Download 94638505 Solution Manual Managerial Accounting Hansen Mowen 8th Editions Ch 10 PDF

Title94638505 Solution Manual Managerial Accounting Hansen Mowen 8th Editions Ch 10
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CHAPTER 10
SEGMENTED REPORTING, INVESTMENT CENTER

EVALUATION, AND TRANSFER PRICING

QUESTIONS FOR WRITING AND DISCUSSION

1. In centralized decision making, decisions
are made at the very top level, and lower-
level managers are responsible for imple-
menting these decisions. For decentralized
decision making, decisions are made and
implemented by lower-level managers.

2. Decentralization is the delegation of deci-
sion-making authority to lower levels.

3. Reasons for decentralization include access
to local information, cognitive limitations,
more timely responses, focusing of central
management, training, and motivation.

4. The only difference is the way in which fixed
overhead costs are assigned. Under varia-
ble costing, fixed overhead is a period cost;
under absorption costing, it is a product
cost.

5. Absorption-costing income is greater be-
cause some of the period’s fixed overhead is
placed in inventory and not recognized on
the absorption-costing income statement.

6. Absorption costing. Variable costing would
recognize only the period’s fixed overhead
as an expense. The additional fixed over-
head expense must have come from inven-
tory.

7. Variable costing does not distort product
performance by allocating common fixed
costs. It allows managers to identify the con-
tributions individual segments are making
toward coverage of fixed costs.

8. Variable costing allows managers to identify
what the costs ought to be for various levels
of activity. By knowing what the costs ought
to be for the actual level of activity, meaning-
ful comparisons can be made to the costs
that actually occurred.

9. A direct fixed cost is traceable to a particular
cost object. A common fixed cost is common


to several cost objects. The distinction is im-
portant because direct fixed costs will vanish
if the cost object is eliminated but common
fixed costs will not.

10. Contribution margin is the amount available
to cover fixed expenses and provide for prof-
it. Segment margin is the amount available
to cover common fixed expenses and pro-
vide for profit for a segment. Contribution
margin is the difference between revenues
and variable expenses. Segment margin is
contribution margin less direct fixed ex-
penses for a segment.

11. Absorption-costing income can increase
from one period to the next if more is pro-
duced than what is sold. Even though the
fixed costs may not have changed, the fixed
costs recognized on the income statement
can change (because of inventory changes).

12. Different customer groups cause different
activities and costs. Understanding what ac-
tivities are unique to the various customer
groups can help the firm determine custom-
er profitability and also help it set different
prices for the customer groups.

13. Margin = Operating income/Sales, and
Turnover = Sales/Average operating assets.
By breaking ROI into margin and turnover,
more information is available to assess per-
formance. Knowledge of margin and turno-
ver gives more insight into why the ROI may
change from one period to the next.

14. ROI (1) encourages managers to pay atten-
tion to the relationships among sales, ex-
penses, and investment, (2) encourages
cost efficiency, and (3) discourages exces-
sive investment in operating assets. In-
creased profitability can be achieved (all
else being equal) by increasing revenues,
decreasing expenses, or lowering invest-
ment.

15. ROI may discourage managers from invest-
ing in projects that would increase the profit-
ability of the firm but decrease the division’s

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ROI. It also may encourage myopic behavior
by encouraging managers to make deci-
sions that are profitable in the short run but
harmful in the long run (e.g., cutting re-
search and development costs).

16. EVA is the difference between after-tax
operating income and the total annual cost
of capital.

17. Owners may have difficulty developing goal
congruence with managers because man-
agers may not want to work as hard as the
owner would like and because managers
may wish to use the company’s resources
for their own benefit. Properly structured in-
centive pay plans may be successful in
overcoming these problems.

18. A transfer price is the price charged for
goods that are transferred from one division
to another.

19. Transfer prices impact the revenues of the
transferring division and the costs of the
buying division and, thus, the profits of both
divisions. A transfer price can affect the prof-
its of the firm because it can affect the out-
put decision of the buying division. If the
price is set too high (low), then the output of
the buying division may be too low (high).
Since the transfer price can affect firmwide
profitability, higher management may be
tempted to interfere with the autonomy of a
division and dictate the price (rather than let-
ting the divisional manager make the pricing
decision).

20. The opportunity cost approach to transfer
pricing identifies the minimum and maximum
transfer prices. The minimum transfer price
is the one that makes the transferring divi-
sion no worse off, and the maximum transfer

price is the one that makes the buying divi-
sion no worse off.

21. Agree. At least one division will be made
better off, and firm profits will increase.

22. Market price. Minimum price = Maximum
price = Market price. Any other price would
make at least one division worse off, and
firm profits may decrease if the price is not
market price.

23. Negotiated transfer prices allow both divi-
sions to be made better off whenever oppor-
tunity costing signals that a transfer should
take place. Because both can be made bet-
ter off, no interference from headquarters is
needed. Moreover, the price emerging is
necessarily a mutually satisfactory price. In
effect, negotiated prices can simultaneously
satisfy the objectives of accurate perfor-
mance evaluation, firmwide efficiency, and
preservation of divisional autonomy. Disad-
vantages of negotiated transfer prices are
that (1) private information can be used for
exploitation, (2) performance measures are
distorted by relative negotiating skills of
managers, and (3) it is costly.

24. Three cost-based transfer prices are full
cost, full cost plus markup, and variable cost
plus fixed fee. Disadvantages are that prices
may not reflect the optimal outcome for the
divisions and for the firm. Specifically, it is
possible for the transfer price using one of
the costing approaches to be less than the
minimum price and greater than the maxi-
mum price. The prices, however, are simple
to use and, in some cases, may reflect the
outcome of a negotiated agreement.

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1. Ziemble Company
Absorption-Costing Income Statement



Sales ........................................................................................... $ 1,512,000
Cost of goods sold* .................................................................. 1,048,000
Gross margin ............................................................................. $ 464,000
Selling and administrative expenses ...................................... 444,000
Net income ........................................................................... $ 20,000


*Fixed overhead rate = $300,000/75,000 = $4 per unit
Applied fixed overhead = $4 × 74,000 = $296,000
Underapplied fixed overhead = $300,000 – $296,000 = $4,000
Cost of goods sold = ($4 × 72,000) + $4,000 + $756,000
= $1,048,000

2. The difference is $8,000 ($20,000 – $12,000) and is due to the fixed overhead

that would be attached to the ending inventory ($4 × 2,000 units).


IA – IV = Fixed overhead rate(Production – Sales)
$20,000 – $12,000 = $4(74,000 – 72,000)
$8,000 = $8,000

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10–20

1. Scented Musical Regular Total
Sales $ 13,000 $ 19,500 $ 25,000 $ 57,500
Less: Variable expenses 9,100 15,600 12,500 37,200
Contribution margin $ 3,900 $ 3,900 $ 12,500 $ 20,300
Less: Direct fixed expenses 4,250 5,750 3,000 13,000
Product margin $ (350) $ (1,850) $ 9,500 $ 7,300
Less: Common fixed expenses 7,500
Net (loss) $ (200)



Kathy should accept this proposal. The 30 percent sales increase, coupled
with the increased advertising, reduces the loss from $1,000 to $200. Both
scented and musical product-line profits increase. However, more must be
done. If the scented and musical product margins remain negative, the two
products may need to be dropped.


2. Regular
Sales $ 20,000
Less: Variable expenses 10,000
Contribution margin $ 10,000
Less: Fixed expenses 10,500
Operating income (loss) $ (500)


Dropping the two lines would still result in a loss. Other options need to be
developed.


3. Combinations would be beneficial. Dropping the musical line (which shows

the greatest segment loss) and keeping the scented line while increasing ad-
vertising yields a profit (the optimal combination).


Scented Regular Total

Sales $ 13,000 $ 22,500 $ 35,500
Less: Variable expenses 9,100 11,250 20,350
Contribution margin $ 3,900 $ 11,250 $ 15,150
Less: Direct fixed expenses 4,250 3,000 7,250
Product margin $ (350) $ 8,250 $ 7,900
Less: Common fixed expenses 7,500
Operating income $ 400

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decides to appeal to higher-level management, the divisional manager can
counter with arguments that inventory was created because he expected the
economy to turn around and did not want to be in a position of not having
enough goods to meet demand. Even though Ruth may have a difficult time
proving any allegation of improper conduct, if she is convinced that the be-
havior is truly unethical, then appeals to higher-level management with the
prospect of ultimate resignation should be the route she takes.



Alternatively, Ruth might decide that the use of absorption costing for inter-
nal reporting and bonus calculation has led to this situation. She could lobby
higher management to begin using variable costing as a way of avoiding
these dysfunctional decisions. Ruth will have a very hard time proving uneth-
ical behavior—at worst, Paul may be accused of having poor judgment re-
garding future economic upturns.


3. The following standards may apply:


Integrity. Refrain from engaging in any conduct that would prejudice carrying
out duties ethically. (III-2)



Credibility. Communicate information fairly and objectively. (IV-1) Disclose
fully all relevant information that could reasonably be expected to influence
an intended user’s understanding of the reports, comments, and recommen-
dations. (IV-2)


10–34

1. ROI based on initial estimates = $1,870,000/$15,600,000 = 11.99%
ROI based on Mel’s estimates = $2,340,000/$15,600,000 = 15%

2. Jason is definitely facing an ethical dilemma. While it is true that the sales

and expense projections are estimates, they are the best ones available to
him. If he uses a sales revenue projection from the top end of the range, he
will be deliberately basing the ROI estimate on a highly unlikely sales figure.
Sales and expense projections are not fantasy figures, they are supposed to
be management’s best estimate of what will actually happen. If Jason pre-
pares the report in accordance with Mel’s desires, he will be knowingly fabri-
cating data.



One might wonder whether or not Mel’s offer to “back up” Jason is sufficient
to let Jason off the hook. It is not. If Mel wants the false projections badly
enough, let him sign them. Jason may have thought he had his dream job, but
it is about to turn into a nightmare. Companies don’t take kindly to employees
who lie, and this lie is sure to come out. If the project is approved, and the
sales do not approach $2.34 million, you can bet that the vice president of

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sales will be quick to point out that she predicted only $1.87 million. Mel will
surely pin the blame directly on Jason, the one whose name is on the report.


3. Jason should prepare the report using the figures he thinks are most descrip-

tive of the project’s potential. He should feel free to include information about
the predicted range of sales, and to point out any other information that re-
flects favorably on the project. If Mel continues to pressure Jason, then Jason
might consider looking for another job.

RESEARCH ASSIGNMENTS

10–35

Answers will vary.

10–36

Answers will vary.

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