CHAPTER 12

Responsibility Accounting and Total Quality

Management

ANSWERS TO REVIEW QUESTIONS

12-1 A responsibility-accounting system fosters goal congruence by establishing the

performance criteria by which each manager will be evaluated. Development of
performance measures and standards for those measures can help to ensure that
managers are striving toward goals that support the organization's overall
objectives.

12-2 Goal congruence results when the managers of subunits throughout an

organization strive to achieve objectives that are consistent with the goals set by
top management. In order for the organization to be successful, the managers and
employees throughout the organization must be striving toward consistent goals.

12-3 Several benefits of decentralization are as follows:

(a) The managers of an organization's subunits have specialized information and

skills that enable them to manage their departments most effectively.

(b) Allowing managers autonomy in decision making provides managerial training

for future higher-level managers.

(c) Managers with some decision-making authority usually exhibit greater

motivation than those who merely execute the decisions of others.

(d) Delegating some decisions to lower-level managers provides time relief to

upper-level managers.

(e) Delegating decision making to the lowest level possible enables an

organization to give a timely response to opportunities and problems.

Several costs of decentralization are as follows:

(a) Managers in a decentralized organization may have a narrow focus on their

own units' performance.

(b) Managers may tend to ignore the consequences of their actions on the
organization's other subunits.

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Managerial Accounting, 5/e 12- 1
 (c) In a decentralized organization, some tasks or services may be duplicated
unnecessarily.

12-4 (a) Cost center: A responsibility center, the manager of which is accountable for
the subunit's costs. (An example is a production department in a
manufacturing firm.)

(b) Revenue center: A responsibility center, the manager of which is accountable

for the subunit's revenue. (An example is a sales district in a wholesaling firm.)

(c) Profit center: A responsibility center, the manager of which is accountable for
the subunit's profit. (An example is a particular restaurant in a fast-food chain.)

(d) Investment center: A responsibility center, the manager of which is

accountable for the subunit's profit and the capital invested to generate that
profit. (An example is a commuter airline division of an airline company.)

12-5 It would be appropriate to change a particular hotel from a profit center to an

investment center if the manager of the hotel is given the authority to make
significant investment decisions affecting the hotel's resources.

12-6 Flexible budgeting allows a performance report to be constructed in a meaningful

way. The performance report should compare actual expenses incurred with the
expenses that should have been incurred, given the actual level of activity. The
expenses that should have been incurred given the actual level of activity can be
obtained from the flexible budget.

12-7 Under activity-based responsibility accounting, management's attention is directed

toward activities, rather than being focused primarily on cost, revenue, and profit
measures of subunit performance. Activity-based responsibility accounting uses
the database generated by an activity-based costing system coupled with
nonfinancial measures of operational performance for key activities. Such an
approach can help management eliminate non-value-added activities and improve
the cost effectiveness of activities that do add value to the organization's product
or service.

12-8 Attention to the following two factors may yield positive behavioral effects from a
responsibility-accounting system.

(a) When properly used, a responsibility-accounting system does not emphasize

blame. The emphasis should be on providing the individual who is in the best
position to explain a particular event or financial result with information to help
in understanding reasons behind the event or financial result.

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12-2 Solutions Manual
 (b) Distinguishing between controllable and uncontrollable costs or revenues
helps the individuals who are evaluated under a responsibility-accounting
system to feel as though they are evaluated on the basis of events and results
over which they have some control or influence.

12-9 Rarely does a single individual completely control a result in an organization.

Most results are caused by the joint efforts of several people and the joint impact
of several events. Nevertheless, there is usually a person who is in the best
position to explain a result or who is in the best position to influence the result. In
this sense, performance reports based on controllability really are based on a
manager's ability to influence results.

12-10 (a) Cost pool: A collection of costs to be assigned to a set of cost objects. (An
example of a cost pool is all costs related to material handling in a
manufacturing firm.)

(b) Cost object: A responsibility center, product, or service to which a cost is

assigned. (The various production departments in a manufacturing firm provide
examples of cost objects. For example, the material-handling cost pool may be
allocated across the various production departments that use material-
handling services.)

12-11 Cost allocation (or distribution): The process of assigning costs in a cost pool to
the appropriate cost objects. (An example of cost allocation would be the
assignment of the costs in the material-handling cost pool to the production
departments that use material-handling services. For example, the material-
handling costs might be allocated to production departments on the basis of the
weight of the materials handled for each department.)

12-12 An example of a common resource in an organization is a computer department.

The resource includes the computer itself, the software, and the computer
specialists who run the computer system and assist its users. The opportunity
costs associated with one person using the computer resource include the
possibility that another user will be precluded from or delayed in using the
computer resource. Allocating the cost of the computer services department to the
users makes the users aware of the opportunity cost of using the computer.

12-13 A computer system has a limited capacity at any one time. Allocating the cost of
using the service to the user makes the user aware that his or her use of the
system may preclude someone else from using it. Thus, the user is made aware of
the potential opportunity cost associated with his or her use.

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Managerial Accounting, 5/e 12- 3
12-14 A cost allocation base is a measure of activity, physical characteristic, or
economic characteristic associated with the responsibility centers, which are the
cost objects in the allocation process. One sensible allocation base for assigning
advertising costs to the various components of a large theme park is the number
of people patronizing the park's various components. Presumably, the number of
people attending a certain part of the theme park is an indication of how popular
that part of the park is. Notice that in most cases the sales revenue generated by
the various components of the theme park is not a viable allocation base, since
most theme parks have a single admission fee for the entire park.

12-15 Marketing costs are distributed to the hotel's departments on the basis of
budgeted sales dollars so that the behavior of one department does not affect the
costs allocated to the other departments. If, on the other hand, the marketing
costs had been budgeted on the basis of actual sales dollars, then the costs
allocated to each department would have been affected when only one
department's actual sales revenue changed.

12-16 A segmented income statement shows the segment margin for each major
segment of the enterprise.

12-17 Many managerial accountants believe that it is misleading to allocate common

costs to an organization's segments. Since these costs are not traceable to the
activities of segments, they can be allocated to segments only on the basis of a
highly arbitrary allocation base.

12-18 It is important in responsibility accounting to distinguish between segments and

segment managers, because some costs that are traceable to a segment may be
completely beyond the influence of the segment manager. Proper evaluation of
the segment as an investment of the company's resources requires that these
costs be included with costs associated with the segment. However, in evaluations
of the manager's performance, these costs should be excluded, since the
manager has no control over them.

12-19 Three key features of a segmented income statement are as follows: contribution
format, identification of controllable versus uncontrollable expenses, and
segmented reporting, which shows income statements for the company as a whole
and for each of its major segments.

12-20 A common cost for one segment can be a traceable cost for another segment. For
example, the salary of the general manager of a hotel is traceable to that segment
of the entire hotel company. However, the salary of the hotel's general manager is
a common cost for each of the departments in that hotel, such as the food and
beverage department and the hospitality department.

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12-4 Solutions Manual
12-21 Customer profitability analysis refers to using the concepts of activity-based
costing to determine how serving particular customers causes activities to be
performed and costs to be incurred. Examples of activities that can be
differentially demanded by customers include order frequency, order size, special
packaging or handling, customized parts or engineering, and special machine
setups. Such activities can make some customers more profitable than others.

12-22 Four types of quality costs are as follows:

(a) Prevention costs: the costs of preventing defects.

(b) Appraisal costs: the costs of determining whether defects exist.

(c) Internal failure costs: the costs of repairing defects found prior to product sale.

(d) External failure costs: the costs incurred when defective products have been
sold.

12-23 Observable quality costs can be measured and reported, often on the basis of
information in the accounting records. For example, the cost of inspectors'
salaries is an observable quality cost. Hidden quality costs cannot easily be
measured, reported, or even estimated. For example, the opportunity cost
associated with lost sales after a defective product is sold is a hidden quality cost
to the company.

12-24 A product's quality of design is how well it is conceived or designed for its
intended use. The product's quality of conformance refers to the extent to which a
product meets the specifications of its design.

12-25 A product's grade is the extent of its capability in performing its intended purpose,
viewed in relation to other products with the same functional use. An example in
the service industry is airline travel. Airplane seats may be coach class or first
class; the difference lies in seat size, comfort, and service. Either class will take
you from Los Angeles to Chicago, but not with the same degree of comfort.

12-26 "An ounce of prevention is worth a pound of cure" can be interpreted in terms of
resources expended on various categories of quality costs. A dollar spent on
prevention may save many dollars of appraisal, internal failure, or external failure
costs.

12-27 A cause and effect diagram shows by means of connected lines all the possible
causes of a particular type of defect in a product or service.

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Managerial Accounting, 5/e 12- 5
SOLUTIONS TO EXERCISES
EXERCISE 12-28 (10 MINUTES)

The type of responsibility center most appropriate for each of the following organizational
subunits is indicated below.

(1) Movie theater: Cost center or profit center.

(2) Radio station: Profit center.

(3) Claims department: Cost center.

(4) Ticket sales division of an airline: Revenue center.

(5) Bottling plant: Cost center.

(6) Orange juice factory: Profit center.

(7) College of engineering at a university: Profit center.

(By designating the college of engineering as a profit center, this subunit is

encouraged to generate research grants and manage its operations most
effectively. The term "profit center" is used in a slightly different way here. No
subunit in a university really makes a profit. However, treating the college of
engineering like a profit center means that this subunit's management will
have considerable authority in managing the subunit's revenues and
expenses.)

(8) European division of a multinational manufacturing company: Investment

center.

(9) Outpatient clinic in a profit-oriented hospital: Profit center.

(10 Mayor's office of a city: Cost center.

)

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12-6 Solutions Manual
EXERCISE 12-29 (10 MINUTES)

The appropriate responsibility-accounting treatment for each of the scenarios is the

following:

(1) Since the cost of idle time incurred in Department B was due to the breakdown
of improperly maintained machinery in Department A, the costs of the idle time
should be charged to Department A.

(2) If the machinery had been properly maintained, it would be more appropriate not
to charge the cost due to idle time in Department B back to Department A. This
cost should be considered a normal cost of operating in a sequential production
environment. The managers of Department B should anticipate such normal
machine breakdowns and plan their production scheduling to accommodate
such events.

EXERCISE 12-30 (10 MINUTES)

The Maintenance Department should not be charged for the excess wages of the skilled
employees who are temporarily assigned to the Maintenance Department. Modifications
should be made in the responsibility-accounting system as follows: (1) the Maintenance
Department should be charged with only the normal wages for maintenance employees,
$12 per hour. (2) The additional $10 per hour ($22 – $12) should be charged to a top
management level account, since the decision to keep these employees on the payroll
was made by top management.

EXERCISE 12-31 (10 MINUTES)

By designating this department as a profit center, the corporation has given the
managers of the department an opportunity to manage their operation just like a full-
fledged business. These managers have specialized knowledge and skills that make
them experts in the area of logistics and distribution. They are in the best position to
read the needs of other units to whom they provide logistics services, and are also in the
best position to make cost-benefit trade-offs that arise in the provision of logistical
services. By treating this service department as a profit center, the organization has
given its managers an incentive to control costs and also provide a quality service that
meets the needs of its customers.

A profit center such as this might not be free to sell its services outside the company.
Moreover, the creation of this profit center suggests the need for an internal pricing
structure for services supplied to other subunits.

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Managerial Accounting, 5/e 12- 7
EXERCISE 12-32 (50 MINUTES)

PERFORMANCE REPORTS FOR MARCH: SELECTED SUBUNITS OF

ALOHA HOTELS AND RESORTS
(IN THOUSANDS)

Flexible Budget* Actual Results* Variance †

  Year to   Year to   Year to
  March   Date**   March   Date**   March   Date**
Food and Beverage
Department
Banquets & Catering........... $    650 $   1,910 $    658 $ 1,923   $8F $ 13  F
Restaurants........................ 1,800 5,550 1,794 5,534 6U 16 U
Kitchen...............................  (1,065)  (3,233) (1,069) (3,242)  4 U   9 U
Total profit.......................... $  1,385 $  4,227 $ 1,383 $ 4,215 $2 U $12 U

Kitchen
Kitchen staff wages............. $     (85) $   (253) $   (86) $   (255) $1 U $ 2U
Food.................................. (690) (2,110) (690) (2,111) —   1U
Paper products................... (125) (375) (122) (370) 3F 5F
Variable overhead............... (75) (225) (78) (232) 3U 7U
Fixed overhead...................      (90)    (270)    (93)   (274)  3 U   4U
Total expense..................... $  (1,065) $ (3,233) $(1,069) $ (3,242) $4 U $ 9U

*Numbers without parentheses denote profit; numbers with parentheses denote expenses.
†
F denotes favorable variance; U denotes unfavorable variance.
**Year-to-date column equals year-to-date column for February in Exhibit 12-4 in the text plus March
amount. For example, $1,910 equals $1,260 plus $650.

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12-8 Solutions Manual
EXERCISE 12-33 (30 MINUTES)

1. Allocation of costs:

Division

Admissions $36,000 $28,800 $25,200  $90,000

(enrollment) (1,000/2,500) (800/2,500) (700/2,500)
Registrar $56,250 $52,500 $41,250 $150,000
(credit hours) (30,000/80,00 (28,000/80,00 (22,000/80,00
0) 0) 0)
Computer $64,000 $128,000 $128,000 $320,000
Services (12/60) (24/60) (24/60)
(courses requiring
computer)

The Admissions Department costs are allocated on the basis of enrollment. The
more students enrolled in a division, the more admissions there are to process.

The Registrar's costs are allocated on the basis of credit hours. The greater
the number of credit hours, the more course registrations there are to process.

The Computer Services Department's costs are allocated on the basis of the
number of courses requiring computer work. The greater the number of computer-
intensive courses, the greater will be the demands placed on the Computer
Services Department.

2. The number of courses would probably be a better allocation base for the
Registrar's costs. Costs in this department are driven by processing course
registrations, not credit hours. A four-credit course does not require any more
registration effort than a three-credit course.

The estimated amount of computer time required would probably be a better

allocation base for the Computer Services Department. Two different courses
requiring computer work could place vastly different demands on the Computer
Services Department.

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Managerial Accounting, 5/e 12- 9
EXERCISE 12-34 (40 MINUTES)

SEGMENTED INCOME STATEMENTS: COUNTYWIDE CABLE SERVICES, INC.

Countywide Segments of Company

Cable
Services Metro Suburban Outlying
Service revenue................... $2,200,00 $1,000,000 $ 800,000 $ 400,000
0
Variable expenses................      200,000   150,000   100,000
450,000
Segment contribution margin $1,750,00 $   800,000 $ 650,000 $ 300,000
0
Less: Fixed expenses
controllable by segment
manager............................   870,000   400,000  320,000   150,000
Profit margin controllable by
segment manager.............. $  880,000 $   400,000 $330,000 $ 150,000
Less: Fixed expenses,
traceable to segment, but
controllable by others........   520,000   230,000  200,000   90,000
Profit margin traceable to
segment............................ $  360,000 $ 170,000 $130,000 $ 60,000

Less: Common fixed    95,000

expenses
Income before taxes............ $  265,000
Less: Income tax expense....   145,000
Net income.......................... $ 120,000

EXERCISE 12-35 (5 MINUTES)

1. appraisal cost

2. external failure cost

3. internal failure cost

4. prevention cost

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12-10 Solutions Manual
EXERCISE 12-36 (20 MINUTES)

SAN MATEO CIRCUITRY

QUALITY COST REPORT
Current Percentage
Month's of
Costs Total
Prevention costs:
Training of quality-control inspectors................................ $21,000 22.2
Total........................................................................... $21,000
Appraisal costs:
Inspection of purchased electrical components................. $12,000 12.7
Tests of instruments.........................................................  30,000 31.7
Total........................................................................... $42,000
Internal failure costs:
Costs of rework............................................................... $ 9,000 9.5
Costs of defective parts that cannot be salvaged..............   6,100 6.5
Total........................................................................... $15,100
External failure costs:
Replacement of instruments already sold.......................... $16,500 17.4
Total........................................................................... $16,500 _____  
Total quality costs............................................................... $94,600 100.00

EXERCISE 12-37 (10 MINUTES)

Observable quality costs in the airline industry:

 Cost of repairing damaged luggage.

 Cost of providing lodging for passengers stranded when a flight is cancelled due
to equipment malfunction.

 Cost of cleaning a passenger's clothing when a flight attendant spills food or

beverages on the passenger.

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Managerial Accounting, 5/e 12- 11
EXERCISE 12-37 (CONTINUED)

Hidden quality costs in the airline industry:

 Cost of lost flight bookings when passengers judge in-flight service to be

substandard.

 Cost of lost flight bookings when potential passengers are unable to get through
to the airline's reservations service.

 Cost of lost flight bookings when passengers react to cancelled or late flights.

EXERCISE 12-38 (30 MINUTES)

Answers will vary widely, depending on the company chosen. Some examples are as
follows:

Marriott Hotels: Company-owned hotel, profit center

McDonald’s Corporation: Company-owned resaurant, profit center

NationsBank: Regional division of company, investment center

Pizza Hut: Kitchen in an individual restaurant, cost center

Ramada Inn: National reservations center, revenue center

Xerox Corporation: Individual manufacturing department or work center, cost center

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12-12 Solutions Manual
SOLUTIONS TO PROBLEMS
PROBLEM 12-39 (30 MINUTES)

A wide range of possible responses is possible for this problem. The organization chart
and companion chart showing responsibility accounting designations should be similar to
the charts given for Aloha Hotels and Resorts in Exhibits 12-1 and 12-2, respectively.
The letter to stockholders should specify the responsibilities of the managers shown in
the charts. Refer to the discussion of Exhibits 12-1 and 12-2 in the text. The charts in
Exhibits 12-1 and 12-2 are repeated here for convenience.

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Managerial Accounting, 5/e 12- 13
 PROBLEM 12-39 (CONTINUED)

Aloha Hotels and Resorts, Inc.

Maui Division Oahu Division

Seven hotels Two other Waikiki

on the hotels on Sands
Island the Island Hotel
of Maui of Oahu (Honolulu)

Grounds and Housekeeping Recreational Food and

Hospitality
Maintenance and Custodial Services Beverage
Department
Department Department Department Department

Banquets and Restaurants Kitchen

Catering

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12-14 Solutions Manual
PROBLEM 12-39 (CONTINUED)

RESPONSIBILITY
MANAGER CENTER

President of Aloha Investment

Hotels and Resorts, Inc. Center

Vice President of Investment

Oahu Division Center

General Manager of Profit

Waikiki Sands Hotel Center

Director of Food
and Beverage Department Profit
Center

Cost
Head Chef
Center

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Managerial Accounting, 5/e 12- 15
PROBLEM 12-40 (40 MINUTES)

Once again, a wide range of responses is possible, depending on the organization

designed in the preceding problem. The format for the performance reports is given in
Exhibit 12-4 for Aloha Hotels and Resorts. This exhibit is repeated here for convenience.

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12-16 Solutions Manual
 PERFORMANCE REPORTS FOR FEBRUARY:
SELECTED SUBUNITS OF ALOHA HOTELS AND RESORTS
(IN THOUSANDS)
Flexible Budget* Actual Results* Variance †
Year Year Year
to to to  
February Date February Date February Date
Company $30,660 $64,567 $30,716 $ 64,570 $  56 F $  3 F
Maui Division............ $18,400 $38,620 $18,470 $ 38,630 $  70 F $10 F
Oahu Division...........  12,260  25,947  12,246  25,940   14 U   7 U
Total Profit............... $30,660 $64,567 $30,716 $ 64,570 $  56 F $  3 F
Oahu Division
Waimea Beach Resort $  6,050 $12,700 $  6,060 $ 12,740 $  10 F $40 F
Diamond Head Lodge 2,100 4,500 2,050 4,430 50 U 70 U
Waikiki Sands Hotel..   4,110   8,747   4,136   8,770   26 F  23 F
Total Profit............... $12,260 $25,947 $12,246 $ 25,940 $  14 U $  7 U
Waikiki Sands Hotel
Grounds & Maintenance $   (45 ) $   (90) $   (44) $    (90 ) $   1 F --
Housekeeping &
Custodial (40) (90) (41) (90) 1 U --
Recreational Services 40 85 41 88 1 F $  3 F
Hospitality................ 2,800 6,000 2,840 6,030 40 F 30 F
Food and Beverage. .   1,355   2,842   1,340    2,832   15 U  10 U
Total Profit............... $ 4,110 $  8,747 $  4,136 $   8,770 $  26 F $23 F
Food and Beverage Dept.
Banquets & Catering $    600 $   1,260 $   605 $  1,265 $   5 F $  5 F
Restaurants.............. 1,785 3,750 1,760 3,740 25 U 10 U
Kitchen....................  (1,030)   (2,168)  (1,025)   (2,173)    5 F   5 U
Total profit................ $ 1,355 $   2,842 $  1,340 $  2,832 $  15 U $10 U
Kitchen
Kitchen staff wages. . $   (80 ) $   (168) $   (78) $  (169) $   2 F $  1 U
Food........................ (675) (1,420) (678) (1,421) 3 U 1 U
Paper products......... (120) (250) (115) (248) 5 F 2 F
Variable overhead. . . . (70) (150) (71) (154) 1 U 4 U
Fixed overhead........     (85)    (180)     (83)    (181)    2 F   1 U
Total expenses......... $(1,030) $(2,168) $(1,025) $(2,173) $   5 F $  5 U

* Numbers without parentheses denote profit; numbers with parentheses denote expenses .
†
F denotes favorable variance; U denotes unfavorable variance.

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Managerial Accounting, 5/e 12- 17
PROBLEM 12-41 (35 MINUTES)

Memorandum
Date: Today

To: Sandy Beach, General Manager of Waikiki Sands Hotel

From: I.M. Student

Subject: Responsibility Centers

The Waikiki Sands Hotel is a profit center as specified by the corporation's top
management. The hotel's general manager does not have the authority to make
significant investment decisions, so an investment-center designation would be
inappropriate for the hotel. The Grounds and Maintenance Department and the
Housekeeping and Custodial Department should be cost centers, since these
departments do not generate revenue. The Food and Beverage Department should be a
profit center, since the department's manager can influence both the costs incurred in
the department and the revenue generated. The Food and Beverage Director can
determine the menu, set meal prices, and make entertainment decisions, all of which
significantly influence the department's revenue.

The Hospitality Department also should be a profit center. The Director of Hospitality
has significant influence in setting room rates and making decorating decisions, which
affect the department's revenue. The Director also makes hiring and salary decisions for
the department's staff, which significantly affect departmental expenses. The Hospitality
Department's three subunits (Front Desk, Bell Staff, and Guest Services) should be cost
centers, since they do not generate revenue. The managers of these subunits can
significantly influence the costs incurred in their units through hiring and salary
recommendations, staff scheduling, and use of materials and equipment.

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12-18 Solutions Manual
PROBLEM 12-42 (60 MINUTES)

1. Performance Report for August: Selected Subunits of Rocky Mountain General

Hospital

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Managerial Accounting, 5/e 12- 19
 Flexible Budget Actual Results Variance*
Year Year Year
to to to
August Date August Date August Date
Rocky Mountain General $582,700 $4,661,60 $581,150 $4,658,30 $  1,550 F $  3,300 F
 Hospital 0 0
General Medicine $210,000 $1,680,00 $204,000 $1,670,90 $  6,000 F $  9,100 F
Division 0 0
Surgical Division......... 140,000 1,120,000 141,000 1,115,800 1,000 U 4,200 F
Medical Support Division 182,700 1,461,600 182,650 1,465,600 50 F 4,000 U
Administrative Division   50,000      53,500      3,500 U   6,000 U
400,000 406,000
Total cost.................... $582,700 $4,661,60 $581,150 $4,658,30 $  1,550 F $  3,300 F
0 0
Medical Support Division
Nursing Department. . . . $  70,000 $  $  75,000 580,000 $  5,000 U $20,000 U
560,000
Radiology and
Labor-      atory
Department................. 18,000 144,000 18,100 144,000 100 U --
Nutrition Department. . . 71,700 573,600 71,950 578,600 250 U 5,000 U
Housekeeping 10,000 80,000 11,600 86,000 1,600 U 6,000 U
          Department
Maintenance Department   13,000       6,000       7,000 F  27,000 F
104,000 77,000
Total cost.................... $182,700 $1,461,60 $182,650 $1,465,60 $     50 F $  4,000 U
0 0
Nutrition Department
Regiestered Dieticians’ $   $   
   Section .................. $  7,500 60,000 $  7,500 60,000 -- --
Food Service Section. . 33,200 265,600 35,050 272,600 $1,850 U $  7,000 U
050
Kitchen.......................  31,000     29,400     1,600 F   2,000 F
248,000 246,000
Total cost.................... $71,700 $  $71,950 $  $   250 U $  5,000 U
573,600 578,600
Food Service Section
Patient Food Service. . . $17,000 $136,000 $18,500 $  $1,500 U $  1,000 U
137,000
Cafeteria.....................  16,200  129,600  16,550       350 U   6,000 U
135,600
Total cost.................... $33,200 $265,600 $35,050 $  $1,850 U $  7,000 U
272,600
Cafeteria
Food servers’ wages. . . $  8,000 $  64,000 $  9,000 $    $1,000 U $  8,000 U
72,000
Paper products............ 4,500 36,000 4,400 36,200 100 F 200 U
Utilities....................... 1,000 8,000 1,050   8,100 50 U 100 U
Maintenance............... 400 3,200 100      300 F 2,100 F
1,100
Custodial.................... 1,100 8,800 1,100      -- 200 F

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12-20 Solutions Manual
 8,600
Supplies......................   1,200    9,600    900        300 F      --  
9,600
Total cost.................... $16,200 $129,600 $16,550 $  $  350 U $  6,000 U
135,600

*F denotes favorable variance; U denotes unfavorable variance.

2. Arrows are included on the performance report to show the cost relationships.

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Managerial Accounting, 5/e 12- 21
PROBLEM 12-42 (CONTINUED)

3. A variety of responses are reasonable for this question. Since the data given in the
problem do not include the individual variances over several months, it is not
possible to condition the investigation on trends. The largest variances in the
performance report are the most likely to warrant an investigation. The following
variances for August would likely catch the attention of the hospital administrator:

General Medicine Division............................................................... $6,000 F

Administrative Division.................................................................... 3,500 U
Nursing Department........................................................................ 5,000 U
Maintenance Department................................................................ 7,000 F
Food servers' wages....................................................................... 1,000 U

The $1,000 variance for food servers' wages is smaller than some of the
variances not listed above. However, it is a relatively large variance for only one
cost item in the subunit. In contrast, the $1,600 variance for the kitchen is for an
entire subunit of the hospital.

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12-22 Solutions Manual
PROBLEM 12-43 (45 MINUTES)

1.
Cost Allocation Percentage Costs
Pool Division Base of Total Distributed
Facilities General Medicine........ 15,000 sq. ft. 37.5% $ 71,250
Surgical...................... 8,000 sq. ft. 20.0% 38,000
Medical Support.......... 9,000 sq. ft. 22.5% 42,750
Administrative.............     8,000 sq. ft.   20.0%   38,000
Total...........................    40,000 sq. ft. 100.0% $190,000

Utilities General Medicine........ 135,000 cu. ft. 33.75% $   8,100

Surgical...................... 100,000 cu. ft. 25.00% 6,000
Medical Support.......... 90,000 cu. ft. 22.50% 5,400
Administrative.............    75,000 cu. ft.  18.75%    4,500
Total...........................   400,000 cu. ft. 100.00% $ 24,000

General General Medicine..... 30 empl. 30.00% $ 66,000

administration Surgical...................... 20 empl. 20.00% 44,000
Medical Support.......... 20 empl. 20.00% 44,000
Administrative.............       30 empl. 30.00%   66,000
Total...........................      100 empl. 100.00% $220,000

Community General Medicine........$2,000,000 50.00% $ 20,000

outreach Surgical......................1,250,000 31.25% 12,500
Medical Support.......... 750,000 18.75% 7,500
Administrative............. — — —
Total...........................$4,000,000 100.00% $ 40,000

2. An alternative allocation base for community outreach costs is the number of hours
spent by each division's personnel in community outreach activities. This base
would be more reflective of the actual contribution of each division to the program.

3. The reason for allocating utility costs to the divisions is so that each division's cost
reflects the total cost of running the division. Since none of the divisions can
operate without electricity, heat, water, and so forth, these costs should be
reflected in divisional cost reports. By allocating such costs, division managers are
made aware of these costs and are able to reflect the costs when pricing services
and seeking third-party reimbursements, such as those from insurance companies.

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

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Managerial Accounting, 5/e 12- 23
PROBLEM 12-44 (35 MINUTES)

1. Segmented income statement:

Show-Off, Las
Inc. Vegas Reno Sacramento

Sales $1,332,000 $444,00 $451,00 $437,000

revenue………………………………. 0 0
Variable operating expenses:
Cost of goods $ 705,000 $203,50 $225,50 $276,000
sold…………………… 0 0
Sales 79,920 26,64 27,06 26,220
commissions…………………… 0 0
Total………………………………. $ 784,920 $230,14 $252,56 $302,220
.. 0 0
Segment contribution $ $213,86 $198,44 $134,780
margin……………. 547,080 0 0
Less: Fixed expenses controllable by
segment manager:
Local $ 81,000 $ $ $ 48,000
advertising……………………… 11,000 22,000
Sales manager 32,000 ---- ---- 32,000
salary…………………
Total………………………………. $ 113,000 $ $ $ 80,000
.. 11,000 22,000
Profit margin controllable by segment
manager……………………………… $ 434,080 $202,86 $176,44 $ 54,780
… 0 0
Less: Fixed expenses traceable to
segment, but controllable by
others:
Local property $ 12,500 $ $ $ 6,000
taxes………………….. 4,500 2,000
Store manager 108,000 31,00 39,00 38,000
salaries………………. 0 0
Other………………………………… 28,200 5,80 4,60 17,800
….. 0 0
Total………………………………. $ 148,700 $ $ $ 61,800
.. 41,300 45,600
Segment profit $ 285,380 $161,56 $130,84 $ (7,020)
margin…………………….. 0 0
Less: Common fixed 192,300
expenses………….
Net $ 93,080
income…………………………………
...

Calculations:

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12-24 Solutions Manual
 Sales revenue: Las Vegas, 37,000 units x $12.00; Reno, 41,000
units x $11.00; Sacramento, 46,000 units x $9.50
Cost of goods sold: Las Vegas, 37,000 units x $5.50; Reno, 41,000
units x $5.50; Sacramento, 46,000 units x $6.00
Sales commissions: Las Vegas, $444,000 x 6%; Reno, $451,000 x
6%; Sacramento, $437,000 x 6%

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

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Managerial Accounting, 5/e 12- 25
PROBLEM 12-44 (CONTINUED)

2. Sacramento is the weakest segment because of several factors:

 Las Vegas and Reno have much higher markups on cost [118%( $6.50/$5.50)
and 100% ($5.50/$5.50), respectively]. However, Sacramento’s markup is only
58% ($3.50/ $6.00).
 Despite being the only store that has a sales manager, and spending
considerably more on advertising than Las Vegas and Reno, Sacramento has
the lowest gross dollar sales of the three stores. Sacramento’s return on
these outlays appears inadequate.
 Sacramento’s “other” noncontrollable costs are much higher than those of Las
Vegas and Reno.

3. Show-Off uses a responsibility accounting system, meaning that managers and

centers are evaluated on the basis of items under their control. Since this is a
personnel-type decision, the decision should be made by reviewing the profit margin
controllable by the store (i.e., segment) manager. The segment contribution margin
excludes fixed costs under a store manager’s control; in contrast, a store’s segment
profit margin would reflect all traceable costs whether controllable or not.

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12-26 Solutions Manual
PROBLEM 12-45 (35 MINUTES)

1. Warranty costs: External failure

Reliability engineering: prevention
Rework at AT’s manufacturing plant: internal failure
Manufacturing inspection: appraisal
Transportation costs to customer sites: external failure
Quality training for employees: prevention

2&3. Evaluation of quality costs:

No. 165 No. 172

$ % of Sales $ % of Sales
Sales revenue:
$60,000 x 80; $55,000 x $4,800,00 $5,500,00
100... 0 0
Prevention:
Reliability engineering
1,600 hours x $
$150……… 240,000
2,000 hours x $
$150……… 300,000
Quality 35,00 50,00
training………………. 0 0
Total………………… $ 5.73% $ 6.36%
… 275,000 350,000
Appraisal (inspection):
300 hours x $ .31%
$50………………. 15,000
500 hours x $ .45%
$50………………. 25,000
Internal failure (rework at AT):
80 units x 35% x $ 1.11%
$1,900…….. 53,200
100 units x 25% x $ .73%
$1,600…… 40,000
External failure:
Warranty costs:
80 units x 70% x $
$1,200… 67,200
100 units x 10% x $
$400…. 4,000
Transportation to customers 29,50 15,00
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Managerial Accounting, 5/e 12- 27
 0 0
Total………………… $ 2.01% $ .35%
… 96,700 19,000
Total quality $ 9.16% $ 7.89%
costs……………….. 439,900 434,000

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12-28 Solutions Manual
PROBLEM 12-45 (CONTINUED)

Individual quality costs as a % of total quality costs:

No. 165 No. 172

$ % of Total $ % of Total

Prevention………. $275,00 62.51% $350,00 80.65%

. 0 0
Appraisal 15,00 3.41% 25,00 5.76%
………... 0 0
Internal failure 53,20 12.09% 40,00 9.22%
…. 0 0
External 96,70 21.98% 19,00 4.38%
failure…. 0 0
Total $439,90 $434,00
…………. 0 0

4. Yes, the company is “investing” its quality expenditures differently for the two
machines. Advanced is spending more up-front on no. 172 with respect to prevention
and appraisal—over 86% of the total quality expenditures. (This figure is
approximately 66% for no. 165.) The net result is lower internal and external failure
costs and, perhaps more important, lower total quality costs as a percentage of sales
(7.89% for no. 172 and 9.16% for no. 165).

This problem illustrates the essence of total quality management systems when
compared with conventional quality control procedures. Overall costs are lower with
TQM when compared against systems that focus on “after-the-fact” detection and
rework.

5. Prevention, appraisal, internal failure, and external failure costs are observable in the
sense that such amounts can be measured and reported. When inferior products
make it to the marketplace, customer dissatisfaction will often increase, resulting in
lost sales of the defective product and perhaps other goods as well. The “cost” of
these lost sales is an opportunity cost—a “hidden” cost that is very difficult to
measure.

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Managerial Accounting, 5/e 12- 29
PROBLEM 12-46 (75 MINUTES)
1. SEGMENTED INCOME STATEMENTS: BUCKEYE DEPARTMENT STORES, INC. (IN THOUSANDS)
Segments of Company Segments of Columbus Division
Buckeye
Department   Cleveland Columbus Olentangy Scioto Downtown Not
Stores, Inc.   Division Division Store Store Store Allocated
Sales revenue ........................................ $39,400 $21,000 $18,400 $5,000 $2,400 $11,000
Variable operating expenses:
Cost of merchandise sold.................... $23,000 $12,000 $11,000 $3,000 $2,000 $6,000
Sales personnel—salaries................... 3,050 1,600 1,450 400 300 750
Sales commissions............................. 380 200 180 50 40 90
Utilities............................................... 590 300 290 80 60 150
Other.................................................     465     250     215     60     35     120
Total variable expenses....................... $27,485 $14,350 $13,135 $3,590 $2,435 $  7,110
Segment contribution margin.................... $11,915 $  6,650 $  5,265 $1,410 $   (35) $  3,890
Less: Fixed expenses controllable by
 segment manager:
Depreciation—furnishings................... $   560 $   290    $ 270 $   80 $    50 $   140
Computing and billing......................... 405 210* 195 40 30 75 50
Warehouse......................................... 780 450    330 70 60 200
Insurance........................................... 355 200    155 40 25 90
Security..............................................    350    210       140     30     30     80 _____
Total........................................................ $2,450 $1,360    $1,090 $   260 $   195 $   585 $   50
Profit margin controllable by
 segment manager .................................. $9,465 $5,290    $4,175 $1,150 $  (230) $3,305   (50)
Less: Fixed expenses, traceable to
 segment, but controllable by others: .......
Depreciation—buildings...................... $   930 $   470    $   460 $   120 $    90 $    250
Property taxes.................................... 305 170    135 35 20 80
Supervisory salaries...........................  1,750  1,000 †    750   150   100     400 $   100
Total........................................................ $2,985 $1,640    $1,345 $  305 $  210 $    730 $   100
Profit margin traceable to segment........... $6,480 $3,650    $2,830 $  845 $(440) $  2,575 $  (150)
Less: Common fixed expenses.................    120
Income before taxes................................ $6,360
Less: Income tax expense........................  1,950
Net income.............................................. $4,410
†
*$210 = $160 listed in table + $50 not allocated.             $1,000 = $900 listed in table + $100 not allocated.

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12-30 Solutions Manual
PROBLEM 12-46 (CONTINUED)
2. The segmented income statement would help the president of Buckeye Department
Stores gain insight into which division and which individual stores are performing
well or having difficulty. Such information serves to direct management's attention to
areas where its expertise is needed.

PROBLEM 12-47 (30 MINUTES)

Responsibility-accounting system:

1. At least two potential behavioral advantages if Building Services Co.'s (BSC's)

managers accept and participate in the development of budgets are as follows:

 They would be motivated to plan ahead and promote goal congruence.

 They would be pleased to be responsible only for those items they can control.

2. At least two potential problems that could arise if the managers do not accept the
change in philosophy are as follows:

 They could resent being measured on an individual basis, since they may be
responsible for costs over which they have no control.

 The could focus too much on their own department's goals at the possible
detriment to the organization as a whole (suboptimization).

3. If the managers support the new system, and most of the disadvantages pointed out
above are avoided, the responsibility-center system will enhance the alignment of
organizational and personal goals. Since Commercial Maintenance, Inc. (CMI) took
the time to fully explain and communicate the system to BSC's managers, by pointing
out the advantages and encouraging their participation, organizational and personal
goals will likely become aligned.

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Managerial Accounting, 5/e 12- 31
PROBLEM 12-47 (CONTINUED)

Participatory budgeting system:

1. At least two potential behavioral benefits are the following:

 BSC's managers are likely to accept the system and be motivated to attain the
budget targets, since they were actively involved in setting the goals and know
what is expected of them.

 Communication and group cohesiveness would be improved, because the

managers would feel part of a team.

2. At least two potential problems that could arise are as follows:

 The managers could be motivated to "pad" their budgets, putting slack in the plan
to ensure meeting the goals.

 Overemphasis on departmental goals could hurt cross-departmental employee

relations.

3. Participatory budgeting can contribute to an organization’s goals by encouraging buy-

in to the resulting budget and performance evaluation by the organization’s
employees. There is no reason to believe that such an approach would not be
beneficial for BSC.

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12-32 Solutions Manual
ROBLEM 12-48 (45 MINUTES)

Memorandum
Date: Today

To: Mathew Basler, President of Warriner Equipment Company

From: I. M. Student

Subject: Responsibility-Accounting System

Warriner Equipment Company's critical success factors are as follows:

1. Cost-efficient production: The firm must meet the market price, which implies
producing in a cost-efficient manner.

2. High product quality: Stated by the company president as necessary for success.

3. On-time delivery: Also noted by the company president as critical to the firm's
success.

Note that the product price is not a critical success factor, since it is largely beyond
the company's control. The price is determined by the market.

A responsibility-accounting system in which the plants are profit centers is

consistent with achieving high performance on the firm's critical success factors. The
plant managers are in the best position to influence production cost control, product
quality, and on-time delivery.

The sales districts should be revenue centers, in which the sales district managers
are accountable for meeting sales projections.

Suppose the plants are cost centers and the sales districts are revenue centers.
When a rush order comes in, the plant manager's incentive is to reject it because rush
orders tend to increase production costs (due to increased setups, interrupted
production, etc.). The sales district manager's incentive is to push rush orders, because
accepting a rush order results in a satisfied customer and increased future business.
Thus, there is a built-in conflict between the plant managers and the sales district
managers.

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Managerial Accounting, 5/e 12- 33
PROBLEM 12-48 (CONTINUED)

If the plants are profit centers, then each plant manager is encouraged to consider
both the costs and the benefits of a rush order. The cost is increased production cost,
and the benefit is a satisfied customer. Since the plant manager is rewarded for
achieving a profit, he or she has an incentive to weigh the cost-benefit trade-off inherent
to the rush-order problem.

In conclusion, I recommend that the plants be designated as profit centers and the
sales districts be designated as revenue centers.

PROBLEM 12-49 (40 MINUTES)

1. The factors that should be present for an organization's quality program to be

successful include the following:

 Evidence of top management support, including motivational leadership and

resource commitments.

 Training of those involved, including employees and suppliers.

 A cultural change leading to a corporate culture committed to the customer and

to continuous, dynamic improvement.

2. From an analysis of the cost-of-quality report, the program appears to have been
successful, because of the following:

 Total quality cost has declined from 23.4 to 13.1 percent of total production
costs.

 External failure costs, those costs signaling customer dissatisfaction, have

declined from 8 percent of total production cost to 2.3 percent. These declines in
warranty repairs and customer returns should translate into increased sales in
the future.

 Internal failure costs have been reduced from 4.6 to 2.3 percent of production
costs, and the overall cost of scrap and rework has gone down by 45.7 percent
($188,000 – $102,000)/$188,000.

 Appraisal costs have decreased by 43.4 percent [($205,000 – $116,000)/

$205,000]. Higher quality is reducing the demand for final testing.

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12-34 Solutions Manual
PROBLEM 12-49 (CONTINUED)

 Quality costs have shifted to the area of prevention, where problems are solved
before the customer becomes involved. Maintenance, training, and design
reviews have increased from 5.8 percent of total production cost to 6 percent
and from 24.9 percent of total quality cost to 45.7 percent. The $30,000 increase
is more than offset by decreases in other quality costs.

3. Tony Reese's current reaction to the quality improvement program is more favorable
because he is seeing the benefits of having the quality problems investigated and
solved before they reach the production floor. Because of improved designs, quality
training, and additional preproduction inspections, scrap and rework costs have
declined. Production personnel do not have to spend an inordinate amount of time
on customer service, because they are now making the product right the first time.
Throughput has increased and throughput time has decreased. Work is now moving
much faster through the department.

4. To measure the opportunity cost of not implementing the quality program,

management could do the following:

 Assume that sales and market share will continue to decline and then calculate
the revenue and income lost.

 Assume that the company will have to compete on price rather than on quality
and calculate the impact of having to lower product prices.

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Managerial Accounting, 5/e 12- 35
SOLUTIONS TO CASES
CASE 12-50 (45 MINUTES)

1. Segmented income statement:

CATHY'S CLASSIC CLOTHES: NORTHEAST REGION

Segmented Income Statement
For May

Coastal New Haven Boston

District Store Store

Sales ........................................................ $1,500,000 $600,000 $525,000

Less: Cost of goods sold............................. 633,750 252,000 220,500
Gross margin.............................................. $ 866,250 $348,000 $304,500

Operating expenses:
Variable selling................................. $ 90,000 $36,000 $31,500
Variable administrative...................... 37,500 15,000 13,125
Other direct expenses:................................
Store maintenance............................ 12,600 7,500 600
Advertising....................................... 75,000 50,000 5,000
Rent and other costs......................... 150,000 60,000 45,000
District general administrative
expenses (allocated)......................... 180,000 72,000 63,000
Regional general and administrative
expenses (allocated)......................... 165,000 55,000 55,000
Total expenses............................................ $ 710,100 $295,500 $213,225
Net Income................................................. $ 156,150 $ 52,500 $ 91,275

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12-36 Solutions Manual
CASE 12-50 (CONTINUED)

Supporting calculations:

Coastal District New Haven Store Boston Store

Sales................................... Given $1,500,000 x .40 $1,500,000 x .35

Cost of goods sold............... Given $600,000 x .42 $525,000 x .42
Variable selling.................... $1,500,000 x .06 $600,000 x .06 $525,000 x .06
Variable administrative......... $1,500,000 x .025 $600,000 x .025 $525,000 x .025
Maintenance........................ $7,500 + $600 Given Given
+ $4,500
Advertising..........................
Given ($75,000)(2/3) $50,000 x .10
Rent.................................... at New Haven
Given $150,000 x .40 $150,000 x .30
District expenses................. for Coastal
Given $180,000 x .40 District
$180,000 x .35

2. The Portland store's net income for May is $12,375 ($156,150 - $52,500 -
$91,275).

3. The impact of the responsibility-accounting system and bonus structure on the

managers' behavior and the effect of this behavior on the financial results for the
two stores include the following:

(a) New Haven Store:

 Because the bonus is based on sales over $570,000, the manager has concentrated
on maximizing sales and has paid little attention to controllable costs. As a result,
the store's net income is less than 9 percent of sales and only 34 percent (rounded)
of total net income.

 In an effort to maximize sales, the New Haven store spent 10 times as much as the
Boston store on advertising but generated only $75,000 more in sales. Thus the
advertising must not have been very effective and should be better controlled.

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Managerial Accounting, 5/e 12- 37
CASE 12-50 (CONTINUED)

(b) Boston Store:

 Because the manager of the Boston store is motivated to maximize net income, there
appears to be a tendency to cut back on discretionary expenses, such as store
maintenance and advertising. While management is seeking cost control by
implementing a bonus based on net income, the lack of spending on these
discretionary items may have an adverse long-term effect.

 The manager of the Boston store will be unhappy with the inclusion of allocated
district and regional expenses in the calculation of net income. These expenses are
not likely to be controlled by the store manager and will reduce the bonus received by
the manager of the Boston store.

4. The assistant controller's actions violate several standards of ethical conduct for
management accountants, including the following:

Competence

 Prepare complete and clear reports and recommendations after appropriate analysis
of relevant and reliable information.

Integrity :

 Communicate unfavorable as well as favorable information and professional

judgements of opinions.

 Refrain from engaging in any activity that would discredit the profession.

Objectivity :

 Communicate information fairly and objectively.

 Disclose fully all relevant information that could reasonably be expected to influence
and intended user's understanding of the reports, comments, and recommendations
presented.

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12-38 Solutions Manual
 CASE 12-51 (60 MINUTES)

1. Segmented income statement by geographic areas:

PACIFIC RIM INDUSTRIES

SEGMENTED INCOME STATEMENT BY GEOGRAPHIC AREAS
FOR THE FISCAL YEAR ENDED APRIL 30, 20x0
Geographic Areas
United Canada Asia Unallocate Total
States d
Sales in units a
Furniture................. 64,000 16,000 80,000 160,000
Sports..................... 72,000 72,000 36,000 180,000
Appliances..............     32,000    32,000       
96,000 160,000
Total unit sales.....    168,000   120,000      
212,000 500,000

Revenue b
Furniture................. $  512,000 $  $  $1,280,00
128,000 640,000 0
Sports..................... 1,440,000 1,440,000 720,000 3,600,000
Appliances..............    480,000  480,000    
1,440,000 2,400,000
Total revenue....... $2,432,000 $2,048,00 $2,800,00 $7,280,00
0 0 0

Variable costs c
Furniture................. $  384,000 $  $  $ 
96,000 480,000 960,000
Sports..................... 864,000 864,000 432,000 2,160,000
Appliances..............    336,000      
336,000 1,008,000 1,680,000
Total variable costs $1,584,000 $1,296,00 $1,920,00 $4,800,00
0 0 0
Contribution margin. . . $  848,000 $ $  $2,480,00
752,000 880,000 0

Fixed costs
Manufacturing
overhead d............. $  165,000 $ 135,000 $  $ 
200,000 500,000
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Managerial Accounting, 5/e 12- 39
 Depreciation e.......... 134,400 96,000 169,600 400,000
Administrative and
selling expenses...    60,000   100,000    $   1,160,000
250,000 750,000
Total fixed costs. . . $ 359,400 $ 331,000 $  $   $2,060,00
619,600 750,000 0
Operating income
(loss)......................... $ 488,600 $ 421,000 $  $ $ 420,000
260,400 (750,000)

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12-40 Solutions Manual
CASE 12-51 (CONTINUED)

SUPPORTING CALCULATIONS
a
Sales in units

Total Units  % of Sales = Units Sold

United States
  Furniture...................................... 160,000 .40 64,000
  Sports.......................................... 180,000 .40 72,000
  Appliances................................... 160,000 .20 32,000

Canada
  Furniture...................................... 160,000 .10 16,000
  Sports.......................................... 180,000 .40 72,000
  Appliances................................... 160,000 .20 32,000

Asia
  Furniture...................................... 160,000 .50 80,000
  Sports.......................................... 180,000 .20 36,000
  Appliances................................... 160,000 .60 96,000

b
Revenue

Units Sold Unit Price Revenue

United States
Furniture............................................ 64,000 $   8.00 $   512,000
Sports................................................ 72,000 20.00 1,440,000
Appliances......................................... 32,000 15.00 480,000

Canada
Furniture............................................ 16,000 8.00 128,000
Sports................................................ 72,000 20.00 1,440,000
Appliances......................................... 32,000 15.00 480,000

Asia
Furniture............................................ 80,000 8.00 640,000
Sports................................................ 36,000 20.00 720,000
Appliances......................................... 96,000 15.00 1,440,000

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Managerial Accounting, 5/e 12- 41
CASE 12-51 (CONTINUED)
c
Variable costs

Variable Variable Total

Units Mfg. Selling Variable
Sold Cost/Unit Cost/Unit Cost
(1) (2) (3) (1)  [(2) +
(3)]
United States
Furniture....................... 64,000 $4.00 $2.00 $ 384,000
Sports........................... 72,000 9.50 2.50 864,000
Appliances.................... 32,000 8.25 2.25 336,000

Canada
Furniture....................... 16,000 4.00 2.00 96,000
Sports........................... 72,000 9.50 2.50 864,000
Appliances.................... 32,000 8.25 2.25 336,000

Asia
Furniture....................... 80,000 4.00 2.00 480,000
Sports........................... 36,000 9.50 2.50 432,000
Appliances.................... 96,000 8.25 2.25 1,008,000

d
Manufacturing overhead

Total Area Proportion Allocated

Manufacturing Variable of Manufacturing
Overhead Costs total Cost

United States.................... $500,000 $1,584,000 33% $165,000  

Canada............................. 500,000  1,296,000 27% 135,000  
Asia.................................. 500,000  1,920,000 40%  200,000  
Total................................. $4,800,00 $500,000  
0

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12-42 Solutions Manual
CASE 12-51 (CONTINUED)
e
Depreciation expense

Area Proportion
Total Units of Allocated
Depreciatio Sold Total Depreciation
n
United $400,000 168,000 33.6% $134,400
States…………………
Canada………………………. 400,000 120,000 24.0% 96,000
..
Asia………………………… 400,000 212,000 42.4%  169,600
….
Total………………………… 500,000 $400,000
…

2. Areas where the company’s management should focus its attention in order to
improve corporate profitability include the following:

 The income statement by product line shows that the furniture product line may
not be profitable. The furniture product line does have a positive contribution.
However, the fixed costs assigned to the product line result in a loss.
Management should investigate:

—The possibility of increasing the selling price of these products.

—The possibility of increasing volume by cutting prices or increasing

advertising, resulting in a larger total contribution margin.

—Cutting variable costs associated with this product line.

—Discontinuing the manufacture of furniture and concentrating on the other

product lines that are more profitable.

—How much of the fixed costs allocated to furniture are separable (avoidable)
if the product line is discontinued.

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Managerial Accounting, 5/e 12- 43
CASE 12-51 (CONTINUED)

 The income statement by geographic area shows that the Asian market is the
least profitable sales area. In order to improve the profit margin in the Asian
market, management should:

— Investigate the selling and administrative expenses in this area as they are
considerably higher than those in other areas.

— Consider increasing the sales of product lines other than furniture as

this product line makes the smallest contribution to profit.

 Management should review the unallocated expenses in an attempt to reduce

these costs and improve overall profitability.

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12-44 Solutions Manual
CURRENT ISSUES IN MANAGERIAL ACCOUNTING
ISSUE 12-52

“HOW FORD, FIRESTONE LET THE WARNINGS SLIDE BY AS DEBACLE DEVELOPED:

THEIR SEPARATE GOALS, GAPS IN COMMUNICATION GAVE RISE TO RISKY
SITUATION," THE WALL STREET JOURNAL , SEPTEMBER 6, 2000, TIMOTHY
AEPPEL, CLARE ANSBERRY, MILO GEYELIN AND ROBERT I. SIMISON.

1. Firestone should have been more aggressive in keeping an eye out for defects
since it previously had a major problem with tread peeling off its tires. Ford should
have kept its own records of tire performance instead of depending on Firestone's
reassurances.

2. The value chain is a set of business functions that add value to the products or
services of an organization. The value chain includes functions such as the
following: research and development: design of products, services, or processes;
production; marketing; distribution; and customer service. In this scenario, Ford
and Firestone are each part of the other’s value chain.

ISSUE 12-53

“MANAGER'S JOURNAL: ANOTHER JACK WELCH ISN'T GOOD ENOUGH," THE WALL
STREET JOURNAL , NOVEMBER 22, 1999, MICHAEL ALLEN.
The next leader of GE will need to have even bigger ideas and imagination than
today's CEO. He or she must have the vision and foresight to anticipate what the
enterprise will need to become over the next 20 years. He or she will need to lead
leaders and have the political skills to deal with challenges from outside the company.

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Managerial Accounting, 5/e 12- 45
ISSUE 12-54

“HERB KELLEHER HAS ONE MAIN STRATEGY: TREAT EMPLOYEES WELL," THE
WALL STREET JOURNAL , AUGUST 31, 1999, HAL LANCASTER.
1. Build a culture with an esprit de corps.

2. Structure training exercises so that everyone has to contribute to complete them

successfully.

3. Give people the license to be themselves and motivate others in that way. Give
each person the opportunity to be a maverick.

4. Allow and encourage people to take pride in what they're doing.

5. Fight bureaucracy and hierarchy.

6. Recognize that people are still the most important part of an organization. How
management treats its employees determines how they treat people outside the
company.

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12-46 Solutions Manual