Segmented reporting, ROI and RI
from
CHAPTER 10
Budgetary Control and Responsibility Accounting
SOLUTIONS FOR DO IT! EXERCISES
DO IT! 10.4
(a)
Controllable margin for 2022:
Sales.....................................................
Variable costs .....................................
Contribution margin ...........................
Controllable fixed costs .....................
Controllable margin ............................
Return on investment for 2022:
(b)
$500,000
300,000
200,000
75,000
$125,000
$125,000
$625,000
Expected return on investment for alternative 1:
$125,000*
= 25%
$500,000
*Controllable margin remains unchanged from (a)
($125,000 ÷ ($625,000 - $125,000) = 25%)
(Control. margin ÷ (Ave. oper. assets – Reduction) = ROI)
=
20%
DO IT! 10.4 (Continued)
Controllable margin for alternative 2:
Sales ($500,000 + $100,000) ...................
Variable costs
($300,000/$500,000 x $600,000) ...........
Contribution margin ...............................
Controllable fixed costs
..........................................................................
..................................................................
Controllable margin ................................
Expected return on investment
for alternative 2:
$165,000
$625,000
$600,000
360,000
240,000
75,000
$165,000
=
26.4%
[(($500,000 + $100,000) – (($300,000 ÷ $500,000) x ($500,000 + $100,000)) - $75,000 = $165,000); ($165,000 ÷
$625,000 = 26.4%)]
[((Old sales + Incr.) – ((Old VC ÷ Old sales) x (Old sales + Incr.)) – Control. FC = Control. margin); (Control.
margin ÷ Ave. oper. assets = ROI)]
LO4 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance
Measurement
SOLUTIONS TO EXERCISES
EXERCISE 10.16
(a)
HARRINGTON COMPANY
Sports Equipment Division
Responsibility Report
For the Year Ended December 31, 2022
Sales
Variable costs
Cost of goods sold
Selling and administrative
Total
Contribution margin
Controllable fixed costs
Cost of goods sold
Selling and administrative
Total
Controllable margin
Budget
Actual
Difference
$900,000
$880,000
$20,000 U
440,000
60,000
500,000
400,000
408,000
61,000
469,000
411,000
32,000 F
1,000 U
31,000 F
11,000 F
100,000
90,000
190,000
$210,000
105,000
66,000
171,000
$240,000
5,000 U
24,000 F
19,000 F
$30,000 F
(b) ($240,000 – $90,000)/$1,000,000 = 15%
[($240,000 - $90,000) ÷ $1,000,000 = 15%]
[(Act. control. margin – Noncontrol. FC) ÷ Ave. oper. assets = ROI]
LO3, 4 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance
Measurement
EXERCISE 10.17
(a) Controllable margin = ($3,000,000 – $1,950,000 – $600,000) = $450,000
ROI = $450,000 ÷ $5,000,000 = 9%
(b) 1.
Contribution margin percentage is 35%, or ($1,050,000 ÷ $3,000,000)
Increase in controllable margin = $300,000 x 35% = $105,000
ROI = ($450,000 + $105,000) ÷ $5,000,000 = 11.1%
[($1,050,000 ÷ $3,000,000 = 35%); ($300,000 x 35% = $105,000); (($405,000 + $105,000) ÷ $5,000,000 =
11.1%)]
[((Sales - VC) ÷ Sales = CM %); (Sales incr. x CM % = Incr. in control. margin); (Control. margin + Incr. in control.
margin) ÷ Ave. oper. assets = ROI)]
2.
($450,000 + $150,000) ÷ $5,000,000 = 12%
[($450,000 + $150,000) ÷ $5,000,000 = 12%]
[(Control. margin + Decr. in VC) ÷ Ave. oper. assets = ROI]
3.
$450,000 ÷ ($5,000,000 – ($5,000,000 x 6.25%)) = 9.6%
[$450,000 ÷ ($5,000,000 – ($5,000,000 x 6.25%)) = 9.6%]
[Control. margin ÷ (Ave. oper. assets – Decr.)]
LO4 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement, Analysis and
Interpretation IMA: Performance Measurement
EXERCISE 10.18
(a)
DINKLE AND FRIZELL DENTAL CLINIC
Preventive Services
Responsibility Report
For the Month Ended May 31, 2022
Service revenue
Variable costs
Filling materials
Novocain
Dental assistant wages
Supplies
Utilities
Total variable costs
Contribution margin
Controllable fixed costs
Dentist salary
Equipment depreciation
Total controllable fixed costs
Controllable margin
Return on investment*
Budget
$39,000
Actual
$40,000
Difference
Favorable F
Unfavorable U
$1,000 F
4,900
3,800
2,500
2,250
390
13,840
25,160
5,000
3,900
2,500
1,900
500
13,800
26,200
100 U
100 U
0
350 F
110 U
40 F
1,040 F
9,400
6,000
15,400
$ 9,760
9,800
6,000
15,800
$10,400
400 U
0
400 U
$ 640 F
12.2%
13.0%
0.8% F
*Average investment = ($82,400 + $77,600) ÷ 2 = $80,000
Budget ROI = $9,760 ÷ $80,000
Actual ROI = $10,400 ÷ $80,000
ROI Difference = $640 ÷ $80,000
[(Bud.: $9,760 ÷ (($82,400 + $77,600) ÷ 2) = 12.2%); (Act.: $10,400 ÷ (($82,400 + $77,600) ÷ 2) = 13.0%); (Diff.:
12.2% - 13.0% = 0.8%F)]
[(Bud.: Control. margin ÷ ((Beg. oper. assets + End. oper. assets) ÷ 2) = ROI); (Act.: Control. margin ÷ ((Beg.
oper. assets + End. oper. assets) ÷ 2) = ROI); (Bud. ROI – Act. ROI = Fav. diff.)]
EXERCISE 10.18 (Continued)
(b)
MEMO
TO: Drs. Reese Dinkle and Anita Frizell
FROM: Student
SUBJECT: Deficiencies in the Current Responsibility Reporting System
The current reporting system has the following deficiencies:
1.
2.
3.
4.
It does not clearly show both budgeted goals and actual
performance.
It does not indicate the contribution margin generated by the
center, which shows the amount available to go towards covering
controllable fixed costs.
It does not report only those costs controllable by the manager of
the center. Instead, it includes both controllable and common fixed
costs. This results in the center appearing to be unprofitable.
It does not indicate the return on investment earned by the center.
All of these deficiencies have been corrected in the recommended
responsibility report attached. As can be seen from that report, the
Preventive Services center is profitable. The service revenues generated in
this center are adequate to cover all of its costs, both variable and
controllable fixed costs, and contribute toward the covering of the clinic’s
common fixed costs. In addition, the report indicates the return on
investment earned by the center and that it exceeds the budget goal.
LO4 BT: AP Difficulty: Moderate TOT: 25 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance
Measurement
EXERCISE 10.19
Planes:
ROI = Controllable margin ÷ Average operating assets
12% = Controllable margin ÷ $25,000,000
Controllable margin = $25,000,000 x 12%
= $3,000,000
Contribution margin = Controllable margin + Controllable fixed costs
= $3,000,000 + $1,500,000
= $4,500,000
Service revenue = Contribution margin + Variable costs
= $4,500,000 + $5,500,000
= $10,000,000
[($25,000,000 x 12% = $3,000,000); ($3,000,000 + $1,500,000 = $4,500,000); ($4,500,000 + $5,500,000 =
$10,000,000)]
[(Ave. oper. assets x ROI = Control. margin); (Control. margin + Control. FC = CM); (CM + VC = Serv. rev.)]
Taxis:
ROI = Controllable margin ÷ Average operating assets
10% =
$80,000
÷ Average operating assets
Average operating assets = $80,000 ÷ 10%
= $800,000
Controllable margin = Contribution margin – Controllable fixed costs
$80,000
=
$250,000
– Controllable fixed costs
Controllable fixed costs
= $250,000 – $80,000
= $170,000
Contribution margin = Service revenue – Variable costs
$250,000
= $500,000 – Variable costs
Variable costs = $500,000 – $250,000
= $250,000
[($80,000 ÷ 10% = $800,000); ($250,000 - $80,000 = $170,000); ($500,000 - $250,000 = $250,000)]
[(Control. margin ÷ ROI = Ave. oper. assets); (CM – Control. margin = Control. FC); (Serv. rev. – CM = VC)]
EXERCISE 10.19 (Continued)
Limos:
ROI = Controllable margin ÷ Average operating assets
= $210,000 ÷ $1,500,000
= 14%
Controllable margin = Contribution margin – Controllable fixed costs
$210,000
=
$480,000
– Controllable fixed costs
Controllable fixed costs
= $480,000 – $210,000
= $270,000
Contribution margin = Service revenue – Variable costs
$480,000
= Service revenue – $300,000
Service revenue
= $480,000 + $300,000
= $780,000
[($210,000 ÷ $1,500,000 = 14%); ($480,000 - $210,000 = $270,000); ($480,000 + $300,000 = $780,000)]
[(Control. margin ÷ Ave. oper. assets = ROI); (CM – Control. margin = Control. FC); (CM + VC = Serv. Rev.)]
LO4 BT: AN Difficulty: Moderate TOT: 25 min. AACSB: Analytic AICPA FC: Reporting IMA: Performance
Measurement
*EXERCISE 10.20
(a)
North Division: ROI = $140,000 ÷ $1,000,000 = 14%
West Division: ROI = $360,000 ÷ $2,000,000 = 18%
South Division: ROI = $210,000 ÷ $1,500,000 = 14%
(b)
North Division:
Residual Income = $140,000 – (.13 x $1,000,000) = $10,000
West Division:
Residual Income = $360,000 – (.16 x $2,000,000) = $40,000
South Division:
Residual Income = $210,000 – (.10 x $1,500,000) = $60,000
*EXERCISE 10.20 (Continued)
(c)
1.
2.
If ROI is used to measure performance, only the North Division
(with a 14% ROI) and the South Division (with a 14% ROI) would
make the additional investment that provides a 16% ROI. The West
Division presently earns an 18% return ($360,000 ÷ $2,000,000), and
therefore would decline the investment.
If residual income is used to measure performance, all three divisions would probably make the additional investment because
each would realize an increase in residual income.
LO5 BT: AN Difficulty: Moderate TOT: 20 min. AACSB: Analytic AICPA FC: Measurement, Analysis and
Interpretation IMA: Performance Measurement
*EXERCISE 10.21
(a) ROI
= Controllable margin
16% =
$200,000
Average operating assets =
÷
÷
Average operating assets
Average operating assets
$1,250,000
(b)
Controllable margin
– (Minimum rate of return x Average operating assets) = Residual income
$200,000
–
(Minimum rate of return x $1,250,000)
=
$100,000
$100,000
=
Minimum rate of return x $1,250,000
Minimum rate of return =
8%
(c)
Controllable margin
Controllable margin
Controllable margin
(d)
ROI =
24% =
– (Minimum rate of return x Average operating assets) = Residual income
–
(11% x $1,200,000)
=
$156,000
=
$288,000
Controllable margin
$288,000
÷
÷
Average operating assets
$1,200,000
LO5 BT: AN Difficulty: Moderate TOT: 20 min. AACSB: Analytic AICPA FC: Measurement, Analysis and
Interpretation IMA: Performance Measurement
SOLUTIONS TO PROBLEMS
PROBLEM 10.5
(a)
OPTIMUS COMPANY
Home Division
Responsibility Report
For the Year Ended December 31, 2022
(in thousands of dollars)
Budget
Actual
Difference
Favorable F
Unfavorable U
Sales
Variable costs
Cost of goods sold
Selling and administrative
Total
Contribution margin
Controllable direct fixed costs
Cost of goods sold
Selling and administrative
Total
Controllable margin
$1,300
$1,400
$100 F
620
100
720
580
665
125
790
610
45 U
25 U
70 U
30 F
170
80
250
$ 330
170
80
250
$ 360
0U
0U
0U
$ 30 F
ROI
16.5%
(1)
18.0%
(2)
1.5% F
(3)
æ $330 ö
÷
è $2,000 ø
(1) ç
$360 ö
(2) æç
÷
è $2,000 ø
(3) æç $30 ö÷
è $2,000 ø
[(Sales: $1,400 - $100 = $1,300); (VC CGS: $665 - $45 = $620); (VC S&A: $125 - $25 = $100); (CM: $610 - $30 =
$580); (Control. margin: $360 - $30 = $330); (Bud. ROI: $330 ÷ $2,000 = 16.5%); (Act. ROI: $360 ÷ $2,000 =
18.0%); (Diff.: $30 ÷ $2,000 = 1.5%)]
[(Sales: Act. amt. – Fav. diff. = Bud. amt.); (VC CGS: Act. amt. – Unfav. diff. = Bud. amt.); (VC S&A: Act. amt –
Unfav. diff. = Bud. amt.); (CM: Act. amt. – Fav. diff. = Bud. amt.); (Control. margin: Act. amt. – Fav. amt. = Bud.
amt.); (Bud.: Control. margin ÷ Ave. oper. assets = ROI); (Act.: Control. margin ÷ Ave. oper. assets = ROI); (Diff.:
Diff. in control. margin ÷ Ave. oper. assets = ROI diff.)]
PROBLEM 10.5 (Continued)
(b) The controllable margin of the manager of the Home Division was above
budget expectations for the year by 9.1% ($30,000 ÷ $330,000). However,
top management would likely recognize the limitations of using a static
budget to evaluate the manager’s performance in controlling variable
costs and therefore would adjust the budgeted amounts for variable
costs based on the increased sales as follows:
æ $620 ö
÷ = $667,692 and
è $1,300 ø
Cost of goods sold: $1,400,000 x ç
Selling and administrative $1,400,000 x ($100 ÷ $1,300) = $107,692.
When the adjusted budget amounts for the variable costs are evaluated,
the cost of goods sold variance changes to a favorable variance of
approximately $3,000 which is only .4% of the adjusted budget and
would most likely not require further investigation. The selling and
administrative variance is still unfavorable. The variance decreases to
$17,308 which is 16.1% of the adjusted budget and most likely would
still require further investigation to discover the cause(s) of this
variance.
(c) 1.
$360,000 + ($125,000 x 4%)
= 18.25%.
$2,000,000
[($360,000 + ($125,000 x 4%)) ÷ $2,000,000 = 18.25%]
[(Act. control. margin + (Act. var. CGS x % decr.)) ÷ Ave. oper. assets = ROI]
2.
$360,000
= 20%.
$2,000,000 – ($2,000,000 x 10%)
[$360,000 ÷ ($2,000,000 – ($2,000,000 x 10%)) = 20%
[Act. control. margin ÷ (Ave. oper. assets – (Ave. oper. assets x % decr.)) = ROI]
3.
$360,000 + $80,000
= 22%.
$2,000,000
[($360,000 + $80,000) ÷ $2,000,000 = 22%]
[(Act. control. margin + CM incr.) ÷ Ave. oper. assets = ROI]
LO4 BT: E Difficulty: Moderate TOT: 50 min. AACSB: Reporting IMA: Performance Measurement
*PROBLEM 10.7
(a)
1.
ROI = Controllable Margin ÷ Average Operating Assets
ROI =
$2,460,000
÷
$12,300,000
ROI = 20%
($2,460,000 ÷ $12,300,000 = 20%)
(Control. margin ÷ Ave. oper. assets = ROI
2.
Residual Income = Controllable Margin – (Minimum Rate of Return
x Average Operating Assets)
Residual Income = $2,460,000 – (.18 x $12,300,000)
Residual Income = $2,460,000 – $2,214,000 = $246,000
[$2,460,000 – (18% x $12,300,000) = $246,000]
[Control. margin – (Min. ROR x Ave. oper. assets) = Residual inc.]
(b)
The management of Jensen Division would clearly have accepted the
investment opportunity it had in 2022 if residual income had been used
as the performance measure because an increase in residual income
results from a project whose ROI is greater than the minimum rate of
return.
If management of the Jensen Division had used ROI as the performance
measure, the decision would be to reject the project because the ROI
of 19% is less than Jensen’s ROI experience range of 20.1% to 23.5%.
With bonuses based in part on ROI, the 19% project would have a
negative effect on bonuses.
LO5 BT: AN Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement, Analysis and
Interpretation IMA: Performance Measurement