Management Advisory Services Prof . Maria Teresa B.

De Jesus
Topic : Responsibility Accounting / Transfer pricing
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A well- designed responsibility accounting system establishes responsibility centers within
the organization. A responsibility center is defined as a unit in the organization which has control
over costs, revenues, and /or investment funds . Responsibility centers can be on of the following
types:
Cost center - is the unit within the organization which is responsible only for costs.
Examples include the production and maintenance departments of a manufacturing company, and
the admissions department of a university.
Variance analysis is based on standard costs and flexible budgets is a typical
performance measure of a cost center.
Profit center - is the unit which is held responsible for the revenues earned and costs
incurred in that center. Examples include a sales office of a publishing company , an appliance
department in a retail store, and auto repair center in a department store . The contribution
approach to cost allocation is widely used to measure the performance of a profit store.
Investment center - is the unit in which is held responsible for costs, revenues and related
investments made in that center. The corporate headquarters or division in a large decentralized
organization is an example of an investment center. Return on investment and residual income
are two key performance measures of an investment center.
The responsibility system should induce management performance that adheres to overall
company’s objectives ( goal congruence )
Sub-optimization occurs when one segment of the company takes action that is in its own
best interests but is detrimental to the firm as a whole .
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Exercise 1
Noah Corporation has two major business segments-Apparel and Accessories. Data
concerning those segments for August appear below:
Sales Revenue, Apparel P 700,000
Variable Expenses, Apparel 406,000
Traceable Fixed expenses, Apparel 98,000
Sales Revenue, Accessories 710,000
Variable Expenses, Accessories 312,000
Traceable Fixed expenses, Accessories 107,000
   Common fixed expenses totaled P292,000 and were allocated as follows: P155,000
to the Apparel business segment and P137,000 to the Accessories business segment.
Required:
Prepare a segmented income statement in the contribution format for the company.
Omit percentages; show only dollar amounts. 

SOLUTION:
Total Apparel Accessories
Sales P1, 410,000 P 700,000 P 710,000
Variable expenses 718,000 406,000 312,000
Contribution Margin 692,000 294,000 398,000
Traceable Fixed expenses 205,000 98,000 107,000
Segment margin 487,000 196,000 291,000
Common fixed expenses 292,000
Net Operating income 195,000
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Exercise 2 : Consider the following 000’s omitted __
Division A Division B
Operating assets P 5,000 P 12,500
Operating Income 1,000 2,250
ROI 20 % 18 %

1. Which is a more successful division in terms of ROI?

ROI of division A is more than division B, it is generating greater returns for the company,
therefore Division A is more successful division in terms of ROI.

2. Using 16 % as the minimum required of return, compute the residual income for each decision.
Which division is more successful under this rate?
 Residual income of Division A = P1,000 - (16% x P5,000) = P1,000 - P800 = P200
 Residual income of Division B = P2,250 - (16% x P12,500) = P2,250 - P2,000 = P250

Since residual income of Division B is more than Division A, therefore Division B is more
successful in terms of residual income.

Exercise 3 : Supply the missing data in the following table :

Division A Division B Division C
Sales P 60,000 P 75,000 P 100,000
Operating Income __4,500 _ 25,000 10,000_
Operating Assets 30,000 250,000 P 50,000
Return on investment 15 % 10 % 20 %
Minimum required rate of return 10 % __8%__ _20%_
Residual income _1,500_ P 5,000 0

Exercise 4

Jacob Products is a division of a major corporation. Last year the division had total sales of
P26,800,000, net operating income of P1,768,800, and average operating assets of P8,000,000.
The company's minimum required rate of return is 12%.

1. The division's margin is closest to:

A) 22.1% B) 6.6% C) 29.9% D) 36.5%

2.The division's turnover is closest to:

A) 0.22 B)2.74 C) 15.15 D) 3.35

3. The division's return on investment (ROI) is closest to:

A) 74.0% B)5.1% C) 22.1% D) 1.5%

4. The division's residual income is closest to:

A) P 808,800 B)P 1,768,800 C) P (1,447,200) D) P 2,728,800

Exercise 5 :

The following data have been extracted from the year-end reports of two companies – Company X
and Company Y:
Company X Company Y
Sales P 800,000 750,000
Net Operating Income 56,000 30,000
Average Operating Assets 400,000 P 125,000
Margin 7% 4%
Turnover 2 6
Return on Investment 14 % 24%

Required: Fill in the missing data on the above table.  

Multiple Choice Theory

1. Decentralized firms can delegate authority by structuring an organization into responsibility

centers. Which of the following organizational segments is most like a totally independent,
standalone business where managers are expected to "make it on their own"?
A. Cost center. B. Revenue center. C. Profit center. D. Investment center.

2. Responsibility accounting
a. Is the most formal communication device within an enterprise.
b. Encourages managers and other employees to achieve enterprise goals, not just their own
individual goals.
c. Encourages managers to focus on a single issue of evaluation.
d. Deals with the reporting of information to facilitate control of operations and
evaluation of performance.

3. In responsibility accounting a center’s performance is measured by controllable costs are best

described as including
a. differential costs c. only those costs that the manager can influence
b. incremental and discretionary costs d. only discretionary costs

4. A responsibility center in which the manager is held accountable for the profitable use of assets
and capital is commonly known as a(n):
A. cost center. B. revenue center. C. profit center. D.investment center.

5. A company is analyzing the performance of responsibility centers. Controllable revenues would

be included in the performance reports of which of the following types of responsibility
centers?
Investment centers Profit Centers Costs Centers
a. No No Yes
b. No Yes Yes
c. Yes Yes No
d. Yes No Yes

6. A center that incurs costs and expenses, generates revenue but does not have control over idle
funds used for investment purposes.
a. Profit center b. Investment center c. Cost center d. responsibility center

7. A responsibility center is an organization unit headed by a responsible manager. It is not

known as: a. cost center b. profit center c. investment center d. expense
center

Multiple Choice Problems

1. Davison Inc. consists of two districts, A and B. The company as a whole had sales of P400,000,
a contribution margin ratio of 25% and a combined segment margin totaling P35,000. District A
had sales of P90,000 during May, a contribution margin ratio of 45%, and a segment margin of
P 16,000. If the net operating income of Davison Inc. for May is P12,000, the traceable fixed
expenses in District B must have been:
A) P23,000 B) P24,500 C) P49,000
D) P40,500

2. The following summarized income statement of Cars Co.’s profit center No. 43 for March 2019
Contribution margin P 70,000
Period Expenses
Manager’s salary P 20,000
Facility Depreciation 8,000
Corporate expense allocation 5,000 33,000
Profit Center Income 37,000
Which of the following amounts is most likely subject to the control of the profit center’s
manager? a. P70,000 b. P50,000 c. P 37,000 d. P 33,000

3- 7 The following information was taken from the segmented income statement of Restin, Inc.,
and the company's three divisions:
Los Bay Central
Restin, Angeles Area Valley
Inc. Division Division Division
Revenues P750,000 P200,000 P235,000 P325,000
Variable operating expenses 410,000 110,000 120,000 180,000
Controllable fixed expenses 210,000 65,000 75,000 70,000
Noncontrollable fixed expenses 60,000 15,000 20,000 25,000
In addition, the company incurred common fixed costs of P18,000.

3. Bay Area's segment profit margin is:

A. P14,000. B. P18,000. C. P20,000. D. P40,000.

4. The profit margin controllable by the Central Valley segment manager is:
A. P32,000. B. P44,000. C. P50,000. D. P75,000.

5. Assuming use of a responsibility accounting system, which of the following amounts should be
used to evaluate the performance of the Los Angeles division manager?
A. P 4,000. B. P 8,000. C. P 10,000. D. P 25,000.

6. Which of the following amounts should be used to evaluate whether Restin, Inc., should
continue to invest company resources in the Los Angeles division?
A. P 4,000. B.P 8,000. C. P 10,000. D. P 25,000.

7. Assume that the Los Angeles division increases its promotion expense, a controllable fixed cost,
by P10,000. As a result, revenues increase by P50,000. If variable expenses are tied directly to
revenues, the new Los Angeles segment profit margin is:
A. P12,500. B. P22,500. C. P32,500. D. P50,000.
8-11 The Rialto Company's income statement for May is given below:
Total Division L Division M
Sales............................................. P300,000 P165,000 P135,000
Variable expenses.........................  153,000    99,000    54,000
Contribution margin....................... 147,000 66,000 81,000
Traceable fixed expenses.............    97,000    45,000    52,000
Segment margin............................ 50,000 P  21,000 P  29,000
Common fixed expenses...............    25,000
Net operating income.................... P  25,000

8. If sales for Division L increase P30,000 with a P9,000 increase in the Division's traceable fixed
expenses, the overall company net operating income should:
A) decrease by P4,000 C) increase by P3,000
B) increase by P21,000 D) increase by P5,700

9. During May, the sales clerks in Division L received salaries totaling P25,000. Assume that during
June the salaries of these sales clerks are discontinued and instead they are paid a
commission of 18% of sales. If sales in Division L increase by P35,000 as a result of this
change, the June segment margin for Division L should be:
A) P 30,300 B) P 24,000 C) P 5,300 D) P 60,000

10. If the sales in Division M increase by 25% while traceable fixed expenses decrease by P
7,000, the segment margin for Division M should:
A) increase by P 13,250 C) decrease by P 17,750
B) increase by P 7,250 D) increase by P 27,250

11. A proposal has been made that will lower variable costs in Division M to 37% of sales. The
reduction can be accomplished only if Division M's traceable fixed costs are allowed to
increase P 12,000. If this proposal is implemented, and if sales remain constant, overall
company net operating income should:
A) increase by P 12,000 C) decrease by P 7,950
B) increase by P 16,050 D) decrease by P 12,000