JAWABAN AKUNTANSI MANAJEMEN

8/9/2019 JAWABAN AKUNTANSI MANAJEMEN

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CHAPTER 10SEGMENTED REPORTING, INVESTMENT CENTER

EVALUATION, AND TRANSFER PRICING

QUESTIONS FOR WRITING AND DISCUSSION

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EXERCISES

10-1

Cost center – Total costProfit center – Operating income

Revenue Center - Sales

Investment center - Return on Investment

10–2

1. Total Cost Per UnitDirect materials $ 120,600 $ 6.03Direct labor 90,000 4.50Variable overhead 26,400 1.32Fixed overhead 68,000 3.40

Total $ 305,000 $ 15.25

Cost of ending inventory = $15.25 650 = $9,912.50

2. Total Cost Per UnitDirect materials $ 120,600 $ 6.03Direct labor 90,000 4.50Variable overhead 26,400 1.32

Total $ 237,000 $ 11.85

Cost of ending inventory = $11.85 650 = $7,702.50

3. Since absorption costing is required for external reporting, the amount re-ported would be $9,912.50.


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10–3

1. Fixed overhead rate = $107,500/25,000 = $4.30 per unit

The difference is computed as follows:

Fixed overhead rate(Production – Sales)

$4.30(25,000 – 23,000) = $8,600

2. a. Lextel, Inc.Variable-Costing Income Statement

For the Year Ended December 31, 2008

Sales (23,000 $26) ........................................ $ 598,000Less variable expenses:

Cost of goods sold (23,000 $12.80) ...... $ 294,400

Selling (23,000 $4) .................................. 92,000 386,400Contribution margin ....................................... $ 211,600Less fixed expenses:

Overhead .................................................... $ 107,500Selling and administrative ........................ 26,800 134,300

Operating income ........................................... $ 77,300

b. Lextel, Inc.Absorption-Costing Income StatementFor the Year Ended December 31, 2008

Sales ..................................................................................... $ 598,000Less: Cost of goods sold (23,000 $17.10) ...................... 393,300Gross margin ....................................................................... $ 204,700Less: Selling and administrative expenses ...................... 118,800

Operating income ........................................................... $ 85,900

10–4

1. Cocino CompanyProduct-Line Income Statements

Blenders Coffee Makers TotalSales $ 2,200,000 $ 1,125,000 $ 3,325,000Less: Variable cost of goods sold 2,000,000 1,075,000 3,075,000Contribution margin $ 200,000 $ 50,000 $ 250,000Less: Direct fixed expenses 90,000 45,000 135,000Product margin $ 110,000 $ 5,000 $ 115,000Less: Common fixed expenses 115,000

Net income $ 0


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2. If the coffee-maker line is dropped, profits will decrease by $5,000, the prod-uct margin. If the blender line is dropped, profits will decrease by $110,000.

3. Blenders Coffee Makers TotalSales $ 2,405,000 $ 1,125,000 $ 3,530,000Less: Variable cost of goods sold 2,200,000 1,075,000 3,275,000Contribution margin $ 205,000 $ 50,000 $ 255,000Less: Direct fixed expenses 90,000 45,000 135,000Product margin $ 115,000 $ 5,000 $ 120,000Less: Common fixed expenses 115,000Operating income $ 5,000

Profits increase by $5,000. Alternatively,

Increased profit = ($20.50 - $20.00) × 10,000 = $5,000

10–5

1. Absorption costing:Direct materials $1.20Direct labor 0.75Variable overhead 0.65Fixed overhead 3.10

Unit cost $5.70

Cost of ending inventory = $5.70 200 = $1,140

2. Variable costing:Direct materials $1.20Direct labor 0.75Variable overhead 0.65

Unit cost $2.60

Cost of ending inventory = $2.60 200 = $520

3. Selling price $ 7.50Less:

Variable cost of goods sold (2.60)Commission (0.75)

Contribution margin per unit $ 4.15


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4. Sales ($7.50 17,600) ............................... $ 132,000Less:

Variable cost of goods sold ................ $45,760Commissions ....................................... 13,200 58,960

Contribution margin .................................. $ 73,040Less fixed expenses:

Fixed overhead .................................... $27,900Fixed administrative ............................ 23,000 50,900

Net income ................................................. $ 22,140

Variable costing should be used, since the fixed costs will not increase asproduction and sales increase.

10–6

1. Operating income = Sales – Expenses = $50,000 $48,000 = $2,000

2. Margin = Operating income/Sales= $2,000/$50,000 = 0.04

Turnover = Sales/Operating assets= $50,000/$10,000 = 5

3. ROI = Margin Turnover = 0.04 5 = 0.20, or 20%

10–7

1. Average operating assets = ($78,650 + $81,350)/2 = $80,000

2. Margin = Operating income/Sales= $7,200/$240,000 = 0.03

Turnover = Sales/Operating assets= $240,000/$80,000 = 3.0

ROI = Margin Turnover = 0.03 3.0 = 0.09, or 9.0%

10–81. a. ROI of division without radio = $480,000/$8,000,000 = 0.06

b. ROI of the radio project = $270,000/$1,500,000 = 0.18

c. ROI of division with radio = $750,000/$9,500,000 = 0.0789

2. Yes, Cheryl will decide to invest in the project, since overall division ROI willincrease.


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10–9

1. After-tax cost of mortgage bonds = (1 – 0.3)(0.08) = 0.056

2. Cost of common stock = 0.06 + 0.06 = 0.12

3. Dollar After-Tax WeightedAmount Percent Cost = Cost

Mortgage bonds $1,300,000 0.65 0.056 0.0364Common stock 700,000 0.35 0.120 0.0420

Total $2,000,000

Weighted average cost of capital 0.0784

4. Cost of capital = $1,500,000 0.0784 = $117,600

5. After-tax operating income $115,000Less: Cost of capital 117,600EVA $ (2,600)

Because EVA is negative, Schipper is destroying wealth.

10–10


2. Cost of common stock = 0.06 + 0.06 = 0.12

3. Dollar After-Tax WeightedAmount Percent Cost = Cost

Mortgage bonds $1,300,000 0.65 0.048 0.0312Common stock 700,000 0.35 0.120 0.0420

Total $2,000,000


4. Cost of capital = $1,500,000 0.0732 = $109,800

5. After-tax operating income $115,000

Less: Cost of capital 109,800EVA $ 5,200

EVA is now positive, and Schipper is creating wealth.


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10-11

1. MP3 player: RI = $116,000 – (0.12 × $800,000)= $20,000

Voice Rec.: RI = $105,000 – (0.12 × $750,000)= $15,000

2. Add Only Add Only Add Both MaintainMP3 Player Voice Rec. Projects Status Quo

Operating income $2,816,000 $2,805,000 $2,921,000 $2,700,000Minimum income* 2,256,000 2,250,000 2,346,000 2,160,000Residual income $ 560,000 $ 555,000 $ 575,000 $ 540,000

*Minimum income = Operating assets × Minimum required rate of return

The manager will invest in both the MP3 player and the voice recorder.

3. ROI MP3 player = $116,000/$800,000 = 0.145 or 14.5%

ROI voice recorder = $105,000/$750,000 = 0.14 or 14.0%

4. Add Only Add Only Add Both MaintainMP3 Player Voice Rec. Projects Status Quo

Operating income $2,816,000 $2,805,000 $2,921,000 $2,700,000Operating assets 18,800,000 18,750,000 19,550,000 18,000,000ROI 14.98% 14.96% 14.94% 15.00%

The manager will invest in neither project.

10-12

1. North Woods residual income = $140,000 (0.08)($1,000,000) = $60,000

Midwest residual income = $330,000 (0.08)($3,000,000) = $90,000

2. North Woods ROI = $140,000/$1,000,000 = 0.14 or 14%

Midwest ROI = $330,000/$3,000,000 = 0.11 or 11 %


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10–13

1. Maximum transfer price = $42

Minimum transfer price = $15

Only variable costs are relevant for the minimum transfer price since the Fur-niture Division has excess capacity.

Yes, the transfer should take place.

2. Benefit to Furniture Division:

Revenue ($30 10,000) $ 300,000Less: Variable cost ($15 10,000) 150,000

Benefit $ 150,000

Benefit to Motel Division:

Outside supplier ($42 10,000) $ 420,000Transfer price ($30 10,000) 300,000Benefit $ 120,000

Benefit to company = $150,000 + $120,000 = $270,000

3. Maximum transfer price = $42

Minimum transfer price = $42

It does not matter whether or not the transfer takes place because the cost tothe company is the same whether the Motel Division buys from the outsidesupplier or from the internal supplier (the Furniture Division).

10–14

1. The minimum and maximum transfer price for each division is $2.30. Thecompany is indifferent to the transfer because it earns the same incomewhether or not it takes place. If the transfer takes place, the price should be$2.30.

2. The minimum transfer price is $2.10, and the maximum price is still $2.30. Thetransfer should take place because the company would save $30,000 (150,000

$0.20) each year.

3. The offer should be accepted because the Small Motor Division’s profitswould increase by $15,000 (representing an even split of the savings from in-ternal transfer).


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10–15

1. Maximum price $ 3.95Minimum price* 2.25Difference $ 1.70

Number of packages 150,000Increased profit $ 255,000

*Due to idle capacity of the Paper Division, the minimum price is a variablecost of $2.25 per package. Since selling costs of $0.40 are avoidable, theyare not included.

Yes, the transfer should take place.

2. Penelope would definitely consider the $3.20 price because her income wouldincrease $112,500 ([$3.95 – $3.20] 150,000). Tom would most likely nego-

tiate a price less than $3.75 if he has knowledge of the excess capacity.

3. The full-cost transfer price is $3.45 ($2.25 + $1.20). If the transfer takes place,the Paper Division will make an additional $180,000 (150,000 $1.20) and theSchool Photography Division will save $75,000 ([$3.95 – $3.45] 150,000).

10–16

A B C DRevenues $10,000 $ 45,000 $200,000 $19,20011

Expenses 7,800 27,000

4

188,000 18,000

12

Operating income 2,200 18,000 12,0007 1,20013 Assets 20,000 144,0005 100,000 9,600Margin 22%1 40% 6%8 6.25%Turnover 0.502* 0.3125 29 2.00ROI 11%3 12.5%6 12.0%10 12.5%14

*Indicates missing amount.1$2,200/$10,000 = 0.22 8$12,000/$200,000 = 0.062$10,000/$20,000 = 0.50 9$200,000/$100,000 = 23$2,200/$20,000 = 0.11 10$12,000/$$100,000 = 0.124$45,000 - $18,000 = $27,000 11$9,600 × 2 = $19,2005$45,000 × 0.3125 = $144,000 12$19,200 - $1,200 = $18,00060.4 × 0.3125 = 0.125 13$19,200 × 0.0625 = 1,2007$200,000 - $188,000 = $12,000 14$1,200/$9,600 = 0.125


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10-17

1. Company A residual income = $2,200 (0.12)($20,000) = $200

Company B residual income = $18,000 (0.12)($144,000) = $720

Company C residual income = $12,000 (0.12)($100,000) = 0

Company D residual income = $1,200 (0.12)($9,600) = $48


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PROBLEMS

10–18

1. Diaz CompanyAbsorption-Costing Income Statements

Year 1 Year 2Sales ........................................................................... $ 572,000 $ 660,000Less: Cost of goods sold* ........................................ 299,000 361,000Gross margin ............................................................. $ 273,000 $ 299,000Less: Selling and administrative expenses ............ 163,800 163,800

Net income ........................................................... $ 109,200 $ 135,200

*Beginning inventory ................................................ $ 0 $ 46,000Cost of goods manufactured .................................. 345,000 315,000

Goods available for sale ......................................... $ 345,000 $ 361,000Less: Ending inventory ........................................... 46,000 0

Cost of goods sold ............................................. $ 299,000 $ 361,000

Firm performance has improved from Year 1 to Year 2.

2. Diaz CompanyVariable-Costing Income Statements

Year 1 Year 2Sales ........................................................................... $ 572,000 $ 660,000Less: Variable cost of goods sold* ......................... 195,000 225,000

Contribution margin ................................................. $ 377,000 $ 435,000Less fixed expenses:

Overhead .............................................................. (120,000) (120,000)Selling and administrative .................................. (163,800) (163,800)

Net income ................................................................. $ 93,200 $ 151,200

*Beginning inventory ................................................ $ 0 $ 30,000Variable cost of goods manufactured ................... 225,000 195,000Goods available for sale ......................................... $ 225,000 $225,000Less: Ending inventory ........................................... 30,000 0

Cost of goods sold ............................................. $ 195,000 $ 225,000

Firm performance has improved from Year 1 to Year 2.3. Year 1 fixed overhead rate = $120,000/30,000 = $4.00

4. Absorption-costing inventory = ($7.50 + $4.00) 4,000 = $46,000

Variable-costing inventory = $7.50 4,000 = $30,000

10–19


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1. Ziemble CompanyAbsorption-Costing Income Statement

Sales ........................................................................................... $ 1,512,000Cost of goods sold* .................................................................. 1,048,000

Gross margin ............................................................................. $ 464,000Selling and administrative expenses ...................................... 444,000

Net income ........................................................................... $ 20,000

*Fixed overhead rate = $300,000/75,000 = $4 per unitApplied fixed overhead = $4 74,000 = $296,000Underapplied fixed overhead = $300,000 – $296,000 = $4,000Cost 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 TotalSales $ 13,000 $ 19,500 $ 25,000 $ 57,500Less: Variable expenses 9,100 15,600 12,500 37,200

Contribution margin $ 3,900 $ 3,900 $ 12,500 $ 20,300Less: Direct fixed expenses 4,250 5,750 3,000 13,000Product margin $ (350) $ (1,850) $ 9,500 $ 7,300Less: Common fixed expenses 7,500

Net (loss) $ (200)

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

2. Regular Sales $ 20,000Less: Variable expenses 10,000Contribution margin $ 10,000Less: Fixed expenses 10,500

Operating income (loss) $ (500)

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

3. Combinations would be beneficial. Dropping the musical line (which showsthe 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 $ 35,500Less: Variable expenses 9,100 11,250 20,350Contribution margin $ 3,900 $ 11,250 $ 15,150Less: Direct fixed expenses 4,250 3,000 7,250Product margin $ (350) $ 8,250 $ 7,900Less: Common fixed expenses 7,500

Operating income $ 400


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10–21

1. Direct materials $3.60Direct labor 2.00Variable overhead 0.40

Fixed overhead ($180,000/200,000) 0.90Total $ 6.90

Per-unit inventory cost on the balance sheet is $6.90.

Sales (207,000 $10) $ 2,070,000Less: Cost of goods sold 1,428,300Gross margin $ 641,700Less: Selling and administrative expenses 132,100

Net income $ 509,600

2. Direct materials $ 3.60Direct labor 2.00Variable overhead 0.40

Total $ 6.00

Per-unit inventory cost under variable costing equals $6.00.

This differs from the per-unit inventory cost in Requirement 1 because thebalance sheet is for external use and reflects absorption costing. Variablecosting does not include per-unit fixed overhead.

Sales $ 2,070,000

Less variable expenses:Variable cost of goods sold 1,242,000Variable selling and administrative 62,100

Contribution margin $ 765,900Less fixed expenses:

Fixed overhead 180,000Fixed selling and administrative 70,000

Net income $ 515,900

3. IV – IA = FOR(Sales – Production)

$515,900 – $509,600 = $0.90(207,000 – 200,000)

$6,300 = $0.90(7,000)$6,300 = $6,300


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4. Sales (196,700 $10) $ 1,967,000Less: Cost of goods sold (196,700 $6.90) 1,357,230Gross margin $ 609,770Less: Selling and administrative expenses 129,010

Absorption costing operating income $ 480,760

Sales $1,967,000Less variable expenses:

Variable cost of goods sold 1,180,200Variable selling and administrative 59,010

Contribution margin $ 727,790Less fixed expenses:

Fixed overhead 180,000Fixed selling and administrative 70,000

Variable costing operating income $ 477,790

5. IA – IV = FOR(Sales – Production)$480,760 – $477,790 = $0.90(200,000 – 196,700)

$2,970 = $0.90(3,300)$2,970 = $2,970

10–22

1. Air conditioner, ROI = $67,500/$750,000 = 9.0%

Turbocharger, ROI = $89,700/$690,000 = 13.0%

2. With Air With With Both NeitherConditioner Turbocharger Investments Investment

Income $3,246,500 $3,268,700 $3,336,200 $3,179,000Assets $29,650,000 $29,590,000 $30,340,000 $28,900,000ROI 10.95% 11.05% 11.00% 11.00%

The manager will choose the turbocharger, but not the air conditioner.

3. Cost of capital = (1 – 0.25)(0.12)($1,500,000)= $135,000

EVA = ($67,500 + $89,700) – $135,000 = $22,200

Yes, the two investments increase the wealth of the division, since EVA ispositive.


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10–23

1. $310,000/$3,000,000 = 10.33%*

2. Margin: $310,000/$3,450,000 = 8.99%Turnover: $3,450,000/$3,000,000 = 1.15

ROI = 1.15 8.99% = 10.34%

*Difference due to rounding.

3. ($310,000 + $57,500)/($3,000,000 + $500,000*) = 10.5%

*($600,000 + $400,000)/2

The manager will approve the investment.

4. Margin: ($310,000 + $57,500)/($3,450,000 + $575,000) = 9.13%Turnover: ($3,450,000 + $575,000)/($3,000,000 + $500,000) = 1.15

The margin has increased, and the turnover ratio has stayed the same.

5. With: ($310,000 + $57,500)/($3,000,000 + $500,000 – $800,000) = 13.61%

Without: $310,000/($3,000,000 – $800,000) = 14.09%

The manager will most likely reject the investment because it lowers the divi-sional ROI. The investment should be accepted because it increases totalprofits.

6. Margin: $310,000/$3,450,000 = 8.99%

Turnover: $3,450,000/$2,200,000 = 1.57

10–24

1. Year 1 Year 2 Year 3

ROI 8.00% 6.97% 6.30%Margin 12.00% 11.00% 10.50%Turnover 0.67 0.63 0.60

2. ROI: $1,200,000/$15,000,000 = 8%Margin: $1,200,000/$10,000,000 = 12%Turnover: $10,000,000/$15,000,000 = 0.67

The ROI increased because expenses decreased and assets turned over at ahigher rate (sales increased).


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3. Operating assets: $15,000,000 80% = $12,000,000

ROI: $945,000/$12,000,000 = 7.88%Margin: $945,000/$9,000,000 = 10.5%Turnover: $9,000,000/$12,000,000 = 0.75

The ROI increased because assets decreased.

4. ROI: $1,200,000/$12,000,000 = 10%Margin: $1,200,000/$10,000,000 = 12%Turnover: $10,000,000/$12,000,000 = 0.83

The ROI increased because expenses decreased and assets turned over at ahigher rate (sales increased and the amount of assets decreased). Both mar-gin and turnover increased.

10–25


Cost of common stock = 0.08 + 0.03 = 0.11

Dollar After-Tax WeightedAmount Percent Cost = Cost

Mortgage bonds $ 3,000,000 0.25 0.036 0.0090Common stock 9,000,000 0.75 0.110 0.0825

Total $ 12,000,000

Weighted average cost of capital 0.0915Cost of capital = $4,000,000 0.0915 = $366,000

2. After-tax operating income $ 350,000Less: Cost of capital 366,000EVA $( 16,000)

EVA is negative; Donegal is destroying wealth.

3. After-tax cost of new bonds = (1 – 0.4)(0.09) = 0.054

Dollar After-Tax WeightedAmount Percent Cost = Cost

Unsecured bonds $ 2,000,000 0.143 0.054 0.0077Mortgage bonds 3,000,000 0.214 0.036 0.0077Common stock 9,000,000 0.643 0.110 0.0707

Total $ 14,000,000


Cost of capital = $5,000,000 0.0861 = $430,500


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4. After-tax operating income $430,000Less: Cost of capital 430,500EVA ($ 500)

No, this is not a good idea. EVA is negative and Donegal is destroying wealth.

10–26

1. Minimum: $26Maximum: $31

2. ($26 + $31)/2 = $28.50. Thus, the transfer price would be expressed as fullcost plus 42.5% ($20 + $8.50/$20).

3. New minimum: $27

New maximum: $32

($27 + $32)/2 = $29.50or full cost plus 47.5% ($20 + $9.50/20)

4. The two divisions would renegotiate because the buying division would prob-ably be able to buy the necessary part at a lower price from another supplier.The Auxiliary Components Division might have to reduce its price.

10–27

1. Lorne should not reduce the price charged to Rosario if he can sell all heproduces. It does not matter whether the two divisions trade internally or not.

2. The minimum price is $53, and the maximum is $75. Yes, Lorne should con-sider the transfer, since his income will increase by $59,500 [3,500($70 –$53)].

3. The transfer price would be $75.60 ($63 1.2). No, the transfer would notoccur, since the transfer price is higher than the outside price that Rosario

could get.

10–28

1. Component Y34 Model SC67 Company

Sales $260,000 $1,680,000 $1,940,000Variable expenses 160,000 920,000 1,080,000Contribution margin $100,000 $ 760,000 $ 860,000


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2. The transfer price should be the market price of $12. This is the minimumprice for the Components Division and the maximum price for the PSF Divi-sion.

3. Unless the PSF Division is able to increase the price of Model S667, the man-

ager will discontinue production and will not purchase any of the compo-nents. (The cost of producing the scanner will increase from $38 to $43.50, acost greater than the current selling price of $42.)

4. All 40,000 units of Component Y34 will be sold externally at the market priceof $12 per unit.

5. Sales $480,000Variable expenses 160,000Contribution margin $320,000

The contribution margin decreases by $540,000. Cam made the wrong deci-

sion.

10–29

1. Madengrad CompanyVariable-Costing Income Statement

Budgeted for Next Year

Sales (21,500 $900) ................................................ $ 19,350,000Less variable expenses:

Cost of goods sold (21,500 $525) .................... $11,287,500

Selling (21,500 $75) .......................................... 1,612,500 12,900,000Contribution margin ................................................. $ 6,450,000Less: Fixed expenses ............................................... 6,600,000

Operating income (loss) ..................................... $ (150,000)

2. Madengrad CompanyVariable-Costing Income Statement

Budget Based on Technological Change

Sales (21,500 $900) ................................................ $ 19,350,000Variable cost of goods sold:

Direct materials (21,500 $180) ......................... $3,870,000

Direct labor (21,500 $216) ................................ 4,644,000Overhead (21,500 $78.75) ................................. 1,693,125 10,207,125

Variable selling (21,500 $75) ................................. 1,612,500Contribution margin ................................................. $ 7,530,375Less: Fixed expenses ............................................... 7,260,000

Operating income ................................................ $ 270,375


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10–30

A. Cost; total manufacturing cost

B. Investment; ROI

C. Revenue; total sales revenueD. Profit; operating income

E. Investment; ROI

10–31

1. The profit change can be explained by the following analysis:

Increase in sales revenues $20,000Increase in variable manufacturing costs ($3.90 2,000) (7,800)

Increase in variable selling costs ($0.50 2,000) (1,000)Increase in fixed overhead:

Year 1—2,000 units $2.90 (5,800) Year 2—1,000 units $3.00 (3,000) Year 3 underapplied fixed OH (3,000)

Net change in income $ (600)

The problem is the increased fixed overhead. We expect variable costs to in-crease, but the increase in fixed overhead expenses is notable, because theactual fixed overhead incurred for Year 3 is the same as that of Year 2. Thisincrease in fixed overhead recognized on the income statement is explained

by the fact that in Year 3, the division sold units from prior years with fixedoverhead attached to them, and by the fact that no fixed overhead was inven-toried (as was the case in Year 2).

2. Year 1 Year 2 Year 3Sales $ 80,000 $100,000 $120,000Less variable expenses:

Cost of goods sold (31,200) (40,000) (47,800)Selling expense (3,200) (5,000) (6,000)

Contribution margin $ 45,600 $ 55,000 $ 66,200Less fixed expenses:

Fixed overhead (29,000) (30,000) (30,000)

Other fixed costs (9,000) (10,000) (10,000)Net income $ 7,600 $ 15,000 $ 26,200

FOH, ending inventory $ 5,800a $ 8,800b $ 0FOH, beginning inventory 0 5,800 8,800Change in fixed overhead $ 5,800 $ 3,000 $ 8,800

a$2.90 2,000 unitsb($3.00 1,000 units) + $5,800


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The difference between the absorption- and variable-costing incomes is dueto the change in fixed overhead in the division’s inventories. In Year 1, $5,800of the fixed overhead went into inventory; so, absorption-costing income ex-ceeds variable-costing income by $5,800. In Year 2, $3,000 more fixed over-head was inventoried, and absorption-costing income was $3,000 greaterthan variable-costing income. However, in Year 3, the inventory was sold, andabsorption-costing income now recognizes that additional $8,800 of fixedoverhead ($5,800 + $3,000), explaining why variable-costing income is greaterby this amount.

3. Since variable-costing income provides an increase in income when sales in-crease and costs do not change, the company vice president would have pre-ferred variable costing. Variable costing would have provided the expectedbonus to the divisional manager and a consistent signal of improved perfor-mance.

10–32

1. The transfer price based on variable manufacturing costs to produce the cu-shioned seat and the Office Division’s opportunity cost is $1,869 for a 100-unit lot, or $18.69 per seat as summarized below:

Variable cost ......................................................... $1,329Opportunity cost .................................................. 540Transfer price ....................................................... $1,869

Variable cost:

Cushioned material:Padding............................................................ $ 2.40Vinyl ................................................................. 4.00

Total ............................................................ $ 6.40Cost increase 10% .......................................... 1.10

Cost of cushioned seat ............................. $ 7.04Cushion fabrication labor

($7.50 0.5) ..................................................... 3.75Variable overhead

($5.00 0.5) ..................................................... 2.50Total variable cost per cushioned seat .............. $13.29

Total variable cost per 100-unit lot ..................... $1,329


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10–32 Concluded

Opportunity cost calculation:

Deluxe Economy

Office Stool Office StoolSelling price $58.50 $41.60Costs:

Materials $14.55 $15.76Labor 11.25 ($7.50 1.5) 6.00 ($7.50 0.8)Variable overhead 7.50 ($5.00 1.5) 4.00 ($5.00 0.8)

Total costs $33.30 $25.76CM/unit $25.20 $15.84Units produced 100 125Total CM $2,520 $1,980

Opportunity cost of shifting production to the economy office stool =$2,520 – $1,980 = $540.

2. Variable manufacturing cost plus opportunity cost would be the best transferpricing system to use because it would allow the supplying division to be in-different between selling the product internally to another division or sellingthe product in the external market. This transfer pricing method ensures thatthe supplying division’s contribution to profit would be the same under eitheralternative. The sum of the variable manufacturing cost and the opportunitycost represents the effort put forth by the supplying division to the overallwell-being of the company.

An appropriate transfer price must attempt to fulfill the company objectives ofautonomy, incentive, and goal congruence. While no one transfer price cannecessarily satisfy each of these objectives fully in all situations, the variablemanufacturing cost plus opportunity cost transfer price should be the mostappropriate method for meeting these objectives in most situations.

10–33

1. Many legitimate reasons support the creation of inventory (e.g., the need toavoid stockouts and the need to ensure on-time delivery). Paul Chesser’s

reasons, however, are based on self-interest and ignore what’s best for thecompany. Knowingly producing for inventory to obtain personal financialgain at the expense of the company certainly could be labeled as unethicalbehavior.

2. Since the decision to produce for inventory was not motivated by any soundeconomic reasoning, and Ruth knows the real motive behind the decision,she should feel discomfort in the role she has been asked to assume. If she


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decides to appeal to higher-level management, the divisional manager cancounter with arguments that inventory was created because he expected theeconomy to turn around and did not want to be in a position of not havingenough goods to meet demand. Even though Ruth may have a difficult timeproving any allegation of improper conduct, if she is convinced that the be-havior is truly unethical, then appeals to higher-level management with theprospect 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 lobbyhigher management to begin using variable costing as a way of avoidingthese 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 carryingout duties ethically. (III-2)

Credibility. Communicate information fairly and objectively. (IV-1) Disclosefully all relevant information that could reasonably be expected to influencean 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 salesand expense projections are estimates, they are the best ones available tohim. If he uses a sales revenue projection from the top end of the range, hewill be deliberately basing the ROI estimate on a highly unlikely sales figure.Sales and expense projections are not fantasy figures, they are supposed tobe 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 sufficientto let Jason off the hook. It is not. If Mel wants the false projections badlyenough, let him sign them. Jason may have thought he had his dream job, butit is about to turn into a nightmare. Companies don’t take kindly to employeeswho lie, and this lie is sure to come out. If the project is approved, and thesales 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 willsurely 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 aboutthe 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 Jasonmight consider looking for another job.

RESEARCH ASSIGNMENTS

10–35

Answers will vary.

10–36

Answers will vary.

JAWABAN AKUNTANSI MANAJEMEN

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