Exam 9: Performance Measurement and Responsibility Accounting

Carter Company reported the following financial numbers for one of its divisions for the year; average total assets of $4,100,000; sales of $4,525,000; cost of goods sold of $2,550,000; and operating expenses of $1,372,000. Assume a target income of 10% of average invested assets. Compute residual income for the division:

The following is a partially completed lower section of a departmental expense allocation spreadsheet for Brickland. It reports the total amounts of direct and indirect expenses for the four departments. Purchasing department expenses are allocated to the operating departments on the basis of purchase orders. Maintenance department expenses are allocated based on square footage. Purchasing Maintenance Fabncation Assembly Operating costs \3 2,000 \1 8,000 \9 6,000 \6 2,000 No. of purchase orders 16 4 Sq. ft. of space 3,300 2,700 Required: Compute the amount of Purchasing department expense to be allocated to Assembly.

Departmental contribution to overhead is the same as gross profit generated by that department.

Advertising expense can be reasonably allocated to departments on the basis of each department's proportion of sales.

Expenses that are not easily associated with a specific department, and which are incurred for the joint benefit of more than one department, are:

Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below: Division Y of the same company would like to use the part manufactured by Division X in one of its products. Division Y currently purchases a similar part made by an outside company for $49 per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the part each period. Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into outside sales. According to the formula in the text, what is the lowest acceptable transfer price from the standpoint of the selling division?

Explain the difference between direct and indirect expenses in accounting for departments.

Marian Corporation has two separate divisions that operate as profit centers. The following information is available for the most recent year: The Black Division occupies 20,000 square feet in the plant. The Navy Division occupies 30,000 square feet. Rent is an indirect expense and is allocated based on square footage. Rent expense for the year was $50,000. Compute gross profit for the Black and Navy Divisions, respectively.