Chapter 22: Q4DQ (page 986)
What three factors would influence your evaluation as to whether a company’s current ratio is good or bad?
Three factors which affect the evaluation of the current ratio are type of business, composition of current assets and turnover rate of assets.
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Britney Brown, the plant manager of LMN Co.’s Chicago plant, is responsible for all of that plant’s costs other than her own salary. The plant has two operating departments and one service department. The refrigerator and dishwasher operating departments manufacture different products and have their own managers. The office department, which Brown also manages, provides services equally to the two operating departments. A monthly budget is prepared for each operating department and the office department. The company’s responsibility accounting system must assemble information to present budgeted and actual costs in performance reports for each operating department manager and the plant manager. Each performance report includes only those costs that a particular operating department manager can control: raw materials, wages, supplies used, and equipment depreciation. The plant manager is responsible for the department managers’ salaries, utilities, building rent, office salaries other than her own, and other office costs plus all costs controlled by the two operating department managers. The April departmental budgets and actual costs for the two operating departments follow.
| Budget | Actual | |||||
| Refrigerator | Dishwasher | Combined | Refrigerator | Dishwasher | Combined | |
Raw material | \(400,000 | \)200,000 | \(600,000 | \)385,000 | \(202,000 | \)587,000 |
Employee wages | \(170,000 | \)80,000 | \(250,000 | \)174,700 | \(81,500 | \)256,200 |
Dept. manager salary | \(55,000 | \)49,000 | \(104,000 | \)55,000 | \(46,500 | 101,500 |
Supplies used | \)15,000 | \(9,000 | \)24,000 | \(14,000 | \)9,700 | \(23,700 |
Depreciation – equipment | \)53,000 | \(37,000 | \)90,000 | \(53,000 | \)37,000 | \(90,000 |
Utilities | \)30,000 | \(18,000 | \)48,000 | \(34,500 | \)20,700 | \(55,200 |
Building rent | \)63,000 | \(17,000 | \)80,000 | \(65,800 | \)16,500 | \(82,300 |
Office department cost | \)70,500 | \(70,500 | \)141,000 | \(75,000 | \)75,000 | \(150,000 |
Total | \)856,500 | \(480,500 | \)1,337,000 | \(857,000 | \)488,900 | \(1,345,900 |
The office department’s budget and its actual costs for April follow.
Budget | Actual | |
Plant manager salary | \)80,000 | \(85,000 |
Other office salaries | 40,000 | 35,200 |
Other office costs | 21,000 | 29,800 |
Totals | \)141,000 | $150,000 |
Required
1. Prepare responsibility accounting performance reports like those in Exhibit 22.2 that list costs controlled by the following:
a. Manager of the refrigerator department.
b. Manager of the dishwasher department.
c. Manager of the Chicago plant. In each report, include the budgeted and actual costs for the month and show the amount by which each actual cost is over or under the budgeted amount.
Analysis Component
2. Did the plant manager or the operating department managers better manage costs? Explain.
A food manufacturer reports the following for two of its divisions for a recent year.
\( million | Beverage Division | Cheese Division |
Invested assets, beginning | \)2,662 | $4,455 |
Invested assets, ending | 2,593 | 4,400 |
Sales | 2,681 | 3,925 |
Operating Income | 349 | 634 |
For each division, compute (1) return on investment, (2) profit margin, and (3)
Billie Whitehorse, the plant manager of Travel Free’s Indiana plant, is responsible for all of that plant’s costs other than her own salary. The plant has two operating departments and one service department. The camper and trailer operating departments manufacture different products and have their own managers. The office department, which Whitehorse also manages, provides services equally to the two operating departments. A budget is prepared for each operating department and the office department. The company’s responsibility accounting system must assemble information to present budgeted and actual costs in performance reports for each operating department manager and the plant manager. Each performance report includes only those costs that a particular operating department manager can control: raw materials, wages, supplies used, and equipment depreciation. The plant manager is responsible for the department managers’ salaries, utilities, building rent, office salaries other than her own, and other office costs plus all costs controlled by the two operating department managers. The annual departmental budgets and actual costs for the two operating departments follow.
Budget | Actual | |||||
Campers | Trailers | Combined | Campers | Trailers | Combined | |
Raw material | \(195,000 | \)275,000 | \(470,000 | \)194,200 | \(273,200 | \)467,400 |
Employee wages | 104,000 | 205,000 | 309,000 | 106,600 | 206,400 | 313,000 |
Dept. manager salary | 43,000 | 52,000 | 95,000 | 44,000 | 53,500 | 97,500 |
Supplies used | 33,000 | 90,000 | 123,000 | 31,700 | 91,600 | 123,300 |
Depreciation -Equipment | 60,000 | 125,000 | 185,000 | 60,000 | 125,000 | 185,000 |
Utilities | 3,600 | 5,400 | 9,000 | 3,300 | 5,000 | 8,300 |
Building rent | 5,700 | 9,300 | 15,000 | 5,300 | 8,700 | 14,000 |
Office department cost | 68,750 | 68,750 | 137,500 | 67,550 | 67,550 | 135,100 |
Totals | \(513,050 | \)830,450 | \(1,343,500 | \)512,650 | \(830,950 | \)1,343,600 |
The office department’s annual budget and its actual costs follow.
Budget | Actual | |
Plant manager salary | \(80,000 | \)82,000 |
Other office salaries | \(32,500 | 30,100 |
Other office costs | 25,000 | 23,000 |
Totals | \)137,500 | $135,100 |
Required
1. Prepare responsibility accounting performance reports like those in Exhibit 22.2 that list costs controlled by the following:
a. Manager of the camper department.
b. Manager of the trailer department.
c. Manager of the Indiana plant. In each report, include the budgeted and actual costs and show the amount that each actual cost is over or under the budgeted amount.
Analysis Component
2. Did the plant manager or the operating department managers better manage costs? Explain
Heart & Home Properties is developing a subdivision that includes 600 home lots. The 450 lots in the Canyon section are below a ridge and do not have views of the neighboring canyons and hills; the 150 lots in the Hilltop section offer unobstructed views. The expected selling price for each Canyon lot is \(55,000 and for each Hilltop lot is \)110,000. The developer acquired the land for \(4,000,000 and spent another \)3,500,000 on street and utilities improvements. Assign the joint land and improvement costs to the lots using the value basis of allocation and determine the average cost per lot.
The following is a partially completed lower section of a departmental expense allocation spreadsheet for Cozy Bookstore. It reports the total amounts of direct and indirect expenses allocated to its five departments. Complete the spreadsheet by allocating the expenses of the two service departments (advertising and purchasing) to the three operating departments.
Allocation of expenses to departments | |||||||
Particular | Allocation base | Expense account balance | Advertising department | Purchasing department | Books Department | Magazine department | News paper department |
Total departmental expenses | \(698,000 | \)24,000 | \(34,000 | \)425,000 | \(90,000 | \)125,000 | |
Service department expenses | |||||||
Advertising department | Sales | ? | ? | ? | ? | ||
Purchasing department | Purchase order | ? | ? | ? | ? | ||
Total expenses allocated to operating departments | ? | ? | ? | ? | |||
Advertising and purchasing department expenses are allocated to operating departments on the basis of dollar sales and purchase orders, respectively. Information about the allocation bases for the three operating departments follows.
Department | Sales | Purchase Order |
Books | \(495,000 | 516 |
Magazines | 198,000 | 360 |
Newspaper | 207,000 | 324 |
Total | \)900,000 | 1,200 |
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