Chapter 12
Lecture Notes
Chapter theme: Managers in large organizations have to
delegate some decisions to those who are at lower levels in the
organization. This chapter explains how responsibility
accounting systems, segmented income statements, and
return on investment (ROI) and residual income measures
are used to help control decentralized organizations.
I.
Decentralization in organizations
A. A decentralized organization does not confine decisionmaking authority to a few top executives; rather,
decision-making authority is spread throughout the
organization. The advantages and disadvantages of
decentralization are as follows:
i.
Advantages of decentralization
1. It enables top management to concentrate on
2.
3.
4.
5.
ii.
strategy, higher-level decision making, and
coordinating activities.
It acknowledges that lower-level managers
have more detailed information about local
conditions that enable them to make better
operational decisions.
It enables lower-level managers to quickly
respond to customers.
It provides lower-level managers with the
decision-making experience they will need
when promoted to higher level positions.
It often increases motivation, resulting in
increased job satisfaction and retention, as well
as improved performance.
Disadvantages of decentralization
1. Lower-level managers may make decisions
II.
without fully understanding the “big picture.”
2. There may be a lack of coordination among
autonomous managers.
a. The balanced scorecard can help reduce
this problem by communicating a
company’s strategy throughout the
organization.
3. Lower-level managers may have objectives
that differ from those of the entire
organization.
a. This problem can be reduced by
designing performance evaluation
systems that motivate managers to make
decisions that are in the best interests of
the company.
4. It may be difficult to effectively spread
innovative ideas in a strongly decentralized
organization.
a. This problem can be reduced through the
effective use of intranet systems, which
enable globally dispersed employees to
electronically share ideas.
Responsibility accounting
A. Responsibility accounting systems link lower-level
managers’ decision-making authority with accountability
for the outcomes of those decisions. The term
responsibility center is used for any part of an
organization whose manager has control over, and is
accountable for cost, profit, or investments. The three
primary types of responsibility centers are cost centers,
profit centers, and investment centers.
i.
Cost center
1. The manager of a cost center has control over
costs, but not over revenue or investment
funds.
a. Service departments such as
accounting, general administration, legal,
and personnel are usually classified as
cost centers, as are manufacturing
facilities.
b. Standard cost variances and flexible
budget variances are often used to
evaluate cost center performance.
ii.
Profit center
1. The manager of a profit center has control over
iii.
both costs and revenue.
a. Profit center managers are often
evaluated by comparing actual profit to
targeted or budgeted profit.
Investment center
1. The manager of an investment center has
control over cost, revenue, and investments in
operating assets.
a. Investment center managers are usually
evaluated using return on investment
(ROI) or residual income, as discussed
later in this chapter.
B. An organizational view of responsibility centers
i.
Superior Foods Corporation provides an
example of the various kinds of responsibility
centers that exist in an organization.
1. The President and CEO as well as the Vice
President of Operations manage investment
centers.
2. The Chief Financial Officer, General Counsel,
and Vice President of Personnel all manage
cost centers.
3. Each of the three product managers that report
to the Vice President of Operations (e.g., salty
snacks, beverages, and confections) manages a
profit center.
4. The bottling plant manager, warehouse
manager, and distribution manager all manage
cost centers that report to the Beverages
product manager.
III. Decentralization and segment reporting
A. Key concepts/definitions
i.
A segment is a part or activity of an organization
about which managers would like cost, revenue, or
profit data.
1. Examples of segments include divisions of a
ii.
company, sales territories, individual stores,
service centers, manufacturing plants,
marketing departments, individual customers,
and product lines.
a. Superior Foods Corporation could
segment its business as follows:
(1). By geographic region
(2). By customer channel
There are two keys to building segmented
income statements.
1. First, a contribution format should be used
because it separates fixed from variable costs
and it enables the calculation of a contribution
margin.
a. The contribution margin is especially
useful in decisions involving temporary
uses of capacity such as special orders.
2. Second, traceable fixed costs should be
separated from common fixed costs to enable
the calculation of a segment margin. Further
clarification of these terms is as follows:
a. A traceable fixed cost of a segment is a
fixed cost that is incurred because of the
existence of the segment. If the segment
were eliminated, the fixed cost would
disappear. Examples of traceable fixed
costs include:
(1). The salary of the Fritos product
manager at PepsiCo is a traceable
fixed cost of the Fritos business
segment of PepsiCo.
(2). The maintenance cost for the
building in which Boeing 747s are
assembled is a traceable fixed cost
of the 747 business segment of
Boeing.
b. A common fixed cost is a fixed cost that
supports the operations of more than one
segment, but is not traceable in whole
or in part to any one segment.
Examples of common fixed costs
include:
(1). The salary of the CEO of General
Motors is a common fixed cost of
the various divisions of General
Motors.
(2). The cost of heating a Safeway or
Kroger grocery store is a common
fixed cost of the various
iii.
departments – groceries, produce,
bakery, etc.
c. It is important to realize that the
traceable fixed costs of one segment
may be a common fixed cost of another
segment. For example:
(1). The landing fee paid to land an
airplane at an airport is traceable to
a particular flight, but it is not
traceable to first-class, businessclass, and economy-class
passengers.
d. A segment margin is computed by
subtracting the traceable fixed costs of a
segment from its contribution margin.
(1). The segment margin is a valuable
tool for assessing the long-run
profitability of a segment.
(2). Allocating common costs to
segments reduces the value of the
segment margin as a guide to
long-run segment profitability.
Activity-based costing can help identify how
costs shared by more than one segment are
traceable to individual segments. For example:
1. Assume that three products, 9-inch, 12-inch,
and 18-inch pipe, share 10,000 square feet of
warehousing space, which is leased at a price of
$4 per square foot.
2. If the 9-inch, 12-inch, and 18-inch pipes
occupy 1,000, 4,000, and 5,000 square feet,
respectively, then activity-based costing can be
used to trace the warehousing costs to the three
products as shown.
a. When using activity-based costing to
trace fixed costs to segments, managers
must still ask themselves if the traceable
costs that they have been identified
would disappear over time if the
segment disappeared.
b. In this example, if the warehouse was
owned rather than leased, perhaps the
warehousing costs assigned to a given
segment would not disappear if the
segment was discontinued.
B. Segmented income statements – an example
i.
Assume that Webber, Inc. has two divisions – the
Computer Division and the Television Division.
1. The contribution format income statement for
the Television Division is as shown. Notice:
a. Cost of goods sold consists of variable
manufacturing costs.
b. Fixed and variable costs are listed in
separate sections.
c. Contribution margin is computed by
taking sales minus variable costs.
d. The divisional segment margin
represents the Television Division’s
contribution to overall company profits.
2. The Television Division’s results can be rolled
into Webber, Inc.’s overall results as shown.
Notice:
a. The results of the Television and
Computer Divisions sum to the results
shown for the whole company.
b. The common costs for the company as a
whole ($25,000) are not allocated to the
divisions.
3. The Television Division’s results can also be
broken down into smaller segments. This
enables us to see how traceable fixed costs of
the Television Division can become common
costs of smaller segments.
a. Assume that the Television Division can
be broken down into two major product
lines – Regular and Big Screen.
b. Assume that the segment margins for
these two product lines are as shown.
c. Of the $90,000 of fixed costs that were
previously traceable to the Television
Division, $80,000 ($45,000 + $35,000) is
traceable to the two product lines and
$10,000 is a common cost.
C. Segmented financial information on external reports
i.
The Financial Accounting Standards Board
now requires that companies in the United States
include segmented financial data in their annual
reports. This ruling has implications for internal
segment reporting because:
1. It mandates that companies report segmented
results to shareholders using the same methods
that are used for internal segmented reports.
2. Since the contribution approach to segment
reporting does not comply with GAAP, it is
likely that some managers will choose to
construct their segmented financial statements
using the absorption approach to comply
with GAAP.
a. The absorption approach hinders
internal decision making because it
does not distinguish between fixed and
variable costs or common and traceable
costs.
IV. Hindrances to proper cost assignment
A. Omission of costs
i.
The costs assigned to a segment should include all
the costs attributable to that segment from the
company’s entire value chain as discussed in
Chapter 1.
1. Since only manufacturing costs are included
in product costs under absorption costing, those
companies that choose to use absorption
costing for segment reporting purposes will
omit from their profitability analysis all
“upstream” and “downstream” costs.
a. “Upstream” costs include research and
development and product design costs.
b. “Downstream” costs include marketing,
distribution, and customer service costs.
c. Although these “upstream” and
“downstream” costs are
nonmanufacturing costs, they are just as
essential to determining product
profitability as are manufacturing costs.
Omitting them from profitability analysis
will result in the undercosting of
products.
B. Inappropriate methods for assigning traceable costs to
segments
i.
Failure to trace costs directly
1. Costs that can be traced directly to specific
segments of a company should not be
allocated to other segments. Rather, such
costs should be charged directly to the
responsible segment. For example:
a. The rent for a branch office of an
insurance company should be charged
directly against the branch office rather
than included in a companywide
overhead pool and then spread
throughout the company.
ii.
Inappropriate allocation base
1. Some companies allocate costs to segments
using arbitrary bases. Costs should be
allocated to segments for internal decision
making purposes only when the allocation base
actually drives the cost being allocated. For
example:
a. Sales is frequently used to allocate selling
and administrative expenses to segments.
This should only be done if sales drive
these expenses.
C. Arbitrarily dividing common costs among segments
i.
Common costs should not be arbitrarily
allocated to segments based on the rationale that
“someone has to cover the common costs” for two
reasons:
1. First, this practice may make a profitable
business segment appear to be unprofitable. If
the segment is eliminated the revenue lost may
exceed the traceable costs that are avoided.
2. Second, allocating common fixed costs forces
managers to be held accountable for costs that
they cannot control.
V.
Evaluating investment center performance – return on
investment
A. Key concepts/definitions
i.
Investment center performance is often evaluating
using a measure called return on investment
(ROI), which is defined as follows:
ROI 
ii.
Net operating income
Average operating assets
Net operating income is income before taxes and
is sometimes referred to as EBIT (earnings before
interest and taxes). Operating assets include cash,
accounts receivable, inventory, plant and
equipment, and all other assets held for operating
purposes.
1. Net operating income is used in the numerator
because the denominator consists only of
operating assets.
2. The operating asset base used in the formula is
typically computed as the average of the assets
between the beginning and the end of the year.
iii.
Net book value versus gross cost
1. Most companies use the net book value (i.e.,
acquisition cost less accumulated depreciation)
of depreciable assets to calculate average
operating assets.
a. With this approach, ROI mechanically
increases over time as the accumulated
depreciation increases. Replacing a fullydepreciated asset with a new asset will
decrease ROI.
2. An alternative to net book value is the gross
cost of the asset, which ignores accumulated
depreciation.
a. With this approach, ROI does not grow
automatically over time, rather it stays
constant. Replacing a fully-depreciated
asset does not adversely affect ROI.
B. Understanding ROI
i.
ii.
Du Pont pioneered the use of ROI and recognized
the importance of looking at the components of
ROI, namely margin and turnover.
1. Margin is computed as shown and is improved
by increasing sales or reducing operating
expenses. The lower the operating expenses per
dollar of sales, the higher the margin earned.
2. Turnover is computed as shown. It
incorporates a crucial area of a manager’s
responsibility – the investment in operating
assets. Excessive funds tied up in operating
assets depress turnover and lower ROI.
Any increase in ROI must involve at least one of
the following – increased sales, reduced
operating expenses, or reduced operating
assets. The following example shows four
different ways to increase ROI:
1. Assume that Regal Company reports the results
as shown.
a. Given this information, its current ROI is
15%.
2. The first way to increase ROI is to increase
sales without any increase in operating
assets.
a. Assume that: (1) Regal’s manager was
able to increase sales to $600,000 (an
increase of 20%), (2) operating expenses
increased to $558,000 (an increase of
18.7%), (3) net income increased to
$42,000, and (4) average operating assets
remained unchanged.
b. In this case, the ROI increases from 15%
to 21%. Notice, for ROI to increase, the
percentage increase in sales must exceed
the percentage increase in operating
expenses.
3. The second way to increase ROI is to decrease
operating expenses with no change in sales
or operating assets.
a. Assume that Regal’s manager was able to
reduce operating expenses by $10,000
without affecting sales or operating
assets.
b. In this case, the ROI increases from 15%
to 20%.
4. The third way to increase ROI is to decrease
operating assets with no change in sales or
operating expenses.
a. Assume that Regal’s manager was able to
reduce inventories by $20,000 by using
just-in-time techniques without affecting
sales or operating expenses.
b. In this case, the ROI increases from 15%
to 16.7%.
5. The fourth way to increase ROI is to invest in
operating assets to increase sales.
a. Assume that Regal’s manager invests in a
$30,000 piece of equipment that
increases sales by $35,000 while
increasing operating expenses by
$15,000.
b. In this case, the ROI increases from 15%
to 21.8%.
C. ROI and the balanced scorecard
i.
It may not be obvious to managers how to increase
sales, decrease costs, and decrease investments in
a way that is consistent with the company’s
strategy. A well-constructed balanced scorecard
can provide managers with a road map that
indicates how the company intends to increase
ROI. A scorecard can answer questions such as:
1. Which internal business processes should be
improved?
2. Which customers should be targeted and how
will they be attracted and retained at a profit?
D. Criticisms of ROI
i.
Just telling managers to increase ROI may not be
enough. Managers may not know how to
increase ROI in a manner that is consistent with
the company’s strategy.
1. This is why ROI is best used as part of a
balanced scorecard.
ii.
A manager who takes over a business segment
typically inherits many committed costs over
which the manager has no control. This may make
it difficult to assess this manager relative to other
managers.
iii.
VI.
A manager who is evaluated based on ROI may
reject investment opportunities that are
profitable for the whole company but that would
have a negative impact on the manager’s
performance evaluation.
Residual income
A. Defining residual income
i.
Residual income is the net operating income that
an investment center earns above the minimum
required return on its assets.
1. Economic Value Added (EVA®) is an
adaptation of residual income. We will not
distinguish between the two terms in this class.
B. Calculating residual income
i.
The equation for computing residual income is as
shown. Notice:
1. This computation differs from ROI. ROI
measures net operating income earned relative
to the investment in average operating assets.
Residual income measures net operating
income earned less the minimum required
return on average operating assets.
ii.
Zepher, Inc. - an example
1. Assume the information as given for a division
of Zepher, Inc.
2. The residual income ($10,000) is computed by
subtracting the minimum required return
($20,000) from the actual income ($30,000).
C. Motivation and residual income
i.
The residual income approach encourages
managers to make investments that are profitable
for the entire company but that would be rejected
by managers who are evaluated using the ROI
formula. More specifically:
1. It motivates managers to pursue investments
where the ROI associated with those
investments exceeds the company’s minimum
required return but is less than the ROI being
earned by the managers.
D. Divisional comparison and residual income
i.
The residual income approach has one major
disadvantage. It cannot be used to compare the
performance of divisions of different sizes.
ii.
Zepher, Inc. – continued
1. Recall that the Retail Division of Zepher had
average operating assets of $100,000, a
minimum required rate of return of 20%, net
operating income of $30,000, and residual
income of $10,000.
2. Assume that the Wholesale Division of Zepher
had average operating assets of $1,000,000, a
minimum required rate of return of 20%, net
operating income of $220,000, and residual
income of $20,000.
3. The residual income numbers suggest that the
Wholesale Division outperformed the Retail
Division because its residual income is $10,000
higher. However:
a. The Retail Division earned an ROI of
30% compared to an ROI of 22% for the
Wholesale Division. The Wholesale
Division’s residual income is larger than
the Retail Division simply because it is a
bigger division.
VII. Appendix 12A: transfer pricing
A. Key concepts/definitions
i.
A transfer price is the price charged when one
segment of a company provides goods or services
to another segment of the company. While
domestic transfer prices have no direct effect on
the entire company’s reported profit, they can
have a dramatic effect on the reported
profitability of a division.
ii.
The fundamental objective in setting transfer
prices is to motivate managers to act in the best
interests of the overall company.
Suboptimization occurs when managers do not
act in the best interests of the overall company or
even their own divisions.
iii.
There are three primary approaches to setting
transfer prices, namely negotiated transfer prices,
transfers at the cost to the selling division, and
transfers at market price.
B. Negotiated transfer prices
i.
A negotiated transfer price results from
discussions between the selling and buying
divisions.
1. Negotiated transfer prices have two
advantages:
a. They preserve the autonomy of the
divisions, which is consistent with the
spirit of decentralization.
b. The managers negotiating the transfer
price are likely to have much better
information about the potential costs and
benefits of the transfer than others in the
company.
2. The range of acceptable transfer prices is the
range of transfer prices within which the profits
of both divisions participating in the transfer
would increase.
a. The lower limit is determined by the
selling division.
b. The upper limit is determined by the
buying division.
ii.
Harris and Louder – an example
1. Assume the information as shown with respect
to Imperial Beverages and Pizza Maven (both
companies are owned by Harris and Louder).
a. The selling division’s (Imperial
Beverages) lowest acceptable transfer
price is calculated as shown.
b. The buying division’s (Pizza Maven)
highest acceptable transfer price is
calculated as shown.
(1). If Pizza Maven had no outside
supplier for ginger beer, then its
highest acceptable transfer price
would be equal to the amount it
expects to earn by selling the
ginger beer, net of its own
expenses.
c. Let’s calculate the lowest and highest
acceptable transfer prices under three
scenarios.
2. If Imperial Beverages has sufficient idle
capacity (3,000 barrels) to satisfy Pizza
Maven’s demands (2,000 barrels) without
sacrificing sales to other customers, then the
lowest and highest possible transfer prices are
computed as follows:
a. The lowest acceptable transfer price, as
determined by the seller, is £8.
b. The highest acceptable transfer price, as
determined by the buyer, is £18.
c. Therefore, the range of acceptable
transfer prices is £8-£18.
3. If Imperial Beverages has no idle capacity and
must sacrifice other customer orders (2,000
barrels) to meet the demands of Pizza Maven
(2,000 barrels), then the lowest and highest
possible transfer prices are computed as
follows:
a. The lowest acceptable transfer price, as
determined by the seller, is £20.
b. The highest acceptable transfer price, as
determined by the buyer, is £18.
c. Therefore, there is no range of
acceptable transfer prices.
d. This is a desirable outcome for Harris
Louder because it would be illogical to
give up sales of £20 to save costs of £18.
4. If Imperial Beverages has some idle capacity
(1,000 barrels) and must sacrifice other
customer orders (1,000 barrels) to meet the
demands of Pizza Maven (2,000 barrels), then
the lowest and highest possible transfer prices
are computed as follows:
a. The lowest acceptable transfer price, as
determined by the seller, is £14.
b. The highest acceptable transfer price, as
determined by the buyer, is £18.
c. Therefore, the range of acceptable
transfer prices is £14-£18.
iii.
Evaluation of negotiated transfer prices
1. If a transfer within the company would result in
higher overall profits for the company, there is
always a range of transfer prices within which
both the selling and buying divisions would
have higher profits if they agree to the transfer.
2. Nonetheless, if managers are pitted against
each other rather than against their past
performance or reasonable benchmarks, a
noncooperative atmosphere is almost
guaranteed. Thus, negotiations often break
down even though it would be in both parties’
best interests to agree to a transfer price.
3. Given the disputes that often accompany the
negotiation process, most companies rely on
some other means of setting transfer prices.
C. Transfers at the cost to the selling division
i.
Many companies set transfer prices at either the
variable cost or full (absorption) cost incurred
by the selling division. The drawbacks of this
approach include:
1. Using full cost as a transfer price can lead to
suboptimization because it does not
distinguish between variable costs, which may
be relevant to the transfer pricing decision, and
fixed costs, which may be irrelevant.
2. If cost is used as the transfer price, the selling
division will never show a profit on any
internal transfer. The only division that shows
a profit is the division that makes the final sale
to an outside party.
3. Cost-based transfer prices do not provide
incentives to control costs. If the actual costs
of one division are passed on to the next, there
is little incentive for anyone to work on
reducing costs.
D. Transfers at market price
i.
A market price (i.e., the price charged for an item
on the open market) is often regarded as the best
approach to the transfer pricing problem. A
market-based transfer price:
1. Works best when the product or service is sold
in its present form to outside customers and the
selling division has no idle capacity.
a. With no idle capacity the real cost of the
transfer from the company’s perspective
is the opportunity cost of the lost revenue
on the outside sale.
2. Does not work well when the selling division
has idle capacity. In this case, market-based
transfer prices are likely to be higher than the
variable cost per unit of the selling division.
Consequently, the buying division may make
pricing and other decisions based on incorrect,
market-based cost information rather than the
true variable cost incurred by the company as a
whole.
E. Divisional autonomy and suboptimization
i.
ii.
The principles of decentralization suggest that
companies should grant managers autonomy to
set transfer prices and to decide whether to sell
internally or externally.
While subordinate managers may occasionally
make suboptimal decisions, top managers should
allow their subordinates to control their own
destiny – even to the extent of granting
subordinate managers the right to make mistakes.
F. International aspects of transfer pricing
i.
The objectives of domestic transfer pricing
include:
1.
2.
3.
4.
ii.
Creating greater divisional autonomy.
Providing greater motivation for managers.
Enabling better performance evaluation.
Establishing better goal congruence.
The objectives of international transfer pricing
include:
1.
2.
3.
4.
Lessen taxes, duties and tariffs.
Lessen foreign exchange risks.
Improve competitive position.
Improve relations with foreign governments.
VIII. Appendix 12B: Service Department Charges (Slide #95 is a
title slide)
A. Most large organizations have both operating
departments and service departments. The central
purposes of the organization are carried out in the
operating departments. In contrast, service departments do
not directly engage in operating activities. This appendix
discusses why and how service department costs are
allocated to operating departments.
i.
Four reasons for allocating service
department costs
1. To encourage operating departments to wisely
use service department resources.
2. To provide operating departments with more
complete cost data for making decisions.
3. To help measure the profitability of
operating departments.
4. To create an incentive for service
departments to operate efficiently.
ii.
The service department charges considered in
this appendix can be viewed as a transfer price
that is charged for services provided by service
departments to operating departments.
B. Charging costs by behavior
i.
Whenever possible, variable and fixed service
department costs should be charged
separately to provide more useful data for
planning and control of departmental operations.
1. A variable cost should be charged to
consuming departments according to whatever
activity causes the incurrence of the cost.
2. A fixed cost should be allocated to consuming
departments in predetermined lump-sum
amounts that are based on either the
department’s peak-period or long-run
average servicing needs. Importantly, fixed
cost allocations:
a. Are based on the amount of capacity
each consuming department requires.
b. Should not vary from period to period.
ii.
Budgeted variable and fixed service
department costs (rather than actual costs)
should be allocated to operating departments.
1. Variable service department costs should be
charged using a predetermined rate applied to
the actual services consumed.
2. The lump sum amount of fixed costs should be
based on budgeted fixed costs, not actual fixed
costs.
C. SimCo – an example
i.
Assuming the facts as shown with respect to
SimCo, the allocation of maintenance costs to
the two operating departments would be as
follows:
1. The variable costs would be allocated by
multiplying the budgeted variable rate ($0.60
per machine hour) by the actual activity level
for each operating department.
2. The fixed costs would be allocated by
multiplying the percent of peak-period
capacity for each operating department by the
budgeted amount of fixed costs ($200,000).
D. Pitfalls in allocating fixed costs
i.
Rather than charge fixed costs to using
departments in predetermined lump-sum
amounts, some companies allocate them using a
variable allocation base that fluctuates from
period to period.
1. This is a pitfall because it creates a situation
ii.
where the fixed costs allocated to one
department are heavily influenced by what
happens in other departments.
Kolby Products – an example
1. Assume the facts as shown with respect to
Kolby.
2. Selected cost data for the last two years is as
shown. Notice:
a. The Western sales territory maintained
an activity level of 1,500,000 miles
driven in both years.
b. The Eastern sales territory dropped
from 1,500,000 miles driven in year one
to 900,000 miles driven in year two.
3. In year one, the two sales territories share the
service department costs equally.
4. In year two, the costs allocated to the Western
sales territory increase by $15,000 despite the
fact that the miles driven within the territory
remained constant in both years. Notice:
a. The cost increase in the Western sales
territory is due to a decrease in miles
driven in the Eastern territory during year
two.
E. Beware of sales dollars as an allocation base
i.
ii.
While sales dollars is a popular allocation base
for service department costs, it is a poor choice
because sales dollars fluctuate from period to
period, whereas the costs being allocated are
often largely fixed.
1. This creates a situation where the sales in one
department will influence the service
department costs allocated to another
department.
Clothier Inc. – an example
1. Assume the facts as shown with respect to
Clothier Inc.
2. The allocations of service department costs for
year one are as shown. Notice:
a. The Suits Department generated 65% of
total sales as was allocated $39,000 of
service department costs.
3. The allocations of service department costs for
year two are as shown. Notice:
a. The Suits Department increased sales by
$100,000 while the other departments’
sales remained unchanged.
b. The allocation of service department
costs to the Suits Department increased
by $4,200 while it decreased in the other
two departments.
c. The manager of the Suits Department is
likely to complain that as a result of his
efforts to expand sales, he is being forced
to carry a larger share of the service
department costs.