Solution Manual For Managerial Accounting 10th Edition

Solution Manual for Managerial Accounting, 10th
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Solution Manual for Managerial Accounting, 10th Edition
CHAPTER 21—Solutions
FLEXIBLE BUDGETS AND PERFORMANCE ANALYSIS
Discussion Questions
DQ1. All of the performance reports contain both financial and nonfinancial measures to under-
stand and compare performance. A cost center report contains only controllable product
costs; it compares the actual costs of direct materials, direct labor, and overhead with their
corresponding amounts in the flexible and master budgets and computes the differences.
Further variance analysis of the differences may also be presented. A discretionary cost
center report compares a center's actual and budgeted controllable costs and computes
variances between the numbers. A revenue center report compares actual and budgeted
revenues by source or type and notes any variances. A profit center report compares the
controllable revenues, costs, and resulting profit of a center and reports any variations. An
investment center report summarizes the information of all the centers that the investment
center controls and reports on its asset investments. Comparisons are made, and the vari-
ances are reported. Through the comparisons presented in each report understanding is
enhanced.
DQ2. Managers use the concepts of understandability and comparability as they manage a wide
range of financial and nonfinancial data to guide and evaluate performance. To do this,
managers use performance analysis tools like flexible budgets; variable costing income
statements; ROI, RI, and EVA ratio analyses; and the balanced scorecard. By measuring
and evaluating with these tools, managers can better understand the causal relationships
they are accountable for to improve performance comparisions and to add value for all
the organization's stakeholders.
DQ3. A flexible budget is a summary of anticipated costs for a range of activity levels. It en-
hances the understanding of forecasted cost data since it can be adjusted for changes in
the level of output. Cost comparisons of the different levels of output provide managers
cost behavior insights. The variable cost per unit and total fixed costs presented in a flex-
ible budget are components of the flexible budget formula and allow for understanding
and comparison of the budgeted cost for any level of output.
DQ4. When variable costing is used, the controllable costs of the profit center’s manager are
classified as variable or fixed. The resulting performance report takes the form of a vari-
able costing or contribution margin income statement instead of a traditional income
statement. The variable costing income statement is useful because it focuses on under-
standing and evaluating cost variability and the profit center’s contribution to income.
DQ5. The balanced scorecard is a framework that links the perspectives of the organization's
stakeholders into four basic groups—financial (investor), learning and growth (employee),
internal business processes, and customer—with its mission and vision, performance mea-
sures, strategic and tactical plans, and resources. The managers can then use the informa-
tion to answer traditional financial questions about such matters as the cost of sales and
the value of inventory (e.g., food ingredients in a resort’s restaurants and the merchandise
in its shops) and to obtain performance data about a resort’s activities, products, services,
and customers. In addition, the system provides managers with timely feedback about their
performance, which enables understanding and comparisons.
21-1
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Short Exercises
SE1. Responsibility Centers
a. profit center
b. cost center
c. revenue center
d. investment center
e. discretionary cost center
SE2. Preparing a Flexible Budget
Units Produced Variable

20,000 22,000 24,000 Cost per Unit
Direct materials $ 20,000 $ 22,000 $ 24,000 $ 1.00
Direct labor 80,000 88,000 96,000 4.00
Variable overhead 160,000 176,000 192,000 8.00
Total variable costs $260,000 $286,000 $312,000 $13.00
Total budgeted fixed overhead 180,800 180,800 180,800
Total costs $440,800 $466,800 $492,800
SE3. Cost Center Performance Report
Cost Center S
Performance Report
For the Month Ended September 30
Actual Flexible Master
Results Variance Budget Variance Budget
Units produced 80 — 80 (20) (U) 100
Center costs:
Direct materials $ 84 $ (4) (U) $ 80 $ 20 (F) $100
Direct labor 150 10 (F) 160 40 (F) 200
Variable overhead 260 (20) (U) 240 60 (F) 300
Fixed overhead 270 (20) (U) 250 0 250
Total cost $764 $(34) (U) $730 $120 (F) $850
Performance measures:
Defect-free units to
total produced 80% (10%) (U) N/A N/A 90%
Average throughput
minutes per unit 11 (1) (U) N/A N/A 10
21-2
SE4. Profit Center Performance Report
Profit Center P
Performance Report
For the Month Ended December 31
Actual Master
Results Variance Budget
Sales $140 $20 (F) $120
Controllable variable costs:
Variable cost of goods sold (25) (10) (U) (15)
Variable selling and administrative expenses (15) (10) (U) (5)
Contribution margin $100 $ 0 $100
Controllable fixed costs 40 20 (F) 60
Profit center operating income $ 60 $20 (F) $ 40
Number of orders processed 50 20 (F) 30
Average daily sales $4.68 $0.68 (F) $4.00
Number of units sold 100 40 (F) 60
SE5. Return on Investment
Center D Center V
Sales $1,600 $2,000
Operating income $400 $200
Average assets invested $3,200 $1,250
Profit margin (Operating Income / Sales) 25.00% 10.00%
Asset turnover (Sales / Average Assets Invested) 0.50 time 1.60 times
ROI (Operating Income / Average Assets Invested) 12.50% 16.00%
21-3
SE6. Residual Income
Center H Center F
Sales $20,000 $25,000
Operating income $1,500 $800 c
Beginning assets invested $4,000 $500
Ending assets invested $6,000 $1,500 d
Average assets invested [(Beginning Assets Invested +
Ending Assets Invested) / 2] $5,000 a $1,000
Desired ROI 20% 20%
Residual income [Operating Income – (Desired ROI ×
b
Average Assets Invested)] $500 $600
a
($4,000 + $6,000) / 2 = $5,000
b
$1,500 – (20% × $5,000) = $500
c
X – (20% × $1,000) = $600
X – $200 = $600
X = $200 + $600
X = $800
d
($500 + Y) / 2 = $1,000
Y + $500 = $2,000
Y = $2,000 – $500
Y = $1,500
SE7. Economic Value Added
Center M Center N
Sales $15,000 $18,000
After-tax operating income $1,000 $1,100
Total assets $4,000 $5,000
Current liabilities $1,000 $1,500 b
Total assets – current liabilities $3,000 $3,500
Cost of capital 15% 15%
Economic value added {After-Tax Operating Income –
a c
[Cost of Capital × (Total Assets – Current Liabilities)]} $550 $575
a
$1,000 – (15% × $3,000) = $550
b
$5,000 – X = $3,500
$5,000 – $3,500 = $1,500
c
$1,100 – (15% × $3,500) = $575
21-4
SE8. The Balanced Scorecard: Stakeholder Values
a. L d. F
b. P, C e. L
c. C f. P
SE9. Balanced Scorecard
1. b
2. c
3. d
4. a
SE10. Coordination of Goals
Performance
Goal Linked Objective Measure Target
Customer 1. To have successful 4. Average number of 3. To increase the aver-
satisfaction fund-raising cam- dollars raised per age donation by 10
paigns donor percent
Customer 5. To have faculty en- 2. Number of publica- 6. To increase the num-
satisfaction gage in cutting-edge tions per year per ber of publications
research tenure-track faculty per faculty member
by at least one per
year
21-5
Exercises: Set A
E1A. Responsibility Centers
a. cost center
b. revenue center
c. cost center
d. profit center
e. investment center
E2A. Organization Chart
Higgly Industries
Organization Chart
Board of Directors
President
Vice President Vice President
Business Office Personnel Production Facility
Technology Cost Center 1 Cost Center 2 Cost Center 3

Physical Plant
Services
21-6
E3A. Preparing a Flexible Budget
Bexar Company
Flexible Budget
For the Year Ended December 31
Variable
Units Produced Cost per
Cost Category 25,000 30,000 35,000 Unit
Direct materials $ 375,000 $ 450,000 $ 525,000 $15.00
Direct labor 250,000 300,000 350,000 10.00
Variable overhead:
Operating supplies 50,000 60,000 70,000 2.00
Indirect labor 87,500 105,000 122,500 3.50
Other 62,500 75,000 87,500 2.50
Total variable costs $ 825,000 $ 990,000 $1,155,000 $33.00
Fixed overhead:
Depreciation $ 80,000 $ 80,000 $ 80,000
Supervisory salaries 90,000 90,000 90,000
Property taxes and insurance 25,000 25,000 25,000
Other 15,000 15,000 15,000
Total fixed overhead $ 210,000 $ 210,000 $ 210,000
Total costs $1,035,000 $1,200,000 $1,365,000
Flexible budget formula for the year ended December 31:

Total Budgeted Costs = ($33.00 × Units Produced) + $210,000
E4A. Performance Report for a Cost Center
Keystone, LLC
Peach Processing Plant
Performance Report
For the Month
Units produced 60,000 — 60,000 10,000 50,000
Center costs:
Direct materials $ 6,200 $ (200) (U) $ 6,000 $(1,000) (U) $ 5,000
Direct labor 12,500 (500) (U) 12,000 (2,000) (U) 10,000
Variable overhead 17,600 400 (F) 18,000 (3,000) (U) 15,000
Fixed overhead 15,000 (1,000) (U) 14,000 — 14,000
Total cost $51,300 $(1,300) (U) $50,000 $(6,000) (U) $44,000
Average daily pounds
processed 2,400 400 (F) N/A N/A 2,000
Average processing
rate per hour 300 50 (F) N/A N/A 250
21-7
E5A. Variable Costing Income Statement
Vegan, LLC
Variable Costing Income Statement
For the Month
Sales $ 890,000
Variable costs:
Variable cost of goods sold (467,000)
Variable selling expenses (44,500)
Contribution margin $ 378,500
Fixed costs:
Fixed production costs (140,000)
Fixed selling and administrative expenses (72,300)
Operating income $ 166,200
E6A. Traditional and Variable Costing Income Statements
Tops Corporation
Traditional Income Statement
Sales ( 88,400 × $18 ) $1,591,200
Cost of goods sold 1,015,320
Gross margin $ 575,880
Selling and administrative expenses 381,098
Tops Corporation
Variable Costing Income Statement
Sales ( 88,400 × $18 ) $1,591,200
Variable cost of goods sold (848,640)
Variable selling expenses (132,600)
Contribution margin $ 609,960
Controllable fixed costs:
Fixed overhead (166,680)
Fixed selling expenses (152,048)
Fixed administrative expenses (96,450)
21-8
E7A. Investment Center Performance
Daisies Pansies Tulips

Sales $50,000 $50,000 $50,000
Operating income $10,000 $10,000 $20,000
Assets invested $25,000 $12,500 $25,000
Desired ROI 30% 30% 30%
ROI (Operating Income / Assets Invested) 40% 80% 80%
Residual income [Operating Income – (Desired ROI ×
Assets Invested)] $2,500 $6,250 $12,500
The results for Daisies, Pansies, and Tulips are very different, even though they all had sales of
$50,000. Daisies and Pansies had the same amount of operating income but had different ROIs
and residual incomes, because Daisies had twice the assets invested. Daisies and Tulips had the
same amount of assets invested but had ROIs of 40 percent and 80 percent, respectively, because
Tulips had twice the operating income of Daisies. Their residual incomes differed by $10,000 be-
cause Tulips had twice the operating income of Daisies but the same amount of assets invested.
Managers must exercise caution when comparing ROIs and residual incomes because there may
be differences in the underlying numbers.
E8A. Economic Value Added
Rock Scissors Paper

Sales $50,000 $50,000 $50,000
After-tax operating income $5,000 $5,000 $20,000
Total assets $25,000 $12,500 $25,000
Current liabilities $5,000 $5,000 $5,000
Cost of capital 15% 15% 15%
Total assets − current liabilities $20,000 $7,500 $20,000
Economic value added {After-Tax Operating Income –
[Cost of Capital × (Total Assets – Current Liabilities)]}* $2,000 $3,875 $17,000
* Rock: $5,000 – (15% × $20,000) = $2,000

Scissors: $5,000 – (15% × $7,500) = $3,875
Paper: $20,000 – (15% × $20,000) = $17,000
The results for these divisions are very different even though they all had sales of $50,000. Rock
and Scissors had the same amount of after-tax operating income but had different EVAs because
Rock had twice the total assets. Rock and Paper had the same amounts of total assets and current
liabilities, but their EVAs differed by $15,000 because Paper had four times the after-tax income
of Rock.
21-9
E9A. Return on Investment and Economic Value Added
1. Residual Income = Operating Income – (Desired ROI × Invested Assets)

$(2,500) = $12,500 − [ 6% ( $300,000 + $200,000 ) / 2 ]
2. a. Profit Margin = Operating Income / Sales

2.5% = $12,500 / $500,000
b. Asset Turnover = Sales / Assets Invested
2 times = $500,000 / [ ( $300,000 + $200,000 ) / 2 ]
c. ROI = Operating Income × Invested Assets
5% = $12,500 / [ ( $300,000 + $200,000 ) / 2 ]
or 2.5% × 2 = 5%
3. a. 12% = $30,000 / [( $300,000 + $200,000 ) / 2 ]

b. 6.25% = $12,500 / [( $300,000 + $100,000 ) / 2 ]
c. 8% = $20,000 / [( $300,000 + $200,000 ) / 2 ]
4. EVA = After-Tax Operating Income – [Cost of Capital × (Total Assets – Current Liabilities)]
$16,400 = $50,000 − [ 8% ( $500,000 − $80,000 ) ]
E10A. Balanced Scorecard
1. a 4. c
2. b 5. d
3. a 6. b
E11A. Performance Measures
1. d
2. c
3. a
4. b
E12A. The Balanced Scorecard
Financial perspective: 3, 5
Learning and growth perspective: 4, 7
Internal business processes perspective: 1, 6
Customer perspective: 2, 8
E13A. The Balanced Scorecard
1. a
2. c
3. d
4. b
21-10
E14A. Performance Incentives
Incentive Effectiveness
Cash bonuses Short-term
Awards Either short- or long-term
Profit sharing Long-term
Stock Either short- or long-term
E15A. Goal Congruence
Goal: Company leading its industry in innovation
Perspective Objective Measure Target

Internal business Agile production Time to market Time to market less
processes processes (the time between than 8 months for
a product idea 70 percent of product
and its first sales) introductions
Financial (investor) Profitable new New-product RI New-product RI of at

products least $50,000
Customer Successful product New-product Capture 65 percent of

introductions market share new-product market
within 8 months
Learning and growth Workforce with Percentage of 80 percent of work

(employee) cutting-edge skills employees cross- group cross-trained
trained on work- on new tasks within
group tasks 20 days
Note to Instructor: Solutions for Exercises: Set B are provided separately on the Instructor's
Resource CD and website.
21-11
Problems
P1. Preparing a Flexible Budget and Evaluating Performance
1. Beverage Products Company

Monthly Flexible Budget
Units Produced Variable
Cost Category 45,000 50,000 55,000 Cost per Unit
Direct materials $ 4,500 $ 5,000 $ 5,500 $0.10
Direct labor 5,400 6,000 6,600 0.12
Variable overhead:
Indirect labor 1,350 1,500 1,650 0.03
Supplies 900 1,000 1,100 0.02
Heat and power 1,350 1,500 1,650 0.03
Other 2,250 2,500 2,750 0.05
Total variable overhead costs $15,750 $17,500 $19,250 $0.35
Fixed overhead:
Heat and power $ 3,500 $ 3,500 $ 3,500
Depreciation 4,200 4,200 4,200
Insurance and taxes 1,200 1,200 1,200
Other 1,600 1,600 1,600
Total fixed overhead costs $10,500 $10,500 $10,500
Total costs $26,250 $28,000 $29,750
2. Flexible budget formula:

Total Budgeted Costs = ( $0.35 × Units Produced ) + $10,500
21-12
P1. Preparing a Flexible Budget and Evaluating Performance (Concluded)
3. Beverage Products Company

Performance Report
For April
Variable Difference
Unit Budgeted Actual Under (Over)
Cost Category Cost Costs* Costs Budget
Direct materials ( $0.10 ) $ 4,556.00 $ 4,975.00 $(419.00)
Direct labor ( $0.12 ) 5,467.20 5,850.00 (382.80)
Variable overhead:
Indirect labor ( $0.03 ) 1,366.80 1,290.00 76.80
Supplies ( $0.02 ) 911.20 960.00 (48.80)
Heat and power ( $0.03 ) 1,366.80 1,325.00 41.80
Other ( $0.05 ) 2,278.00 2,340.00 (62.00)
Total variable overhead costs $15,946.00 $16,740.00 $(794.00)
Fixed overhead:
Heat and power $ 3,500.00 $ 3,500.00 —
Depreciation 4,200.00 4,200.00 —
Insurance and taxes 1,200.00 1,200.00 —
Other 1,600.00 1,600.00 —
Total fixed overhead costs $10,500.00 $10,500.00 —
Totals $26,446.00 $27,240.00 $(794.00)
* Based on actual production of 45,560 units.
4. A performance report comparing actual costs with budgeted costs computed specifically for
the number of units produced is more meaningful, because the actual and budgeted amounts
reflect the same level of output. As shown, unfavorable variances exist for all but two of the
variable cost categories. The variances should now be analyzed to determine the reasons
for inefficient operations or excessive spending, especially in the areas of direct materials
and direct labor.
21-13
P2. Evaluating Cost Center Performance
1. East Coast Plant

Performance Report
For the Month
Center costs:
Rolled aluminum ( $0.01 ) $3,492,000 $ 108,000 (F) $3,600,000 $400,000 (F) $4,000,000
Lids ( $0.005 ) 1,980,000 (180,000) (U) 1,800,000 200,000 (F) 2,000,000
Direct labor ( $0.0025 ) 864,000 36,000 (F) 900,000 100,000 (F) 1,000,000
Small tools and supplies ( $0.0013 ) 432,000 36,000 (F) 468,000 52,000 (F) 520,000
Depreciation and rent 480,000 — 480,000 — 480,000
Total cost $7,248,000 $ — $7,248,000 $752,000 (F) $8,000,000
Cans processed per hour 41,096 (4,566) (U) N/A N/A 45,662
Average daily pounds of scrap metal 6 (1) (U) N/A N/A 5
Cans processed (in millions) 360 — 360 (40) (U) 400
2. West Coast Plant

Performance Report
For the Month
Center costs:
Rolled aluminum ( $0.01 ) $5,040,000 $ (840,000) (U) $4,200,000 $(200,000) (U) $4,000,000
Lids ( $0.005 ) 2,016,000 84,000 (F) 2,100,000 (100,000) (U) 2,000,000
Direct labor ( $0.0025 ) 1,260,000 (210,000) (U) 1,050,000 (50,000) (U) 1,000,000
Small tools and supplies ( $0.0013 ) 588,000 (42,000) (U) 546,000 (26,000) (U) 520,000
Depreciation and rent 480,000 — 480,000 — 480,000
Total cost $9,384,000 $(1,008,000) (U) $8,376,000 $(376,000) (U) $8,000,000
Cans processed per hour 47,945 2,283 (F) N/A N/A 45,662
Average daily pounds of scrap metal 7 (2) (U) N/A N/A 5
Cans processed (in millions) 420 — 420 20 (F) 400
21-14
P2. Evaluating Cost Center Performance (Concluded)
3. The East Coast plant produced 40 million fewer cans than budgeted. The West Coast plant
produced 20 million more cans than budgeted. East Coast kept all but its lid costs in line with
its flexible budget. West Coast's actual costs exceeded the flexible budget in all areas except
lid costs. The average daily pounds of scrap for both plants exceeded expectations, which
calls for further analysis of the cause of the scrap. The West Coast plant's number of cans
processed per hour exceeded expectations, but the East Coast plant's can production fell
short. Additional analysis of the factors contributing to this difference is needed.
4. A flexible budget should be prepared to compare actual results with a budget based on com-
parable actual production levels.
21-15
P3. Evaluating Profit and Investment Center Performance
1. Sewell, Bagan, and Clark, LLP

City Branch
Performance Report
Partner in Charge: Vanessa Smith
Billed hours 4,900 — 4,900 (100) (U) 5,000
Revenue $ 254,800 $ 9,800 (F) $ 245,000 $(5,000) (U) $ 250,000
Controllable variable
costs:
Direct labor (137,200) (19,600) (U) (117,600) 2,400 (F) (120,000)
Variable overhead (34,300) 4,900 (F) (39,200) 800 (F) (40,000)
Contribution margin $ 83,300 $ (4,900) (U) $ 88,200 $(1,800) (U) $ 90,000
Rent (30,000) — (30,000) — (30,000)
Other administrative
expenses (42,000) 3,000 (F) (45,000) — (45,000)
Branch operating income $ 11,300 $ (1,900) (U) $ 13,200 $(1,800) (U) $ 15,000
2. Actual billed hours were 100 hours below expectations, so revenue was below the amount
targeted in the master budget. Actual revenue exceeded the flexible budget, however, pos-
sibly because client billing rates were increased. Smith's primary problem appears to be
labor costs, which are almost $20,000 over the amount in the flexible budget. Because Smith
has control over employee compensation, she needs to analyze the situation further and per-
haps devise a different performance incentive plan.
21-16
P3. Evaluating Profit and Investment Center Performance (Concluded)
3. a. Actual Flexible Master

ROI = $11,300 / $40,000 $13,200 / $40,000 $15,000 / $40,000
= 28.25% 33.00% 37.50%
Residual Income = $11,300 − ( 30% × $40,000 ) $13,200 − ( 30% × $40,000 ) $15,000 − ( 30% × $40,000 )
= $(700) $1,200 $3,000
b. Vanessa Smith's performance as branch manager fell short of her law firm's expectations. The City Branch was expected
to generate a desired ROI of 30 percent, but its actual ROI was 28.25 percent. The actual ROI also fell short of the flexible
budget projection of 33 percent and the master budget projection of 37.5 percent. In addition, the branch's actual residual
income fell $1,900 short of the flexible budget's projected RI of $1,200. Smith can improve her branch's performance by
generating more billable hours and reducing direct labor costs.
21-17
P4. Return on Investment and Residual Income
1. This Year Last Year
Profit Margin* = $52,500 / $180,000 = 29.17% $43,500 / $160,000 = 27.19%
Asset Turnover* = $180,000 / [ ( $173,900 + $163,900 ) / 2 ] $160,000 / [ ( $163,900 + $157,900 ) / 2 ]

= 1.07 0.99
Return on Investment* = $52,500 / [ ( $173,900 + $163,900 ) / 2 ] $43,500 / [ ( $163,900 + $157,900 ) / 2 ]

= 31.08%** 27.04%**
* Rounded
** Alternatively: This Year: ROI = 29.17% × 1.07 = 31.21. Last Year: ROI = 27.19% × 0.99 = 26.92. Differences are due to rounding.

Residual Income = $52,500 −{ 12% × [ ( $173,900 + $163,900 ) / 2 ]} $43,500 −{ 12% × [ ( $163,900 + $157,900 ) / 2 ]}
= $32,232 $24,192

Economic Value Added = $34,650 −[ 8% × ( $173,900 − $13,900 ) ] $28,710 −[ 8% × ( $163,900 − $10,000 ) ]
= $21,850 $16,398
4. Additional financial and nonfinancial information for multiple years about the division, company, competition, and market segment would
be necessary before drawing any conclusions on the division's performance.
21-18
P5. The Balanced Scorecard and Benchmarking
1. Balanced Scorecard
Mission
To provide high-quality, innovative risk-protection services to individuals and businesses
Financial Perspective
Objective:
● To provide a sufficient return on investment by increasing sales and maintaining the
liquidity needed to support operations
● Growth in revenues for each type of insurance
● Cash flow
● Return on assets
Learning and Growth Perspective

Objective:
● To add value to the agency's services by training employees to be knowledgeable and
competent
● Number of new ideas for customer insurance
● Number of dollars spent on training
● Percentage of employees who complete 40 hours of training during the year
Internal Business Processes Perspective

Objective:
● To operate an efficient and cost-effective office support system for customer agents
● Average time for processing insurance applications
● Average time for processing claims
● Percentage of revenue devoted to office support system (information systems, accounting,
orders, and claims processing)
Customer Perspective
Objective:
● To retain customers and attract new customers
● Percentage of customers who rate services as excellent
● Percentage of new customer leads that result in sales
● Number of customer complaints
● Percentage of customers who renew policies
2. Benchmarking is a technique for determining a company's competitive advantage by com-

paring its performance with that of its best competitors. Benchmarks are measures of the best
practices in the industry. Referring to industry statistics can help Howski in at least two ways:
● The industry statistics may provide other key performance measures in addition to the
ones already identified.
● The industry statistics will provide a basis for Howski in determining benchmarks against
which to measure the company's performance.
21-19
Alternate Problems
P6. Flexible Budgets and Performance Evaluation
1. The report shows that the company received selling fees on 20 more home sales than orig-
inally planned (200 actual home sales − 180 budgeted home sales). Thus, actual selling fees
exceeded the budget by $190,200. However, the actual costs exceeded the budget by
$190,653. As a result, the actual operating income was $453 less than the budgeted operat-
ing income for the year.
The report is not highly reliable. It compares revenues and costs at two different levels of
activity. Performance is better measured by comparing revenues and costs for the same
level of activity.
2. Total for 180 Per Home

Home Sales Sale
Selling fees $2,052,000 $11,400.00
Variable costs:
Sales commissions $1,102,950 $ 6,127.50
Automobile 36,000 200.00
Advertising 93,600 520.00
Home repairs 77,400 430.00
General overhead 656,100 3,645.00
Total variable costs $1,966,050 $10,922.50
3. Realtors, Inc.
Performance Report
Difference
Under (Over)
Budget* Actual** Budget
Total selling fees $2,280,000 $2,242,200 $37,800
Variable costs:
Sales commissions $1,225,500 $1,205,183 $20,317
Automobile 40,000 39,560 440
Advertising 104,000 103,450 550
Home repairs 86,000 89,240 (3,240)
General overhead 729,000 716,970 12,030
$2,184,500 $2,154,403 $30,097
Fixed costs:
General overhead 60,000 62,300 (2,300)
Total costs $2,244,500 $2,216,703 $27,797
Operating income $ 35,500 $ 25,497 $10,003
* Budgeted data based on 200 home sales.

** Actual selling fees and operating costs for 200 home sales.
21-20
P6. Flexible Budgets and Performance Evaluation (Concluded)
4. The revised performance report shows that only one variable cost category, home repair
costs, exceeded the budgeted amount. All other categories were under budget. Fees were
under budget because revenues from home sales were lower than expected. This, in turn,
reduced the amount of commissions paid. The report is more reliable because it is based
on the actual number of home sales, which is at a higher level than the level on which the
original budget was based.
5. The managing partner should further analyze the company's sales trends to see if the
change in selling fees for houses sold is permanent or only temporary. Future budgets
should be based on this analysis.
In addition, the variable part of general overhead cost is under budget by a fairly significant
amount. This indicates that management should identify the specific areas that were under
budget. The budget could be revised to better reflect general overhead costs.
21-21
P7. Evaluating Cost Center Performance
1. North Plant
Performance Report
For the Month
Center costs:
Plastic pellet ( $0.009 ) $3,880,000 $ 170,000 (F) $4,050,000 $450,000 (F) $4,500,000
Caps ( $0.004 ) 1,990,000 (190,000) (U) 1,800,000 200,000 (F) 2,000,000
Direct labor ( $0.002 ) 865,000 35,000 (F) 900,000 100,000 (F) 1,000,000
Small tools and supplies ( $0.0005 ) 198,000 27,000 (F) 225,000 25,000 (F) 250,000
Depreciation and rent 440,000 10,000 (F) 450,000 — 450,000
Total cost $7,373,000 $ 52,000 (F) $7,425,000 $775,000 (F) $8,200,000
Bottles processed per hour 62,000 (7,450) (U) N/A N/A 69,450
Average daily pounds of scrap 6 (1) (U) N/A N/A 5
Bottles processed (in millions) 450 — 450 (50) (U) 500
2. South Plant
Performance Report
For the Month
Center costs:
Plastic pellets ( $0.009 ) $5,500,000 $(820,000) (U) $4,680,000 $(180,000) (U) $4,500,000
Caps ( $0.004 ) 2,000,000 80,000 (F) 2,080,000 (80,000) (U) 2,000,000
Direct labor ( $0.002 ) 1,240,000 (200,000) (U) 1,040,000 (40,000) (U) 1,000,000
Small tools and supplies ( $0.0005 ) 280,000 (20,000) (U) 260,000 (10,000) (U) 250,000
Depreciation and rent 480,000 (30,000) (U) 450,000 — 450,000
Total cost $9,500,000 $(990,000) (U) $8,510,000 $(310,000) (U) $8,200,000
Bottles processed per hour 70,250 800 (F) N/A N/A 69,450
Average daily pounds of scrap 7 (2) (U) N/A N/A 5
Bottles processed (in millions) 520 — 520 20 (F) 500
21-22
P7. Evaluating Cost Center Performance (Concluded)
3. The North plant produced 50 million fewer bottles than budgeted. The South plant produced
20 million more bottles than budgeted. North kept all but its cap costs in line with its flexible
budget. South's actual costs exceeded the flexible budget in all areas except cap costs. The
average daily pounds of scrap for both plants exceeded expectations, which calls for further
analysis of the cause of the scrap. The South plant's number of bottles processed per hour
exceeded expectations, but the North plant's bottle production fell short. Additional analysis
of the factors contributing to these differences is needed.
4. A flexible budget should be prepared to compare actual results with a budget based on com-
parable actual production levels.
21-23
P8. Evaluating Profit and Investment Center Performance
1. Park Theater
Performance Report
For the Month
Manager: Morris Burgman
Tickets sold 110,000 — 110,000 (10,000) (U) 120,000
Revenue—tickets $ 880,000 $ 110,000 (F) $ 770,000 $ (70,000) (U) $ 840,000
Revenue—concessions 330,000 (110,000) (U) 440,000 (40,000) (U) 480,000
Total revenue $1,210,000 $ — $1,210,000 $(110,000) (U) $1,320,000
Concessions (99,000) 11,000 (F) (110,000) 10,000 (F) (120,000)
Direct labor (330,000) 55,000 (F) (385,000) 35,000 (F) (420,000)
Variable overhead (550,000) (55,000) (U) (495,000) 45,000 (F) (540,000)
Contribution margin $ 231,000 $ 11,000 (F) $ 220,000 $ (20,000) (U) $ 240,000
Rent (55,000) — (55,000) — (55,000)
Other administrative
expenses (50,000) (5,000) (U) (45,000) — (45,000)
Theater operating income $ 126,000 $ 6,000 (F) $ 120,000 $ (20,000) (U) $ 140,000
2. Although ticket sales fell below expectations, operating income was better than expected (based on the flexible
budget), possibly because of lower costs for concessions and direct labor. Other favorable results were offset by
unfavorable results in other areas. For example, gains from increased ticket prices were offset by lower conces-
sion revenues. Improved labor costs were offset by higher than expected variable overhead. Burgman controlled
and monitored some areas better than others. Favorable areas include ticket sales, concessions cost, and direct
labor cost. Unfavorable areas include variable overhead, concessions sales, and other administrative expenses.
21-24
P8. Evaluating Profit and Investment Center Performance (Concluded)
3. a. Actual Flexible Master

ROI = $126,000 / $2,000,000 $120,000 / $2,000,000 $140,000 / $2,000,000
= 6.3%* 6.0% 7.0%
Residual Income = $126,000 − ( 6% × $2,000,000 ) $120,000 − ( 6% × $2,000,000 ) $140,000 − ( 6% × $2,000,000 )
= $6,000 $ — $20,000
*Rounded
b. Burgman's performance as manager of the Park Theater was mixed. Burgman's actual ROI was 6.3 percent, which fell between the
flexible budget projection of 6 percent and the master budget projection of 7 percent. Burgman's actual residual income was $6,000,
which also fell between the flexible budget's projected RI of $0 and the master budget's projection of $20,000. Because the theater
sold 10,000 fewer tickets than planned in the master budget, Burgman's ROI and RI fell short of the projections in that budget. How-
ever, because Burgman controlled costs and increased the price of tickets, his ROI and RI exceeded the projections in the flexible
budget. Burgman can improve his performance by generating more ticket sales.
21-25
P9. Return on Investment and Residual Income
Profit Margin = $69,160 / $247,000 = 28.00% $71,400 / $204,000 = 35.00%
Asset Turnover = $247,000 / [( $200,000 + $180,000 ) / 2 ] $204,000 / [( $180,000 + $160,000 ) / 2 ]

= 1.30 1.20
Return on Investment = $69,160 / [( $200,000 + $180,000 ) / 2 ] $71,400 / [ ( $180,000 + $160,000 ) / 2 ]

= 36.40% 42.00%

Residual Income = $69,160 −{ 10% × [ ( $200,000 + $180,000 ) / 2 ]} $71,400 −{ 10% × [ ( $180,000 + $160,000 ) / 2 ]}
= $50,160 $54,400

Economic Value Added = $49,000 −[ 5% × ( $200,000 − $10,000 )] $42,000 −[ 5% × ( $180,000 − $10,000 )]
= $39,500 $33,500
4. Additional financial and nonfinancial information for multiple years about the division, company, competition, and
market segment would be necessary before drawing any conclusions on the division's performance.
21-26
P10. The Balanced Scorecard and Benchmarking
1. Balanced Scorecard
Mission
To provide high-quality courses and degrees to individuals to add value to their lives
Financial Perspective
Objective:
● To provide a sufficient return on investment by increasing tuition revenues and main-
taining the liquidity needed to support operations
● Growth in revenues for each department
● Cash flow
● Return on assets
Learning and Growth Perspective

Objective:
● To add value to the college's courses by encouraging faculty to be lifelong learners
● Number of faculty publications
● Number of dollars spent on professional development
● Percentage of faculty who annually do 40 hours of professional development
Internal Business Processes Perspective

Objective:
● To operate efficient and cost-effective student support systems
● Average time for processing student applications
● Average time for processing transcript requests
● Percentage of revenue devoted to student services systems (registrar, computer ser-
vices, financial aid, and student health)
Customer Perspective
Objective:
● To retain students and attract new students
● Percentage of students who rate college as excellent
● Percentage of new student leads that result in enrollment
● Number of student complaints
● Percentage of returning students
2. Benchmarking is a technique for determining an entity's competitive advantage by compar-

ing its performance with that of its best competitors. Benchmarks are measures of the best
practices in the industry. Referring to association statistics can help Resource College in at
least two ways:
● The industry statistics may provide other key performance measures in addition to the
ones already identified.
● The industry statistics will provide a basis for Resource College in determining bench-
marks against which to measure the college's performance.
21-27
Cases
C1. Interpreting Management Reports: Responsibility Centers
1. Given that Wood4Fun values low-cost, high-quality production, it could use performance mea-
sures such as cost variances for direct materials, direct labor, and overhead; number of de-
fects to total number of units produced; number of defective products returned; savings from
employee suggestions; and market share percentage.
2. To measure the performance it desires, Wood4Fun should classify the manufacturing plants
as cost centers because their managers are able to control only product costs.
3. The sales regions should be classified as revenue centers because they are primarily respon-
sible for sales volume and not for product price or product cost.
C2. Conceptual Understanding: Types of Responsibility Centers
1. Aldo's Tortillas appears to be a cost center, since it does not control the number of units it
produces or sells. Aldo's Tortillas controls only its costs: variable cost of goods sold, variable
administrative expenses, fixed overhead (excluding depreciation), and fixed administrative
expenses. Yuma Foods, through its exclusive authority over Aldo's Tortillas sales and pro-
duction, controls Aldo's Tortillas sales, variable corporate expenses, and depreciation.
2. Yuma Foods
Performance Report for Aldo's Tortillas
For the Year Ended June 30
Variable cost of goods sold $3,000
Variable administrative expenses 1,000
Fixed overhead 300
Fixed administrative expenses 500
Center cost $4,800
MEMORANDUM
To: President of Yuma Foods
From: Student's name
Date: Today's date
Subject: Aldo's Tortillas' performance report
I have examined the current performance report for Aldo's Tortillas and the sources of the
revenue and costs it contains. It is my conclusion that Aldo's Tortillas has been erroneously
classified as a profit center. In fact, Aldo's Tortillas is a cost center because its manager con-
trols only costs and not revenues. Given that Aldo's Tortillas manager cannot control sales,
variable corporate expenses, and depreciation, return on investment is not an appropriate
performance measure to use in evaluating his or her performance. A more appropriate way
to evaluate the manager of a cost center is to compare actual controllable costs to their
corresponding amounts in the flexible and master budgets to determine how well the man-
ager is carrying out his or her assigned responsibilities.
I recommend that Aldo's Tortillas be reclassified as a cost center and evaluated accordingly.
21-28
C3. Decision Analysis: Return on Investment and Residual Income
1. Investment Center
Food and Lodging Division
Actual Results
Sales $40,000,000
Operating income $6,450,000
Average assets invested $10,000,000
Desired ROI 30%
Return on investment 64.50%
Profit margin 16.13% *
Asset turnover 4 times
Residual income $3,450,000
Actual Results
Sales $40,000,000
Desired ROI 40%
Asset turnover 4 times
Actual Results
Sales $40,000,000
Desired ROI 30%
Asset turnover 3.33 times
4. The use of formatted spreadsheets simplifies solving for ROI and residual income because
a change in one of the assumption cells automatically changes the solution. Analyzing and
solving "what-if" situations by spreadsheet makes it easy for managers to see the effects of
changing assumptions.
*Rounded
21-29
C4. Conceptual Understanding: Economic Value Added and Performance
1. EVA = After-Tax Operating Income – [ Cost of Capital × ( Total Assets – Current Liabilities ) ]
(In millions of dollars)
Worldwide: $3.30 = $15 − [ 9% ( $210 − $80 ) ]
Europe: $(1.00) = $5 − [ 10% ( $70 − $10 ) ]
Americas: $2.60 = $5 − [ 8% ( $70 − $40 ) ]
Asia: $0.20 = $5 − [ 12% ( $70 − $30 ) ]
The factors that affect each office's economic value added: the cost of capital, total assets,
current liabilities, and after-tax operating income. If an office is able to secure capital at
lower rates, reduce total assets, or increase after-tax operating income by increasing sales
or decreasing costs, then it can improve its economic value added.
2. Economic value added is an attempt to measure an office's economic income above a set
target. If bonuses are awarded based on economic value added, managers will be motivated
to secure capital at low rates, reduce total assets, and increase after-tax operating income.
3. No, to evaluate investment centers adequately, additional measures of performance based

on the perspectives of multiple stakeholders should also be used.
C5. Group Activity: Performance Measures and the Balanced Scorecard
This assignment is designed to develop research, writing, and speaking skills. Students will
identify many different performance measures and targets for each balanced scorecard per-
spective for a variety of local businesses. The email-style report allows them to practice how
to construct an informative email. In class, after several students have presented their group's
findings, ask each student to identify the single most important measure for his or her busi-
ness. List the measure on the board and ask the class if there are any common threads among
the measures. At the end of the discussion, you might summarize the linked perspectives and
measures. Then reinforce a balanced evaluation approach that takes all perspectives into
consideration. If students have interviewed their business's manager or accountant, ask how
their companies actually implemented the balanced scorecard. Compare the students' and the
business manager's perceptions of measurement.
21-30
C6. Continuing Case: Cookie Company
1. Your projected operating income is $30,800.

● Before year end, your store should account for all expenses relevant to this year's rev-
enues (the matching principle) and recognize all the responsibilities your store has to
creditors—on the books. Keeping bills in your desk drawer would not be ethical and
would be a conscious attempt to misstate operating results. When you record the bills
on your books (Dr. Expenses or Cost of Goods Sold, Cr. Accounts Payable), the store's
operating income will be reduced by $5,000 to $25,800, and your bonus this year will be
smaller.
● If you write down $3,000 in inventory, that decrease in the value of the inventory will be
permanent. Because the inventory's failure to sell seems related to temporary conditions
(economic downturn), no write-down should be taken this year. If you take the write-
down, the loss will decrease operating income and assets this year by $3,000.
2. This year, your store's projected ROI is $30,800 / $140,000 = 22%, which is above the store's
target of 20%. If the inventory write-down is taken, the store's revised ROI this year would be
($30,800 – $3,000) / {[$130,000 + ($150,000 – $3,000)] / 2} = $27,800 / $138,500 = 20% (rounded),
which is still acceptable. Next year, the ratio would be better than expected because reve-
nue and operating income would rise by the $4,000 (because the cost of goods sold is zero)
and the beginning assets would be lower ($147,000 instead of $150,000). You should not take
the inventory write-down because, as stated in 1, the economic conditions are temporary.
Thus, this year's ROI will remain at 22%, and next year's ROI will not be as high as it would
if the inventory write-down were taken. You face an ethical dilemma only if you take the
write-down, because that action would disregard generally accepted accounting principles.
21-31
Solution Manual for Managerial Accounting, 10th Edition
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SE1. Responsibility Centers

SE2. Preparing a Flexible Budget

Units Produced Variable

SE3. Cost Center Performance Report

SE5. Return on Investment

SE7. Economic Value Added

SE9. Balanced Scorecard

SE10. Coordination of Goals

E1A. Responsibility Centers

E2A. Organization Chart

Vice President Vice President

Business Office Personnel Production Facility

Technology Cost Center 1 Cost Center 2 Cost Center 3

Flexible budget formula for the year ended December 31:

E4A. Performance Report for a Cost Center

E6A. Traditional and Variable Costing Income Statements

Daisies Pansies Tulips

E8A. Economic Value Added

Rock Scissors Paper

* Rock: $5,000 – (15% × $20,000) = $2,000

1. Residual Income = Operating Income – (Desired ROI × Invested Assets)

2. a. Profit Margin = Operating Income / Sales

3. a. 12% = $30,000 / [( $300,000 + $200,000 ) / 2 ]

E10A. Balanced Scorecard

E11A. Performance Measures

E12A. The Balanced Scorecard

E13A. The Balanced Scorecard

E15A. Goal Congruence

Goal: Company leading its industry in innovation

Perspective Objective Measure Target

Financial (investor) Profitable new New-product RI New-product RI of at

Customer Successful product New-product Capture 65 percent of

Learning and growth Workforce with Percentage of 80 percent of work

P1. Preparing a Flexible Budget and Evaluating Performance

1. Beverage Products Company

2. Flexible budget formula:

3. Beverage Products Company

* Based on actual production of 45,560 units.

1. East Coast Plant

2. West Coast Plant

1. Sewell, Bagan, and Clark, LLP

3. a. Actual Flexible Master

1. This Year Last Year

Profit Margin* = $52,500 / $180,000 = 29.17% $43,500 / $160,000 = 27.19%

Asset Turnover* = $180,000 / [ ( $173,900 + $163,900 ) / 2 ] $160,000 / [ ( $163,900 + $157,900 ) / 2 ]

Return on Investment* = $52,500 / [ ( $173,900 + $163,900 ) / 2 ] $43,500 / [ ( $163,900 + $157,900 ) / 2 ]

2. This Year Last Year

3. This Year Last Year

Learning and Growth Perspective

Internal Business Processes Perspective

2. Benchmarking is a technique for determining a company's competitive advantage by com-

P6. Flexible Budgets and Performance Evaluation

2. Total for 180 Per Home

* Budgeted data based on 200 home sales.

3. a. Actual Flexible Master

1. This Year Last Year

Profit Margin = $69,160 / $247,000 = 28.00% $71,400 / $204,000 = 35.00%

Asset Turnover = $247,000 / [( $200,000 + $180,000 ) / 2 ] $204,000 / [( $180,000 + $160,000 ) / 2 ]

Return on Investment = $69,160 / [( $200,000 + $180,000 ) / 2 ] $71,400 / [ ( $180,000 + $160,000 ) / 2 ]