Managerial Accounting II

Assignment No. 2
Submitted by Aldrin Santos
Submitted to Rosalie Harms
June 14, 2015

Managerial Accounting II

Case 10-37
Variance Analysis
Direct Materials
Actual Quantity of Inputs
Actual Quantity of Inputs
Standard Qty for Output
at Actual Price (AQ x AP)
at Standard Price (AQ x AP)
at Standard Price (SQ x SP)
69,0002 x $2.953
69,000 x $3
67,500 x $3
$203,550
$207,000
$202,500
Price Variance
Quantity Variance
$3,450 F
$4,500 U
Total Variance
$7,950 U

Direct Labour
Actual Hours of Inputs
Actual Hours of Inputs
Standard Hours for Output
at Actual Rate (AH x AR)
at Standard Rate (AH x SR)
at Standard Rate (SH x SR)
9,7004 x $15.755
9,700 x $15
9,000 x $15
$152,775
$145,500
$135,000
Rate Variance
Efficiency Variance
$7,275 U
$10,500 U
Total Variance
$17,775 U
Variable Manufacturing Overhead
Actual Hours of Inputs
Actual Hours of Inputs
Standard Hours for Output
at Actual Rate (AH x AR)
at Standard Rate (AH x SR)
at Standard Rate (SH x SR)
$29,100 - $650
9,700 x $3
9,000 x $3
$28,4506
$29,100
$27,000
Spending Variance
Efficiency Variance
$650 F
$2,100 U
Total Variance
$1,450 U
Fixed Manufacturing Overhead
Actual Fixed
Budgeted Fixed
Applied Fixed Overhead
Overhead Cost
Overhead Cost
Cost to Work In Process
$70,000 - $250
$63,000 + $7,000
9,000 x $7
$69,750
$70,0007
$63,000
Budged Variance
Volume Variance
$250 F
$7,000 U
Total Variance
$6,750 U

Managerial Accounting II

Summary of Analysis:
1. Units produced = Standard quantity allowed for output
Quantity per unit
= 67,500 kilograms
9 kilograms
= 7,500 units
(from superscripts)
2. 69,000 kilograms
3. $2.95
4. 9,700 direct labour hours
5. $15.75
6. $28,450
7. $70,000
8. Denominator activity = Budged Fixed Overhead Cost
Pre-determined Overhead Rate
= $70,000
$7
= 10,000 direct labour hours
Case 11-38
1. Transfer price of Electronics Division:
Transfer price
> Variable Cost + Total contribution margin on lost sales
per unit
Number of units transferred
>
8.25 + (12.50 - 8.25)
Transfer price
>
$12.50
Electronics Division can only sell its circuits to the Clock Division at a price of no less than
$12.50 because it does not have any idle capacity and they can sell all their products to outside
customers at the prevailing selling price. Therefore, they cannot sell their products to the Clock
Division at $9.
2. Revenue-cost summary per unit of timing devices sold by Stanco Inc.
Selling price
$70
Less variable costs:
Loss of additional revenue from sale
12.5
of XL5 circuit board to outside customers
Other purchased parts from outside vendors
30
Other variable costs
20.75
63.25
Net profit gained
$6.75
Based on the summary above, supplying the circuit boards to the Clock Division will lead to an
additional profit of $6.75 for the company. Considering the lost revenue that the Electronics
Division will lose by selling the boards to the Clocks Division at $9 rather to outside customers,

Managerial Accounting II

Stanco Inc. as a whole would still benefit since the variable costs directly related to the
manufacturing of timing devices ($63.25) is lower than the selling price ($70).
3.
Selling price
Less variable costs:
Loss of additional revenue from sale
of XL5 circuit board to outside customers
Other purchased parts from outside vendors
Other variable costs
Division contribution margin

$70
12.5
30
20.75

63.25
$6.75

Both managers will benefit from the transfer price agreement since their respective divisions will
generate positive contribution margins. The Clock Division will still have a contribution margin
of $6.75 per unit of timing devices sold despite the costs of the circuit boards is $12.50.
Meanwhile, the Electronics Division will still receive the same revenue it gets at the transfer
price. Therefore, any transfer price between $12.50 and $19.50 ($12.50 + $6.75) is the acceptable
range for the two managers to come up with a deal.
4. Since Stanco Inc is decentralized, autonomy on decision-making with regard to transfer prices
is up to the division managers. A problem that may arise in this situation is sub optimization,
where managers act on their own interests rather than the interests of the organization. When this
arise, the top management can intervene, but will be subject to another problem. If top
management pushes transfer pricing between the two divisions, the purpose of decentralization is
undermined, where autonomy of the divisions is preserved since they have much better
information than the top management about the potential costs and benefits of the transfer so they
are in a better position to determine the best final transfer price.
Case 11-40
1. a. ROI
Return on Investment (ROI)

=
Margin
= Operating Income
Sales
936,000
15,600,000
6% (margin)
=
15%

x
x
x
x

Turnover
Sales
Ave. operating assets
15,600,000
6,240,000 1
2.50 times (turnover)

Average operating assets

Balance, January 01
Balance, December 31
Total
Average Operating Assets
b. Residual Income

$6,000,000
$6,480,000
$12,480,000
2
$6,240,000

(6,480,000 1.08)

Managerial Accounting II

Average Operating Assets

Operating Income
Minimum required return
(6,240,000 x 11%)
Residual Income

$6,240,000
$936,000
$686,400
$249,600

2. The managers of Superior Steel Division will likely more to accept the investment opportunity
if the performance measure is based on residual income because the rate of return is above the
minimum required rate of return for the company. Despite that the investment opportunity has a
lower expected rate of return than Kaisers normal rate of return of 14% and 17%, and its current
ROI of 15%, Superiors residual income will increase the investment opportunity.
3. The division managers can freely control all aspects of the income statement such as revenues,
expenses, and aspects concerning income such as ROI and other profit-based metrices. On the
other hand, through the residual income approach, the division can control the same aspects;
however, it should consider that it cannot be used to compare the performance of different
divisions, as larger divisions tend to produce more residual income because of its larger asset
base.
Case 11-41
1.

Canadian Association of Nutritionists

Segmented Income Statement
Year Ended December 31
Membershi
p
Total
Services
$970,000
$450,000

Revenues
Traceable Costs
Salaries
Occupancy costs
Distributions to local chapters
Printing
Mailing
Continuing ed. instructor's fees
Total Traceable Costs
Segment Margin
Common Costs
Salaries - Central Staff
Occupancy costs
Mailing
General and Administrative
Total Common Costs
Excess of revenues over expenses

$320,000
$90,000
$210,000
$82,000
$19,000
$60,000
$781,000
$189,000
$120,000
$30,000
$5,000
$27,000
$182,000
$7,000

$170,000
$50,000
$210,000

$430,000
$20,000

Journal
$220,000

Books &
Reports
$70,000

Continuin
g
Education
$230,000

$60,000
$10,000

$40,000
$10,000

$50,000
$20,000

$44,000
$11,000

$25,000
$8,000

$13,000

$125,000
$95,000

$83,000
$13,000

$60,000
$143,000
$87,000

Managerial Accounting II

Total
Revenues
Membership dues
Non-member journal subscriptions
Advertising
Books and reports
Continuing education courses
Total revenues

$600,000
$20,000
$50,000
$70,000
$230,000
$970,000

Membershi
p
Services
$450,000

Journal

Books &
Reports

Continuin
g
Education

$150,000
$20,000
$50,000
$70,000
$220,000

$70,000

2. An argument for the allocation of common cost among the four programs includes the
cognizance of the organization that common costs are present. However, allocation among the
programs must be arbitrary since there is no cause and effect relationship between the common
costs and the programs on which they are ought to be allocated.
Another argument against the allocation of common costs is that the costs of the programs would
be overstated and their margins understated. As a result, some programs might appear to be
unprofitable and managers might decide to eradicate the program even though it is actually
profitable. If a program is eliminated because of the existence arbitrarily allocation common
costs, the overall profit of the organization would decrease by the amount of the of the segment
margin since the common costs will still remain.

$230,000
$230,000