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Management Accounting 6th Canadian edition Charles T. Horngren, Gary L. Sundem, William O. Stratton, Phillip Beaulieu - Solutions

How do profit centres and investment centres differ?
Name five kinds of responsibility centres.
"There are corporate objectives other than profit." Name four.
"Goals are useless without performance measures." Do you agree? Explain.
What is the purpose of a management control system?
The president of North Shore Railroad wants to obtain an overview of the company’s operations, particularly with respect to comparing freight and passenger business. He has heard about "contribution" approaches to cost allocations that emphasize cost behaviour patterns and contribution margins,
Wells and Severson are manufacturing companies. Comparative data for 2006 and 2012 are Assume that inflation has totalled 15 percent during these six years so that each 2006 dollar is equivalent to 1.15 2012 dollars, due to inflation. 1. Compute 2006 and 2012 productivity measures in
Mark Ferguson, the president of Ferguson Foundry Limited (FFL), sat in his office early on June 2, 2010, reviewing the financial statements of FFL for the fiscal year ended May 31, 2010. The results for the year were both a shock and a disappointment. Ferguson called Carl Holitzner, an
Durst Industries Inc. (Durst), a multinational company, has its head office in Western Canada. Shares are listed on Canadian stock exchanges and on several foreign exchanges. For the fiscal year ended June 30, 2009, consolidated net sales amounted to $1.2 billion and net income was $45 million. The
Riverside Mining and Manufacturing is a vertically integrated company that mines, processes, and finishes various non-precious metals and minerals. Riverside has decentralized both on a geographical and on an operational basis. For example, Exploration and Development, which includes all mining
The Whole Company is an integrated multidivisional manufacturing firm. Two of its divisions, Rod and Champ, are profit centres and their division managers have full responsibility for production and sales (both internal and external). Both the Rod and Champ division managers are evaluated by top
EZtronics, a manufacturer of small appliances, has an Engineering Consulting Department (ECD). The department’s major task has been to help the production departments improve their operating methods and processes. For several years the consulting services have been charged to the production
In October 2009 CanWest Global Communications Corp. was declared insolvent and began selling media assets by announcing the sale of Global Television. CanWest also owned many major Canadian newspapers, including The National Post, Montreal Gazette, Vancouver Sun, and Calgary Herald. CanWest
This is an expansion of E14-8. The primary difference between the EVA and residual income measures is the increased focus on cash flow by EVA. EVA companies make several adjustments to both operating income from the income statement and invested capital from the balance sheet. Common examples of
Tom Clay is the chief executive officer of Mayberry Company. Clay has a financial management background and is known throughout the organization as a “no-nonsense” executive. When Clay became chief executive officer, he emphasized cost reduction and savings and introduced a comprehensive
Antonio Company uses the decentralized form of organizational structure and considers each of its divisions as an investment centre. Division L is currently selling 15,000 air filters annually, although it has sufficient productive capacity to produce 21,000 units per year. Variable manufacturing
Assume that a machine shop acquires $600,000 of fixed assets with a useful life of four years and no residual value. The shop uses straight-line depreciation. The company judges the shop manager based on income in relation to these fixed assets. Annual net income, after deducting depreciation, is
As the CEO of Friendly Hardware Company, you examined the following measures of the performance of three divisions (in thousands of dollars). 1. Calculate for each division the rate of return on net assets and the residual income based on historical cost and on replacement cost. For purposes
Accountants often express ROI as the product of two components—capital turnover and return on sales. You are considering investing in one of three companies, all in the same industry, and are given the following information. 1. Why would you desire the breakdown of return on investment into
The London Trading Company plans to hire a manager for its division in Kenya. London Trading’s president and vice president/personnel are trying to decide on an appropriate incentive employment contract. The manager will operate far from the London corporate headquarters, so evaluation by
Keyworth Co. is a large, integrated conglomerate with shipping, metals, and mining operations throughout the world. The general manager of the Shipbuilding division plans to submit a proposed capital budget for 2011 for inclusion in the companywide budget. The division manager has for
A large automobile dealership is installing a responsibility accounting system and three profit centres: parts and service; new vehicles; and used vehicles. The department managers have been told to run their shop as if they were in business themselves. However, there are interdepartmental
Canadian Medical Instruments produces a variety of medical products at its plant in Saskatoon. The company has sales divisions worldwide. One of these sales divisions is located in Uppsala, Sweden. Assume that the combined federal and provincial income tax rate applied to Saskatoon operations is 34
The Lighting division of St. John’s Office Furniture needs 1,200 units of a leaded-glass lamp shade from the Fabricating division. The company has a policy of negotiated transfer prices. The Fabricating division has enough excess capacity to produce 2,000 units of the lamp shade. Its variable
A consulting firm, TAC, is decentralized with 25 offices around the country. The headquarters is based in Vancouver. Another operating division is located in Calgary. A printing subsidiary operation, Kwik Print, is located in the headquarters building. Top management has indicated the desirability
The Furniture division of Barrie Woodcraft purchases lumber, which it uses to fabricate tables, chairs, and other wood furniture. Most of the lumber is purchased from the Southshore Mill, also a division of Barrie Woodcraft. Both the Furniture division and Southshore Mill are profit
The Moncton division of Glencoe Corporation, operating at capacity, has been asked by the Antigonish division of Glencoe to supply it with Electrical Fitting No. LX29. Moncton sells this part to its regular customers for $10 each. Antigonish, which is operating at 50 percent capacity, is willing to
The Coca-Cola Company uses EVA to evaluate top management performance. In 2008, Coca-Cola had net operating income of $8,446 million, income taxes of $1,632 million, and average noncurrent liabilities plus shareholders’ equity of $27,531 million. The company’s capital is about 15 percent
Hershey Company manufactures, distributes, and sells many items with the Hershey brand name. It also has many other brands including Almond Joy, Milk Duds, and Twizzlers. Its financial results for two recent fiscal years included (in millions): 1. Suppose that Hershey’s cost of capital is
Technology does business in three different business segments: (1) Entertainment, (2) Publishing/Information, and (3) Consumer/ Commercial Finance. Results for a recent year were (in millions): 1. Compute the following for each business segment. a. Return on sales b. Capital
Cambridge International has production and marketing divisions throughout the world. It produces one particular product in Ireland, where the income tax rate is 12 percent, and transfers it to a marketing division in Japan, where the income tax rate is 40 percent. Assume that Japan places an import
A chair’s variable cost is $50 and its market value as a piece of unfinished furniture is $63 at a transfer point from the Assembly division to the Finishing division. The Finishing division’s variable cost of sanding and finishing the chair is $28, and the selling price of the finished chair
The St. Cloud division of Martinelli Company just purchased an asset for $150,000. The asset has a three-year life. Martinelli’s top management evaluates Freida Schmidt, manager of the St. Cloud division, based on her division’s ROI. She can choose to measure her assets using either gross asset
Laurel Company has assets of $2 million and long-term, 10 percent debt of $900,000. Hardy Company has assets of $2 million and no long-term debt. The annual operating income (before interest) of both companies is $400,000. Ignore taxes. 1. Compute the rate of return on a. Assets
Consider the following data. 1. Prepare a similar tabular presentation, filling in all blanks. 2. Which division is the best performer? Explain. Division J K $280,000 $ Income 2$ Revenue Invested capital $3,000,000 $16,000,000 Income percentage of revenue Capital turnover Rate of return
Footwear has assets of $2 million and a long-term, 10 percent debt of $800,000. Shirley Shoes has assets of $2 million and no long-term debt. The annual operating income (before interest) of both companies is $500,000.1. Compute the rate of return ona. Assets available.b. Shareholders’ equity.2.
Consider the following data: 1. Prepare a similar tabular presentation, filling in all blanks. 2. Which division is the best performer? Explain. 3. Suppose each division is assessed an imputed interest rate of 12 percent on invested capital. Compute the residual income for each
Fill in the blanks: Division А в с % Income percentage of revenue Rate of return on invested capital 7% 3% Capital turnover 3 % 24% 20%
You are given the following data. Sales...................$120,000,000 Invested capital..$ 60,000,000 Net income...........$ 6,000,000 Compute the following: 1. Turnover of capital 2. Return on sales 3. Return on investment (ROI)
Northland Company makes bicycles. Components are made in various divisions and transferred to the Western division for assembly into final products. The Western division can also buy components from external suppliers. The wheels are made in the Eastern division, which also sells wheels to external
A desk calendar’s variable cost is $5 and its market value is $6.25 at a transfer point from the Printing division to the Binding division. The Binding division’s variable cost of adding a simulated leather cover is $2.80, and the selling price of the final calendar is $8.50. 1. Prepare a
Describe management by objectives (MBO).
Company X uses net book value as a measure of invested capital when computing ROI. A division manager has suggested that the company change to using gross book value instead. What difference in motivation of division managers might result from such a change? Do you suppose most of the assets in the
“Managers who use a historical-cost accounting system look backward at what something cost yesterday, instead of forward to what it will cost tomorrow.” Do you agree? Why?
Give four possible definitions of invested capital that can be used in measuring ROI or residual income.
Division A’s ROI is 20 percent, and B’s is 10 percent. Each manager is paid a bonus based on his or her division’s ROI. Discuss whether each division manager would accept or reject a proposed project with a rate of return of 15 percent. Would either of them make a different decision if
“Both ROI and residual income use profit and invested capital to measure performance. Therefore, it really doesn’t matter which we use.” Do you agree? Explain.
What two major items affect ROI?
What is the major benefit of the ROI technique for measuring performance?
According to agency theory, employment contracts trade off three factors. Name the three.
Discuss two factors that affect multinational transfer prices but have little effect on purely domestic transfers
“We use variable-cost transfer prices to ensure that no dysfunctional decisions are made.” Discuss.
Why is it necessary to include opportunity cost in the general rule for transfer pricing?
Why are transfer-pricing systems needed?
What kinds of organizations find decentralization to be preferable to centralization?
Why is decentralization more popular in profit-seeking organizations than in non-profit organizations?
“The essence of decentralization is the use of profit centresa.” Do you agree? Explain.
The Tokyo division of Kaycee Toy Company manufactures units of the game Shogi and sells them in the Japanese market for ¥7,200 each. The following data are from the Tokyo division’s 2012 budget. Variable cost ¥ 5,000 per unit Fixed overhead ¥ 6,080,000 Total assets
Ogopogo Enterprises runs a chain of drive-in ice cream stands in the Okanagan Valley during the summer season. Managers of all stands are told to act as if they owned the stand and are judged on their profit performance. Ogopogo Enterprises has rented an ice cream machine for the summer to supply
A A company that uses EVA reported the following results for 2011 and 2012 (in millions): Average adjusted invested capital was $20,308 million in 2011 and $19,591 million in 2012, and the cost of capital increased from 9 percent in 2011 to 10 percent in 2012. 1. Compute the company’s
Consider the following data regarding budgeted operations for 2012 of the Winnipeg division of Machine Products: a.1. What average unit sales price does the Winnipeg division need to obtain its desired rate of return on average available assets?2. What would be the expected capital
Omar Efenti is manager of the Pacific division of Zenna Inc. His division makes a single product that is sold to industrial customers. Demand is seasonable but is readily predictable. The division’s budget for 2010 called for production and sales of 120,000 units, with production of 10,000 units
On your first day as assistant to the president of Harold Systems Inc. (HSI), your in-box contains the following memo. To: Assistant to the President From: The President Subject: Mickey Mouse Watch Situation This note is to bring you up to date on one of our acquisition problem
Current River is a medium-sized city that has experienced rapid growth in the last two decades. For several of those years the city had the highest growth rate in the country. Much of the growth has occurred in the suburbs that now have full commercial facilities that are at least equal to those in
The discovery of vast petroleum reserves in the country of Atlantis has led to massive expenditures on government services. Several years ago, the Minister of Communications had automated the Atlantis post office, but despite the latest equipment, the delivery of mail remained slow and
Ron Miron, president of Champion’s Sporting Goods (CSG), was concerned about the profits earned by CSG during the fiscal year ending July 31, 2012. He had expected to sell 4,400 ski packages and earn $143,250 before taxes; actual profits earned were only $36,950. The market for ski equipment
Sam Leaf, the president of Ginkgo Manufacturing Limited, was very pleased but puzzled by the 2012 operating results (Exhibit 12A-1). He knew that both manufacturing and marketing had problems during the year and he had not anticipated that the actual income from operations would exceed the budget.
The Holcomb Hotel is a 200-room hotel located in a residential section of Kingston, Ontario. It is an older hotel of distinction that is very popular with those who appreciate the amenities of the older style of service. While the Holcomb is a respected hotel, it has not always been a
Manchester Machining Company (MMC) produces and sells three main product lines. The company employs a standard cost-accounting system for recordkeeping purposes. At the beginning of 2010, the president of MMC presented the budget to the parent company and accepted a commitment to earn a profit
Distributors reported the following budget and actual data for the month of March. Calculate the total sales-volume variance, the market-share variance, and the market size variance. 16,000 units Budgeted total contribution margin, Bourgeau $1,200,000 200,000 units 21,600 units 240,000
Materials support cost for the Industrial Equipment Manufacturing Company depends on the weight of material (plate steel, castings, etc.) moved. For actual production in the current budget period, the standard weight that was allowed to be moved was 750,000 kilograms. The standard materials support
Consider the following data: Compute the price, quantity, and flexible-budget variances for direct materials and direct labour. Use U or F to indicate whether the variances are unfavourable or favourable. Direct Direct Materials Labour Costs incurred: actual inputs × actual prices
Standard direct labour rate.....................................................$14.00 Actual direct labour rate...........................................................$12.20 Standard direct-labour-hours..................................................12,000 Direct labour
Shanghai Toy Company produced 10,000 stuffed bears. The standard direct material allowance is 1.75 kilograms per bear, at a cost per kg of $3. Actually, 16,500 kg of materials (input) were used to produce the 10,000 bears (output).Similarly, the standard allowance for direct labour is 4.6 hours to
The manager of the City of Sydney road maintenance shop uses standards to judge performance. Because a clerk mistakenly discarded some labour records, however, the manager has only partial data for April. She knows that the total direct labour flexible-budget variance was $1,855 favourable.
Tailored Shirt Company (TSC) uses a special fabric in the production of dress shirts. During August TSC purchased 10,000 square metres of the fabric at $6.90 per metre and used 7,900 square metres in the production of 3,800 shirts. The standard allows 2 metres at $7.10 per metre for each
Western Power is considering the replacement of an old billing system with new software that should save $5,000 per year in net cash operating costs. The old system has zero disposal value, but it could be used for the next 12 years. The estimated useful life of the new software is 12 years and it
Toyland Company was one of the original producers of “Transformers. An especially complex part of “Sect-a-con needs special tools that are not useful for other products. These tools were purchased on November 16, 2006, for $200,000. It is now July 1, 2010. The manager of the Transformer
The head of the consulting division of a major firm has proposed investing $300,000 in personal computers for the staff. The useful life of the computers is five years. Computers qualify for Class 10, 30 percent declining balance. There is no terminal salvage value. Labour savings of $125,000 per
G. Esteban, the president of a Toronto trucking company, is considering whether to invest $410,000 in new semi-automatic loading equipment that will last five years, have zero scrap value, and generate cash operating savings in labour usage of $160,000 annually, using 2010 prices and wage rates. It
The City of Prince George is considering the purchase of a photocopying machine for $7,300 on December 31, 2010, useful life five years, and no residual value. The cash operating savings are expected to be $2,000 annually, measured in 2010 dollars. The minimum desired rate is 14 percent, which
Luxon Company produces industrial and residential lighting fixtures at its manufacturing facility in Calgary. Shipment of company products to an eastern warehouse is handled by common carriers at a rate of $0.25 per kilogram of fixtures (expressed in Year-0 dollars). The warehouse is located 2,500
The Sea Pines Company is planning to spend $45,000 for modernized production equipment. It will replace equipment that has zero book value and no salvage value, although the old equipment would last another seven years. The new equipment will save $13,500 in cash operating costs for each of
Assume that income tax rates are 30 percent and that the asset qualifies for a 25 percent declining balance CCA, and the required rate of return is 10 percent. 1. The book value of an old machine is $20,000. It is to be sold for $8,000 cash. What is the effect of this decision on cash flows,
Tsumagari Company, an electronics company in Kobe, Japan, is planning to buy new equipment to produce a new product. Estimated data are: Assume a 60 percent flat rate for income taxes. All revenues and expenses other than depreciation will be received or paid in cash. Use a 14 percent discount
South Chemicals Corporation was adversely affected by a tax ruling that certain selling and administrative expenses must be treated as product costs instead of period costs for reporting to the tax authorities. (Recall that period costs are charged as expenses in the period they are incurred.
Thirdgill has a small sewing and tailoring shop in the basement of her home. She uses the single telephone line into the home for both business and personal calls. She estimates that 50 percent of the phone use is for business. Until 2010 she allocated the basic cost of the telephone line, $20 per
Goladen Vineyards is a successful small winery. The owner, Gino Colucchio, is considering an additional line of business: selling wind generated electricity to the local utility. Tax law requires power utilities to purchase windmill electricity. Gino could put windmills on his current land without
An asset with an accounting book value of $50,000 was sold for cash on January 1, 2010. Assume two selling prices: $65,000 and $30,000. For each selling price, prepare a tabulation of the accounting gain or loss, the effect on income taxes, and the total after-tax effect on cash. Assume the asset
The president of a software company is contemplating acquiring some computers used for designing software. The computers will cost $150,000 cash and will have zero terminal salvage value. The recovery period and useful life are both three years. Annual pre-tax cash savings from operations will be
Dominique’s Frozen Food Company makes frozen dinners and sells them to retail outlets near London. Dominique has just inherited £10,000 and has decided to invest it in the business. She is trying to decide between the following alternatives: Alternative A: Buy a £10,000 contract, payable
Anika Paar, the owner of a nine-hole golf course on the outskirts of Hamilton, Ontario, is considering the proposal that the course be illuminated and operated at night. Ms. Paar purchased the course early last year for $90,000. Her receipts from operations during the 28-week season were $24,000.
Suppose Simon Fraser University is considering replacing some Xerox copiers with faster copiers purchased from Kodak. The administration is very concerned about the rising costs of operations during the last decade. In order to convert to Kodak, two operators would have to be retrained.
Evergreen Outdoor School (EOS) has a chance to invest $10,000 in a project that is certain to pay $4,500 at the end of each of the next three years. The minimum desired rate of return is 10 percent. 1. What is the project’s net present value? 2. Show that EOS would be equally well off
Suppose the University of Toronto Faculty of Applied Science and Engineering is considering the purchase of a special-purpose machine for $60,000. It is expected to have a useful life of three years with no terminal salvage value. The university’s controller estimates the following savings in
Bowden Institution currently has its laundry done by a local cleaners at an annual cost of $46,000. It is considering a purchase of washers, dryers, and presses at a total installed cost of $52,000 so that inmates can do the laundry. The county expects savings of $15,000 per year, and it expects
“Sometimes direct labour cost is the best cost driver for overhead allocation even if wage rates vary within a department. ?Do you agree? Explain.
The budgeted prices for materials and direct labour per unit of finished product are $11 and $5, respectively. The production manager is delighted about the following data. Is the manager’s happiness justified? Prepare a report that might provide a more detailed explanation of why the static
Scottish Designs has a department that makes high-quality leather cases for iPods. Consider the following data for a recent month. Budget Formula per Various Levels of Output Unit 6,000 7,000 Units 8,000 $ ? $ ? $ ? Sales $15 Variable costs Direct 39,000 ? ? materials Hand labour 4 Fixed
The Calgary Chief of Police is attempting to predict the costs of operating a fleet of police cars. Among the items of concern are fuel, $0.15 per kilometre, and depreciation, $6,000 per car per year. The manager is preparing a flexible budget for the coming year. Prepare the flexible-budget

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