the PW27 are $2.00 per unit.
Packaging and shipping costs for the new special part would be only $0.50 per unit. The
Parts Division is now producing and selling 40,000 units of the PW27 each year.
Production and sales of the PW27 would drop by 40% if the new special part is
produced for the Equipment Division.
Required:
a. What is the range of transfer prices within which both the Divisions' profits would
increase as a result of agreeing to the transfer of 20,000 special parts per year from
the Parts Division to the Equipment Division?
b. Is it in the best interests of Ishtaki Corporation for this transfer to take place?
Explain.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-79
Chapter 12 Segment Reporting and Decentralization
Ans:
a. From the perspective of the Parts Division, profits would increase as a result of the
transfer if and only if:
Transfer price > Variable cost + Opportunity cost
The opportunity cost is the contribution margin on the lost sales, divided by the
number of units transferred:
Opportunity cost = [($38.00-$29.00-$2.00)×16,000*]/20,000 = $5.60
* 40%×40,000 = 16,000
Therefore, Transfer price > ($16.00+$0.50)+$5.60 = $22.10.
From the viewpoint of the Equipment Division, the transfer price must be less than
the cost of buying the units from the outside supplier. Therefore, Transfer price <
$25.00.
Combining the two requirements, we get the following range of transfer prices:
$22.10 < Transfer price < $25.00.
b. Yes, the transfer should take place. From the viewpoint of the entire company, the
cost of transferring the units within the company is $22.10, but the cost of
purchasing the special parts from the outside supplier is $25.00. Therefore, the
company’s profits increase on average by $2.90 for each of the special parts that is
transferred within the company, even though this would cut into production and
sales of another product.
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting Appendix: 12A
12-80
LO: 4
Level: Hard
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
131. Division G has asked Division F of the same company to supply it with 5,000 units of
part WD26 this year to use in one of its products. Division G has received a bid from an
outside supplier for the parts at a price of $19.00 per unit. Division F has the capacity to
produce 25,000 units of part WD26 per year. Division F expects to sell 21,000 units of
part WD26 to outside customers this year at a price of $18.00 per unit. To fill the order
from Division G, Division F would have to cut back its sales to outside customers.
Division F produces part WD26 at a variable cost of $12.00 per unit. The cost of
packing and shipping the parts for outside customers is $2.00 per unit. These packing
and shipping costs would not have to be incurred on sales of the parts to Division G.
Required:
a. What is the range of transfer prices within which both the Divisions' profits would
increase as a result of agreeing to the transfer of 5,000 parts this year from Division
G to Division F?
b. Is it in the best interests of the overall company for this transfer to take place?
Explain.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-81
Chapter 12 Segment Reporting and Decentralization
Ans:
a. From the perspective of Division G, profits would increase as a result of the transfer
if and only if:
Transfer price > Variable cost + Opportunity cost
The opportunity cost is the contribution margin on the lost sales, divided by the
number of units transferred:
Opportunity cost = [($18.00 - $12.00 - $2.00)×1,000*]/5,000 = $0.80
* Demand from outside customers................................ 21,000
Units required by Division G.....................................
5,000
Total requirements...................................................... 26,000
Capacity...................................................................... 25,000
Required reduction in sales to outside customers......
1,000
Therefore, Transfer price > $12.00 + $0.80 = $12.80.
From the viewpoint of Division F, the transfer price must be less than the cost of
buying the units from the outside supplier. Therefore,
Transfer price < $19.00.
Combining the two requirements, we get the following range of transfer prices:
$12.80 < Transfer price < $19.00.
b. Yes, the transfer should take place. From the viewpoint of the entire company, the
cost of transferring the units within the company is $12.80, but the cost of
purchasing them from the outside supplier is $19.00. Therefore, the company’s
profits increase on average by $6.20 for each of the special parts that is transferred
within the company.
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting Appendix: 12A
Level: Medium
12-82
LO: 4
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
132. Cannata Corporation has two operating divisions-a North Division and a South Division.
The company's Logistics Department services both divisions. The variable costs of the
Logistics Department are budgeted at $32 per shipment. The Logistics Department's
fixed costs are budgeted at $372,300 for the year. The fixed costs of the Logistics
Department are determined based on peak-period demand.
North Division.......
South Division.......
Percentage of Peak
Period Capacity Required
25%
75%
Budgeted
Shipments
1,700
5,600
At the end of the year, actual Logistics Department variable costs totaled $335,000 and
fixed costs totaled $382,850. The North Division had a total of 4,700 shipments and the
South Division had a total of 5,300 shipments for the year.
Required:
a. Prepare a report showing how much of the Logistics Department's costs should be
charged to each of the operating divisions at the end of the year.
b. How much of the actual Logistics Department costs should not be charged to the
operating divisions at the end of the year? Who should be held responsible for these
uncharged costs?
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-83
Chapter 12 Segment Reporting and Decentralization
Ans:
a. The amount of cost that would be charged to each of the operating divisions at the
end of the year would be as follows:
North Division South Division
Variable cost allocation:
$32 × 4,700 shipments..........
$150,400
$32 × 5,300 shipments..........
$169,600
Fixed cost allocation:
25% × $372,300....................
93,075
75% × $372,300....................
279,225
Total cost charged....................
$243,475
$448,825
b. The uncharged costs are:
Total actual costs incurred.......
Costs charged...........................
Spending variance....................
Variable
Fixed
$335,000 $382,850
320,000 372,300
$15,000 $10,550
The spending variance represents the difference between the Logistics Department’s
actual costs and what those costs should have been, given the actual level of activity.
This difference is properly the responsibility of the Logistics Department and should not
be charged to the operating divisions.
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement Appendix: 12B
12-84
LO: 5
Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
133. Sauseda Corporation has two operating divisions-an Inland Division and a Coast
Division. The company's Customer Service Department provides services to both
divisions. The variable costs of the Customer Service Department are budgeted at $38
per order. The Customer Service Department's fixed costs are budgeted at $433,200 for
the year. The fixed costs of the Customer Service Department are determined based on
the peak period orders.
Inland Division.......
Coast Division........
Percentage of Peak Period
Capacity Required
40%
60%
Budgeted
Orders
2,400
5,200
At the end of the year, actual Customer Service Department variable costs totaled
$303,240 and fixed costs totaled $450,280. The Inland Division had a total of 2,430
orders and the Coast Division had a total of 5,170 orders for the year.
Required:
a. Prepare a report showing how much of the Customer Service Department's costs
should be charged to each of the operating divisions at the end of the year.
b. How much of the actual Customer Service Department costs should not be charged
to the operating divisions at the end of the year? Who should be held responsible for
these uncharged costs?
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-85
Chapter 12 Segment Reporting and Decentralization
Ans:
a. The amount of cost that would be charged to each of the operating divisions at the
end of the year would be as follows:
Inland Division Coast Division
Variable cost allocation:
$38 × 2,430 orders..........
$92,340
$38 × 5,170 orders..........
$196,460
Fixed cost allocation:
40% × $433,200..............
173,280
60% × $433,200..............
259,920
Total cost charged..............
$265,620
$456,380
b. The uncharged costs are:
Total actual costs incurred....
Costs charged........................
Spending variance.................
Variable
Fixed
$303,240 $450,280
288,800 433,200
$14,440 $17,080
The spending variance represents the difference between the Customer Service
Department’s actual costs and what those costs should have been, given the actual level
of activity. This difference is properly the responsibility of the Customer Service
Department and should not be charged to the operating divisions.
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement Appendix: 12B
12-86
LO: 5
Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 12 Segment Reporting and Decentralization
134. Nealon Corporation's Maintenance Department provides services to the company's two
operating divisions-the Paints Division and the Stains Division. The variable costs of
the Maintenance Department are budgeted based on the number of cases produced by
the operating departments. The fixed costs of the Maintenance Department are
determined based on the number of cases produced by the operating departments during
the peak period. Data appear below:
Maintenance Department
Budgeted variable cost........................................ $7 per case
Budgeted total fixed cost....................................
$600,000
Actual total variable cost....................................
$432,072
Actual total fixed cost.........................................
$602,860
Paints Division
Percentage of peak period capacity required......
Budgeted cases....................................................
Actual cases........................................................
30%
15,000
15,020
Stains Division
Percentage of peak period capacity required......
Budgeted cases....................................................
Actual cases........................................................
70%
45,000
44,990
Required:
a. Prepare a report showing how much of the Maintenance Department's costs should
be charged to each of the operating divisions at the end of the year.
b. How much of the actual Maintenance Department costs should not be charged to the
operating divisions at the end of the year? Who should be held responsible for these
uncharged costs?
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12-87
Chapter 12 Segment Reporting and Decentralization
Ans:
a. The amount of cost that would be charged to each of the operating divisions at the
end of the year would be as follows:
Paints Division Stains Division
Variable cost allocation:
$7 × 15,020 orders..........
$105,140
$7 × 44,990 orders..........
$314,930
Fixed cost allocation:
30% × $600,000..............
180,000
70% × $600,000..............
420,000
Total cost charged..............
$285,140
$734,930
b. The uncharged costs are:
Variable
Fixed
Total actual costs incurred....... $432,072 $602,860
Costs charged........................... 420,070 600,000
Spending variance.................... $12,002
$2,860
The spending variance represents the difference between the Maintenance
Department’s actual costs and what those costs should have been, given the actual
level of activity. This difference is the responsibility of the Maintenance
Department and should not be charged to the operating divisions.
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement Appendix: 12B
12-88
LO: 5
Level: Easy
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition