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Horngren'S Financial And Managerial Accounting
Found in: Page 1361

Short Answer

One subunit of Racer Sports Company had the following financial results last month:

Subunit X Actual Results Flexible Budget Flexible Budget % Variance

Variance (F or U) (F or U)

Net Sales

Revenue $ 476,000 $ 451,000

Variable

Expenses 261,000 251,000

Contribution

Margin 215,000 200,000

Traceable

Fixed Expenses 40,000 26,000

Divisional

Segment Margin $ 175,000 $ 174,000

Requirements

1. Complete the performance evaluation report for this subunit (round to two decimal places).

2. Based on the data presented and your knowledge of the company, what type of responsibility center is this subunit?

3. Which items should be investigated if part of management’s decision criteria is to investigate all variances equal to or exceeding $8,000 and exceeding 10% (both criteria must be met)?

4. Should only unfavorable variances be investigated? Explain.

5. Is it possible that the variances are due to a higher-than-expected sales volume? Explain.

6. Will management place equal weight on each of the variances exceeding $8,000? Explain.

7. Which balanced scorecard perspective is being addressed through this performance report? In your opinion, is this performance report a lead or a lag indicator? Explain.

8. List one key performance indicator for the three other balanced scorecard perspectives. Make sure to indicate which perspective is being addressed by the indicators you list.

(1) Performance evaluation report is completed in Step 1.

(2) Profit center

(3) Variance equal to and exceeding $8,000 and exceeding 10% should be investigated.

(4) No, both should be investigated, for effective decision making.

(5) No, not possible as fixed expenses may vary

(6) No, equal weights cannot be assigned due to degree of variances.

(7) Financial performance and operational performance

(8) Customer, Internal Business, and Learning & Growth

See the step by step solution

Step by Step Solution

Step 1: Performance Evaluation Report

A responsibility accounting system is a system of evaluating the performance of the business based on the performance of different responsibility centers and their managers.

Subunit X

Actual Results

Flexible Budget

Flexible Budget Variance (F or U)

% Variance (F or U)

Net Sales Revenue

$ 476,000

$ 451,000

$ 25,000 (F)

5.54% (F)

Variable Expenses

261,000

251,000

10,000 (U)

3.98% (U)

Contribution Margin

215,000

200,000

15,000 (F)

7.5% (F)

Traceable Fixed Expenses

40,000

26,000

14,000 (U)

53.85% (U)

Divisional Segment Margin

175,000

174,000

1,000 (F)

0.57% (F)

% Variance has been computed by the following formula –

Step 2: Responsibility Center

A responsibility center is a part of the organization for which a manager has been appointed as an authority for decision-making and has the accountability for those decisions.

Based on the given data, the responsibility center is the profit center. The responsibility center is responsible for both revenue and cost. In the given data set, the responsibility center presented the performance report for Sales revenue and all expenses. So this is a profit center.

Step 3: Investigated items

The management criteria are to investigate all items having variances –

a) Equal to and exceeding $8,000 and

b) Exceeding 10%

Since both the conditions must be met, so from the performance report, only the “Traceable Fixed Expenses” should be investigated as it has a $14,000 unfavorable variance and variance exceeds 10%.

Besides this other items has more than $8,000 variance, but no item has a variance exceeding 10%.

Step 4: Investigated variances – favorable vs unfavorable

For making an effective analysis both favorable and unfavorable variances should be investigated.

Unfavorable variances are given priority as the business wants to locate the reasons for having an unfavorable estimate. But at the same time investigating favorable variances also helps in knowing the factors for having favorable results.

Thus for effective decision making both favorable and unfavorable variances should be investigated.

Step 5: Variances and sales volume

Variances are the difference between estimated and actual results. In the given case, the responsibility center is the profit center. In the profit center, both revenue and cost are controlled.

For every generated revenue, there is some cost associated with it. Some cost is variable and changes as per the sales volume. But some costs are fixed and are not affected by the sales volume.

Thus it is not possible that variances are due to higher-than-expected sales volume. Irrespective of sales volume, the fixed expense may vary from the expected amount.

Step 6: Management’s decision on variances

Although management is investigating variances above $8,000 and 10%. But it will not pace equal weight on all variances exceeding $8,000. Some variances having $8,000 value do not vary very much from the flexible budget. While some variances exceeding $8,000 has even higher variance percent from the benchmarking.

So management would place the weight as per the degree of variance for each item. Variance having a 50% result would be given more priority than the variance having only a 10% change.

Step 7: Balanced Scorecard Perspective

The balanced scorecard is a performance evaluation report that consists of both financial performance and operational performance. Thus based on these two areas, a balanced scored card can have different four perspectives

In the given case, the balanced card perspective is Financial. This is justified as the key performance indicators are – Sales revenue growth, gross margin growth, Net income, etc.

Step 8: Other Balanced Scorecard Perspective and key indicators

The other three different perspectives are – Customer, Internal Business, and Learning & Growth.

The key performance indicator for each perspective is as follows –

Perspective

Key Performance Indicator

Customer

Customer satisfaction ratings

Internal Business

Number of units produced per hour

Learning and Growth

Number of cross-trained employees

Most popular questions for Business-studies Textbooks

Question: Determining transfer pricing

The Hernandez Company is decentralized, and divisions are considered investment centers. Hernandez has one division that manufactures oak dining room chairs with upholstered seat cushions. The Chair Division cuts, assembles, and finishes the oak chairs and then purchases and attaches the seat cushions. The Chair Division currently purchases the cushions for $32 from an outside vendor. The Cushion Division manufactures upholstered seat cushions that are sold to customers outside the company. The Chair Division currently sells 1,800 chairs per quarter, and the Cushion Division is operating at capacity, which is 1,800 cushions per quarter. The two divisions report the following information:

Chair Division Cushion Division

Sales Price per Chair $ 95 Sales Price per Cushion $ 34

Variable Cost (other than cushion) 56 Variable Cost per Cushion 12

Variable Cost (cushion) 32

Contribution Margin per Chair $ 7 Contribution Margin per Cushion $ 22

Requirements

1. Determine the total contribution margin for Hernandez Company for the quarter.

2. Assume the Chair Division purchases the 1,800 cushions needed from the Cushion Division at its current sales price. What is the total contribution margin for each division and the company?

3. Assume the Chair Division purchases the 1,800 cushions needed from the Cushion Division at its current variable cost. What is the total contribution margin for each division and the company?

4. Review your answers for Requirements 1, 2, and 3. What is the best option for Hernandez Company?

5. Assume the Cushion Division has capacity of 1,800 cushions per quarter and can continue to supply its outside customers with 1,800 cushions per quarter and also supply the Chair Division with 1,800 cushions per quarter. What transfer price should Hernandez Company set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter.

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