Chapter 12 Segment Reporting and Decentralization: True/False Questions

Chapter 12 Segment Reporting and Decentralization
True/False Questions
1. Allocating common fixed costs to segments on segmented income statements reduces the usefulness of
such statements.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Easy
2. A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit
data.
3. A responsibility center is a business segment whose manager has control over costs, revenues, or
investments in operating assets.
4. Residual income is used in the numerator to compute turnover in an ROI analysis.
Ans: False AACSB: Reflective Thinking
LO: 2 Level: Easy
AICPA BB: Critical Thinking
AICPA FN: Reporting
5. Net operating income is earnings before interest and taxes.

6. Land held for possible plant expansion would be included as an operating asset in the ROI calculation.
LO: 2 Level: Medium
AICPA FN: Reporting
7. Margin equals Stockholders' Equity divided by Sales.

LO: 2 Level: Easy
AICPA FN: Reporting
8. The use of return on investment (ROI) as a performance measure may lead managers to reject a project
that would be favorable for the company as a whole.
Ans: True AACSB: Reflective Thinking
LO: 2 Level: Medium
AICPA FN: Reporting
9. Residual income is equal to the difference between total revenues and operating expenses.
LO: 3 Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
AICPA FN: Reporting
12-5

10. When using residual income as a measure of performance, it is not meaningful to compare the residual
incomes of divisions of different sizes.
LO: 3 Level: Easy
AICPA FN: Reporting
11. The transfer price used for internal transfers between divisions of the same company can increase or
decrease each division's reported profits.
Ans: True AACSB: Analytic AICPA BB: Critical Thinking
Appendix: 12A LO: 4 Level: Medium
AICPA FN: Reporting
12. For performance evaluation purposes, the lump-sum amount of fixed service department costs charged
to an operating department should usually be based on either the operating department's peak-period or
long-run average needs.
Appendix: 12B LO: 5 Level: Easy
AICPA FN: Reporting
13. In service department cost allocations, sales dollars should be used as an allocation base whenever
possible.
AICPA FN: Reporting
AICPA FN: Reporting
14. A cost center is also a responsibility center.

LO: 6 Level: Easy
15. The basic objective of responsibility accounting is to charge each manager with those costs and/or
revenues over which he has control.
LO: 6 Level: Easy
AICPA FN: Reporting
Multiple Choice Questions

16. The impact on net operating income of short-run changes in sales for a segment can be most clearly
predicted by analyzing:
A) the contribution margin ratio.
B) the segment margin.
C) the ratio of the segment margin to sales.
D) net sales less segment fixed costs.
Ans: A AACSB: Reflective Thinking
LO: 1 Level: Medium
12-6
AICPA FN: Reporting

17. In a segmented contribution format income statement, what is the best measure of the long-run
profitability of a segment?
A) its gross margin
B) its contribution margin
C) its segment margin
D) its segment margin minus an allocated portion of common fixed expenses
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting; Measurement LO: 1 Level: Medium
18. In order to properly report segment margin as a guide to long-run segment profitability and performance,
fixed costs must be separated into two broad categories. One category is common fixed costs. What is
the other category?
A) discretionary fixed costs
B) committed fixed costs
C) traceable fixed costs
D) specialized fixed costs
Ans: C AACSB: Analytic
LO: 1 Level: Easy
AICPA FN: Reporting; Measurement
19. Which of the following segment performance measures will decrease if there is an increase in the
interest expense for that segment?
Return on Investment Residual Income
A)
Yes
Yes
B)
No
Yes
C)
Yes
No
D)
No
No
Ans: D AACSB: Analytic
Level: Hard
AICPA FN: Reporting
LO: 2; 3
20. Which of the following segment performance measures will increase if there is a decrease in the selling
expenses for that segment?
Return on Investment Residual Income
A)
Yes
Yes
B)
No
Yes
C)
Yes
No
D)
No
No
Ans: A AACSB: Analytic
Level: Medium
AICPA FN: Reporting
LO: 2; 3
21. Some investment opportunities that should be accepted from the viewpoint of the entire company may
be rejected by a manager who is evaluated on the basis of:
A) return on investment.
B) residual income.
C) contribution margin.
D) segment margin.
Level: Medium
AICPA FN: Reporting
12-7
LO: 2

22. Consider the following three conditions:
I. An increase in sales
II. An increase in operating assets
III. A reduction in expenses
Which of the above conditions provide a way in which a manager can improve return on investment?
A) Only I
B) Only I and II
C) Only I and III
D) Only II and III
Level: Medium
AICPA FN: Reporting
LO: 2
23. When calculating a segment's return on investment (ROI), which of the following assets of that segment
would be considered a part of average operating assets?
A) cash
B) accounts receivable
C) plant and equipment
D) all of the above
Level: Medium
AICPA FN: Reporting
LO: 2
24. Which of the following measures of performance encourages continued expansion by an investment
center so long as it is able to earn a return in excess of the minimum required return on average
operating assets?
A) return on investment
B) transfer pricing
C) the contribution approach
D) residual income
Ans: D AACSB: Reflective Thinking
LO: 3 Level: Easy
AICPA FN: Reporting
25. Residual income is:

A) Net operating income plus the minimum required return on average operating assets.
B) Net operating income less the minimum required return on average operating assets.
C) Contribution margin plus the minimum required return on average operating assets.
D) Contribution margin less the minimum required return on average operating assets.
Ans: B AACSB: Analytic
Level: Easy
AICPA FN: Reporting
LO: 3
26. Which of the following is NOT a common approach used to set transfer prices?
A) market price
B) variable cost
C) negotiation
D) suboptimization
Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Appendix: 12A LO: 4 Level: Easy
12-8

27. For performance evaluation purposes, the variable costs of a service department should be charged to
operating departments using:
A) the actual variable rate and the budgeted level of activity for the period.
B) the budgeted variable rate and the actual level of activity for the period.
C) the budgeted variable rate and the budgeted level of activity for the period.
D) the actual variable rate and the peak-period or long-run average servicing capacity.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
Appendix: 12B LO: 5 Level: Medium
AICPA FN: Reporting
28. Which of the following companies is following a policy with respect to the costs of service departments
that is not recommended?
A) To charge operating departments with the depreciation of forklifts used at its central warehouse,
Shalimar Electronics charges predetermined lump-sum amounts calculated on the basis of the
long-term average use of the services provided by the warehouse to the various segments.
B) Manhattan Electronics uses the sales revenue of its various divisions to allocate costs connected
with the upkeep of its headquarters building.
C) Rainier Industrial does not allow its service departments to pass on the costs of their inefficiencies
to the operating departments.
D) Golkonda Refinery separately allocates fixed and variable costs incurred by its service
departments to its operating departments.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
Appendix: 12B LO: 5 Level: Medium Source: CMA; adapted
29. A segment of a business responsible for both revenues and expenses would be called:
A) a cost center.
B) an investment center.
C) a profit center.
D) residual income.
Level: Easy
AICPA FN: Reporting
LO: 6
30. Devlin Company has two divisions, C and D. The overall company contribution margin ratio is 30%,
with sales in the two divisions totaling $500,000. If variable expenses are $300,000 in Division C, and if
Division C's contribution margin ratio is 25%, then sales in Division D must be:
A) $50,000
B) $100,000
C) $150,000
D) $200,000
Level: Hard
AICPA FN: Reporting
12-9
LO: 1

Solution:
Total company contribution margin = $500,000 30% = $150,000
Total company variable expenses = $500,000 $150,000 = $350,000
Division C contribution margin ratio = (Sales $300,000) Sales = 0.25
Sales $300,000 = 0.25 Sales
(0.75 Sales) 0.75 = $300,000 0.75
Sales = $400,000
Division D sales = Total company sales Division C sales
= $500,000 $400,000 = $100,000
Sales...................................
Less variable expenses ......
Contribution margin ..........
Contribution margin ratio ..
Divisions
Total
Company Division C Division D
$500,000
$400,000
$100,000
350,000
300,000
50,000
$150,000
$100,000
$ 50,000
0.30
0.25
0.50
31. Toxemia Salsa Company manufactures five flavors of salsa. Last year, Toxemia generated net operating
income of $40,000. The following information was taken from last year's income statement segmented
by flavor (brackets indicate a negative amount):
Contribution margin .
Segment margin .......
Segment margin less
allocated common
fixed expenses.......
Wimpy
$(2,000)
$(16,000)
Mild
Medium
Hot
Atomic
$45,000 $35,000 $50,000 $162,000
$(5,000)
$7,000 $10,000 $94,000
$(26,000) $(15,000) $(3,000)
$0
$84,000
Toxemia expects similar operating results for the upcoming year. If Toxemia wants to maximize its
profitability in the upcoming year, which flavor or flavors should Toxemia discontinue?
A) no flavors should be discontinued
B) Wimpy
C) Wimpy and Mild
D) Wimpy, Mild, and Medium
LO: 1 Level: Medium
AICPA FN: Decision Making;
Solution:
The segment margin is a better indication of profitability of individual products than the segment margin
less allocated common fixed expenses. The products with negative segment margins should be
discontinued to maximize profit: Wimpy and Mild.
12-10

32. Uchimura Corporation has two divisions: the AFE Division and the GBI Division. The corporation's net
operating income is $42,000. The AFE Division's divisional segment margin is $15,700 and the GBI
Division's divisional segment margin is $175,400. What is the amount of the common fixed expense not
traceable to the individual divisions?
A) $149,100
B) $57,700
C) $217,400
D) $191,100
Level: Medium
AICPA FN: Reporting
LO: 1
Solution:
Total
Company
Divisional segment margin ..............................
$191,100
Less common fixed costs not
traceable to the individual divisions ............
X
Net operating income ......................................
$ 42,000
($15,700 + $175,400)
Common fixed costs not traceable to the individual divisions

= $191,100 $42,000 = $149,100
33. Younie Corporation has two divisions: the South Division and the West Division. The corporation's net
operating income is $26,900. The South Division's divisional segment margin is $42,800 and the West
Division's divisional segment margin is $29,900. What is the amount of the common fixed expense not
traceable to the individual divisions?
A) $56,800
B) $69,700
C) $72,700
D) $45,800
Level: Medium
AICPA FN: Reporting
Solution:
Total
Company
Divisional segment margin ..............................
$72,700
X
$26,900
($42,800 + $29,900)
Common fixed costs not traceable to the individual divisions

= $72,700 $26,900 = $45,800
12-11
LO: 1

34. Dukelow Corporation has two divisions: the Governmental Products Division and the Export Products
Division. The Governmental Products Division's divisional segment margin is $255,000 and the Export
Products Division's divisional segment margin is $59,800. The total amount of common fixed expenses
not traceable to the individual divisions is $163,700. What is the company's net operating income?
A) $314,800
B) ($314,800)
C) $151,100
D) $478,500
LO: 1 Level: Easy
Solution:
Total
Company
Divisional segment margin .............................
$314,800 *
163,700
$151,100
*$255,000 + $59,800 = $314,800
35. Miscavage Corporation has two divisions: the Beta Division and the Alpha Division. The Beta Division
has sales of $580,000, variable expenses of $301,600, and traceable fixed expenses of $186,500. The
Alpha Division has sales of $510,000, variable expenses of $178,500, and traceable fixed expenses of
$222,100. The total amount of common fixed expenses not traceable to the individual divisions is
$235,500. What is the company's net operating income?
A) $374,400
B) $201,300
C) $609,900
D) ($34,200)
LO: 1 Level: Easy
Solution:
Sales ..............................................
Less: variable expenses .................
Contribution margin ......................
Less: traceable fixed expenses ......
Divisional segment margin ...........
Less common fixed expenses ........
Net operating income ....................
12-12
Divisions
Total
Alpha
Beta
Company Division
Division
$1,090,000 $510,000
$580,000
480,100 178,500
301,600
609,900 331,500
278,400
408,600 222,100
186,500
201,300 $109,400
$91,900
235,500
($34,200)

36. J Corporation has two divisions. Division A has a contribution margin of $79,300 and Division B has a
contribution margin of $126,200. If total traceable fixed costs are $72,400 and total common fixed costs
are $34,900, what is J Corporation's net operating income?
A) $168,000
B) $170,600
C) $133,100
D) $98,200
LO: 1 Level: Easy
Solution:

Less: traceable fixed expenses ......
Divisional segment margin ...........
Less common fixed expenses ........
Total Company
$205,500 *
72,400
133,100
34,900
$ 98,200
*$79,300 + $126,200 = $205,500

37. Kop Corporation has provided the following data:
Return on investment (ROI) ................
Sales ....................................................
Average operating assets .....................
Minimum required rate of return.........
Margin on sales ...................................
15%
$120,000
$60,000
12%
7.5%
Kop Corporation's residual income is:

A) $1,800
B) $5,400
C) $2,700
D) $3,600
Level: Medium
AICPA FN: Reporting
LO: 2; 3
Solution:
Net operating income = Sales Margin on sales = $120,000 7.5% = $9,000
Residual income = Net operating income (Average operating assets Minimum required rate of
return) = $9,000 ($60,000 12%) = $9,000 $7,200 = $1,800
12-13

38. Spar Company has calculated the following ratios for one of its investment centers:
Margin ...................
Turnover ................
25%
0.5 times
What is Spar's return on investment for this investment center?

A) 50.0%
B) 12.5%
C) 15.0%
D) 25.0%
Level: Easy Source: CPA; adapted
AICPA FN: Reporting
LO: 2
Solution:
Return on investment = Margin Turnover = 25% 0.5 times = 12.5%
39. Mike Corporation uses residual income to evaluate the performance of its divisions. The company's
minimum required rate of return is 14%. In January, the Commercial Products Division had average
operating assets of $970,000 and net operating income of $143,700. What was the Commercial Products
Division's residual income in January?
A) $7,900
B) -$20,118
C) $20,118
D) -$7,900
Level: Easy
AICPA FN: Reporting
LO: 3
Solution:
return) = $143,700 ($970,000 14%) = $143,700 $135,800 = $7,900
40. In November, the Universal Solutions Division of Keaffaber Corporation had average operating assets
of $480,000 and net operating income of $46,200. The company uses residual income, with a minimum
required rate of return of 11%, to evaluate the performance of its divisions. What was the Universal
Solutions Division's residual income in November?
A) -$6,600
B) $5,082
C) $6,600
D) -$5,082
Level: Easy
AICPA FN: Reporting
LO: 3
Solution:
return) = $46,200 ($480,000 11%) = $46,200 $52,800 = -$6,600
12-14

41. If operating income is $60,000, average operating assets are $240,000, and the minimum required rate of
return is 20%, what is the residual income?
A) 40%
B) 25%
C) $12,000
D) $48,000
Level: Easy
AICPA FN: Reporting
LO: 3
Solution:
return) = $60,000 ($240,000 20%) = $60,000 $48,000 = $12,000
42. Division A makes a part that it sells to customers outside of the company. Data concerning this part
appear below:
Selling price to outside customers.............
Variable cost per unit ................................
Total fixed costs ........................................
Capacity in units ........................................
$40
$30
$10,000
20,000
Division B of the same company would like to use the part manufactured by Division A in one of its
products. Division B currently purchases a similar part made by an outside company for $38 per unit and
would substitute the part made by Division A. Division B requires 5,000 units of the part each period.
Division A is already selling all of the units it can produce to outside customers. If Division A sells to
Division B rather than to outside customers, the variable cost per unit would be $1 lower. What is the
lowest acceptable transfer price from the standpoint of the selling division?
A) $40
B) $39
C) $38
D) $37
AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4
Level: Hard
Solution:
Transfer price Variable cost per unit + (Total contribution margin on lost sales Number of units
transferred) = ($30 $1) + [($40 $30) 5,000] 5,000 = $29 + $10 = $39
12-15

43. Product A, which is produced by the Parts Division of BYP Corporation, sells for $14.25 on the outside
market. The costs to make Product A as recorded by the company's cost accounting system are:
Direct materials .........................................
Direct labor................................................
Variable manufacturing overhead .............
Fixed manufacturing overhead ..................
$7.25
$2.25
$1.50
$2.50
The Assembly Division of BYP Corporation requires a part much like Product A to make one of its
products. The Assembly Division can buy this part from an outside supplier for $14.15. However, the
Assembly Division could use Product A instead of this part purchased from an outside supplier. What is
the most the Assembly Division would be willing to pay the Parts Division for Product A?
A) $13.50
B) $14.25
C) $14.15
D) $14.00
AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4
Level: Easy
Solution:
Transfer price Cost of buying from outside supplier = $14.15
44. Macumber Corporation has two operating divisions-an Atlantic Division and a Pacific Division. The
company's Logistics Department services both divisions. The variable costs of the Logistics Department
are budgeted at $36 per shipment. The Logistics Department's fixed costs are budgeted at $234,000 for
the year. The fixed costs of the Logistics Department are determined based on peak-period demand.
Atlantic Division .........

Pacific Division ...........
Percentage of Peak
Period Capacity Required
30%
70%
Actual
Shipments
1,100
3,400
How much Logistics Department cost should be charged to the Altlantic Division at the end of the year
for performance evaluation purposes?
A) $198,000
B) $109,800
C) $118,800
D) $96,800
AICPA FN: Reporting
Solution:
Labor department cost charged to Atlantic Division
= (1,100 shipments $36 per shipment) + ($234,000 30%)
= $39,600 + $70,200 = $109,800
12-16
45. Erholm Corporation has two operating divisions-an Atlantic Division and a Pacific Division. The
Atlantic Division ...............

Pacific Division .................
Percentage of Peak Period

Capacity Required
35%
65%
Budgeted
Shipments
1,900
5,200
At the end of the year, actual Logistics Department variable costs totaled $290,700 and fixed costs
totaled $431,950. The Atlantic Division had a total of 3,900 shipments and the Pacific Division had a
total of 5,100 shipments for the year. How much Logistics Department cost should be charged to the
Pacific Division at the END of the year for performance evaluation purposes?
A) $391,453
B) $425,770
C) $445,498
D) $409,502
AICPA FN: Reporting
Solution:
Logistics department cost charged to Pacific Division
= (5,100 shipments $31 per shipment) + ($411,800 65%)
= $158,100 + $267,670 = $425,770
12-17

46. Gretter Corporation has two operating divisions-an Atlantic Division and a Pacific Division. The
Atlantic Division .........

Pacific Division ...........

Capacity Required
25%
75%
Budgeted
Shipments
1,600
5,800
totaled $418,680. The Atlantic Division had a total of 2,600 shipments and the Pacific Division had a
total of 5,600 shipments for the year. For performance evaluation purposes, how much actual Logistics
Department cost should NOT be charged to the operating divisions at the END of the year?
A) $28,920
B) $9,840
C) $19,080
D) $0
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting
Solution:
Actual Logistics Department cost incurred = $305,040 + $418,680 = $723,720
Logistics Department charged to operating divisions
= [$36 per shipment (2,600 shipments + 5,600 shipments)] + $399,600
= [$36 per shipment 8,200 shipments] + $399,600
= $295,200 + $399,600 = $694,800
Actual Logistics Department cost not charged to operating divisions
= $723,720 $694,800 = $28,920
12-18

47. Bockoven Corporation has two operating divisions-a Consumer Division and a Commercial Division.
The company's Customer Service Department provides services to both divisions. The variable costs of
the Customer Service Department are budgeted at $46 per order. The Customer Service Department's
fixed costs are budgeted at $181,500 for the year. The fixed costs of the Customer Service Department
are determined based on the peak period orders.
Consumer Division............
Commercial Division ........

Capacity Required
40%
60%
Actual
Orders
1,100
2,200
How much Customer Service Department cost should be charged to the Consumer Division at the
beginning of the year for performance evaluation purposes?
A) $123,200
B) $166,650
C) $111,100
D) $133,320
AICPA FN: Reporting
Solution:
Customer Service Department cost charged to Consumer Division
= ($46 per order 1,100 orders) + ($181,500 40%)
= $50,600 + $72,600 = $123,200
12-19

48. Levar Corporation has two operating divisions-a Consumer Division and a Commercial Division. The
company's Order Fulfillment Department provides services to both divisions. The variable costs of the
Order Fulfillment Department are budgeted at $73 per order. The Order Fulfillment Department's fixed
costs are budgeted at $470,400 for the year. The fixed costs of the Order Fulfillment Department are
determined based on the peak period orders.

Capacity Required
25%
75%
Budgeted
Orders
1,800
6,600
At the end of the year, actual Order Fulfillment Department variable costs totaled $621,600 and fixed
costs totaled $473,970. The Consumer Division had a total of 1,840 orders and the Commercial Division
had a total of 6,560 orders for the year. For purposes of evaluation performance, how much Order
Fulfillment Department cost should be charged to the Commercial Division at the END of the year?
A) $831,680
B) $855,588
C) $840,918
D) $846,240
AICPA FN: Reporting
Solution:
Order Fulfillment Department cost charged to Commercial Division
= ($73 per order 6,560 orders) + ($470,400 75%)
= $478,880 + $352,800 = $831,680
12-20

49. Schabel Corporation has two operating divisions-a Consumer Division and a Commercial Division. The
company's Customer Service Department provides services to both divisions. The variable costs of the
Customer Service Department are budgeted at $72 per order. The Customer Service Department's fixed
costs are budgeted at $695,400 for the year. The fixed costs of the Customer Service Department are

Capacity Required
25%
75%
Budgeted
Orders
2,600
9,600
At the end of the year, actual Customer Service Department variable costs totaled $891,089 and fixed
costs totaled $709,820. The Consumer Division had a total of 2,610 orders and the Commercial Division
had a total of 9,580 orders for the year. For performance evaluation purposes, how much actual
Customer Service Department cost should NOT be charged to the operating divisions at the END of the
year?
A) $13,409
B) $0
C) $14,420
D) $27,829
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting
Solution:
Actual Customer Service Department cost incurred
= $891,089 + $709,820 = $1,600,909
Customer Service Department cost charged to operating divisions
= [$72 per order (2,610 orders + 9,580 orders)] + $695,400
= [$72 per order 12,190 orders] + $695,400
= $877,680 + $695,400 = $1,573,080
Actual Customer Service Department cost not charged to operating divisions
= $1,600,909 $1,573,080 = $27,829
12-21

50. Mangiamele Corporation's Maintenance Department provides services to the company's two operating
divisions-the Paints Division and the Stains Division. The variable costs of the Maintenance Department
are budgeted based on the number of cases produced by the operating departments. The fixed costs of
the Maintenance Department are budgeted based on the number of cases produced by the operating
departments during the peak period. Data appear below:
Maintenance Department
Budgeted variable cost .......................................
Budgeted total fixed cost....................................
$4 per case
$693,000
Paints Division
Percentage of peak period capacity required .....
Actual cases........................................................
30%
18,000
Stains Division
Actual cases........................................................
70%
59,000
For performance evaluation purposes, how much Maintenance Department cost should be charged to the
Paints Division at the end of the year?
A) $234,000
B) $500,500
C) $279,900
D) $300,300
AICPA FN: Reporting
Solution:
Maintenance Department cost charged to Paints Division
= ($4 per case 18,000 cases) + ($693,000 30%)
= $72,000 + $207,900 = $279,900
12-22

51. Tabarez Corporation's Maintenance Department provides services to the company's two operating
the Maintenance Department are budgeted based on the number of cases produced by the operating
Actual total variable cost....................................
Actual total fixed cost ........................................
$2 per case
$1,140,000
$239,400
$1,157,980
Paints Division
Budgeted cases ...................................................
Actual cases........................................................
30%
29,000
29,040
Stains Division
Budgeted cases ...................................................
Actual cases........................................................
70%
85,000
84,960
For performance evaluation purposes, how much Maintenance Department cost should be charged to the
Stains Division at the END of the year?
A) $989,002
B) $1,041,416
C) $967,920
D) $1,019,520
AICPA FN: Reporting
Solution:
Maintenance Department cost charged to Stains Division
= ($2 per case 84,960 cases) + ($1,140,000 70%)
= $169,920 + $798,000 = $967,920
12-23

Use the following to answer questions 52-56:
O'Neill, Incorporated's income statement for the most recent month is given below.
Sales ......................................
Variable expenses .................
Contribution margin ..............
Traceable fixed expenses ......
Segment margin ....................
Common fixed expenses .......
Net operating income ............
Total
Store A
Store B
$300,000 $100,000 $200,000
192,000
72,000 120,000
108,000
28,000
80,000
76,000
21,000
55,000
32,000 $ 7,000 $ 25,000
27,000
$ 5,000
For each of the following questions, refer back to the original data.
52. If Store B sales increase by $20,000 with no change in traceable fixed expenses, the overall company net
operating income should:
A) increase by $2,500
B) increase by $5,000
C) increase by $8,000
D) increase by $12,000
LO: 1 Level: Medium
Solution:
Store B contribution margin ratio = $80,000 $200,000 = 40%
Additional net operating income = $20,000 40% = $8,000
53. The marketing department believes that a promotional campaign at Store A costing $5,000 will increase
sales by $15,000. If its plan is adopted, overall company net operating income should:
A) decrease by $800
B) decrease by $5,800
LO: 1 Level: Medium
Solution:
Store A contribution margin ratio = $28,000 $100,000 = 28%
Change in net operating income = ($15,000 28%) $5,000
= $4,200 $5,000 = $800 decrease
12-24

54. A proposal has been made that will lower variable expenses in Store A to 62% of sales. However, this
reduction can only be accomplished by an increase in fixed expenses of $8,000. If this proposal is
implemented and sales remain constant, overall company net operating income should:
A) remain the same
B) decrease by $4,200
LO: 1 Level: Medium
Solution:
New amount for Store A variable expenses = $100,000 62% = $62,000
Change in net operating income = ($72,000 $62,000) $8,000
= $10,000 $8,000 = $2,000 increase
55. If sales in Store B increase by $30,000 as a result of a $7,000 expenditure in fixed expenses:
A) the contribution margin should increase by $18,000
B) the segment margin should increase by $12,000
C) the contribution margin should increase by $11,000
D) the segment margin should increase by $5,000
Level: Hard
AICPA FN: Reporting
LO: 1
Solution:
Store B contribution margin ratio = $80,000 $200,000 = 40%
Change in segment margin = ($30,000 40%) $7,000
= $12,000 $7,000 = $5,000 increase
56. Currently the sales clerks receive a salary of $7,000 per month in Store B. A proposal has been made to
change from a fixed salary to a sales commission of 5%. Assume that this proposal is adopted, and that
as a result sales increase by $20,000. The new segment margin for Store B should be:
A) $29,000
B) $32,000
C) $39,000
D) $45,000
LO: 1 Level: Hard
Solution:
Sales......................................
Sales commissions ................
Other variable expenses........
Contribution margin .............
Traceable fixed expenses......
Segment margin ....................
$220,000 ($200,000 + $20,000)

11,000
($220,000 5%)
132,000
($220,000 60%*)
77,000
48,000
($55,000 $7,000)
$ 29,000
*Variable expenses Sales = $120,000 $200,000 = 60%

12-25

Higgins Company sells three products, Product A, Product B, and Product C. Sales during June totaled
$1,500,000 in the company. The company's overall contribution margin ratio was 38%, and its fixed expenses
totaled $525,000 for the year. Sales by product were: Product A, $750,000; Product B, $450,000; and Product
C, $300,000. Traceable fixed expenses were: Product A, $180,000; Product B, $150,000; and Product C,
$90,000. The variable expenses were: Product A, $450,000; Product B, $270,000; and Product C, $___?___.
57. The net operating income for the company as a whole for June was:
A) $45,000
B) $105,000
C) $150,000
D) $570,000
LO: 1 Level: Medium
Solution:
Sales......................................
Contribution margin ratio .....
Contribution margin .............
Fixed expenses .....................
Net operating income ...........
$1,500,000
38%
$570,000
525,000
$ 45,000
58. The contribution margin ratio for Product C for June was:
A) 0%
B) 30%
C) 38%
D) 70%
Level: Hard
AICPA FN: Reporting
Solution:
Company variable expenses = $1,500,000 (100% 38%)
= $1,500,000 62% = $930,000
Product C variable expenses = $930,000 $450,000 $270,000 = $210,000
Product C contribution margin = $300,000 $210,000 = $90,000
Product C contribution margin ratio = $90,000 $300,000 = 30%
12-26
LO: 1

59. Common fixed expenses for Higgins Company for June were:
A) $45,000
B) $420,000
C) $150,000
D) $105,000
Level: Hard
AICPA FN: Reporting
LO: 1
Solution:
Common fixed expenses = Total fixed expenses Traceable fixed expenses
= $525,000 ($180,000 + $150,000 + $90,000)
= $525,000 $420,000 = $105,000
Azuki Corporation operates in two sales territories, urban and rural. Shown below is last year's income
statement segmented by territory:
Sales ...............................................
Variable expenses ..........................
Contribution margin .......................
Traceable fixed expenses ...............
Segment margin .............................
Urban
$320,000
208,000
112,000
48,000
$64,000
Rural
$80,000
56,000
24,000
30,000
$(6,000)
Azuki's common fixed expenses were $25,000 last year.

60. What was Azuki Corporation's overall net operating income for last year?
A) $33,000
B) $45,000
C) $58,000
D) $83,000
LO: 1 Level: Easy
Solution:
Segment margin .............................
Common fixed expenses ...............
$58,000 ($64,000 + -$6,000)

25,000
$33,000
12-27

61. If urban sales were 10% higher last year, by approximately how much would Azuki's net operating
income have increased? (Assume no change in the revenue or cost structure.)
A) $4,400
B) $6,400
C) $11,200
D) $32,000
Level: Medium
AICPA FN: Reporting
LO: 1
Solution:
Urban contribution margin ratio = $112,000 $320,000 = 35%
Increase in net operating income = $320,000 10% 35% = $11,200
62. If operations in rural areas would have been discontinued at the beginning of last year, how would this
have changed the net operating income of Azuki Company as a whole?
A) $5,000 increase
B) $6,000 increase
C) $11,000 increase
D) $24,000 decrease
Level: Easy
AICPA FN: Reporting
LO: 1
Solution:
Rural segment margin = Contribution margin Traceable fixed expenses
= $24,000 $30,000 = ($6,000)
Net operating income would have increased by $6,000 if operations in rural areas would have been
discontinued at the beginning of last year.
12-28

Tubaugh Corporation has two major business segmentsEast and West. In December, the East business
segment had sales revenues of $690,000, variable expenses of $352,000, and traceable fixed expenses of
$104,000. During the same month, the West business segment had sales revenues of $140,000, variable
expenses of $56,000, and traceable fixed expenses of $24,000. The common fixed expenses totaled $162,000
and were allocated as follows: $89,000 to the East business segment and $73,000 to the West business segment.
63. The contribution margin of the West business segment is:
A) $84,000
B) $234,000
C) $422,000
D) $145,000
Level: Easy
AICPA FN: Reporting
LO: 1
Solution:
West contribution margin = Sales Variable expenses
= $140,000 $56,000 = $84,000
64. A properly constructed segmented income statement in a contribution format would show that the
segment margin of the East business segment is:
A) $352,000
B) $145,000
C) $234,000
D) $249,000
LO: 1 Level: Easy
Solution:
Sales ..............................................
Variable expenses..........................
Traceable fixed expenses ..............
Segment margin ............................
$690,000
352,000
338,000
104,000
$234,000
12-29

65. A properly constructed segmented income statement in a contribution format would show that the net
operating income of the company as a whole is:
A) $294,000
B) $422,000
C) $132,000
D) -$30,000
LO: 1 Level: Easy
Solution:
Total
Company
$830,000
408,000
422,000
128,000
294,000
162,000
$132,000
Sales...................................
Variable expenses ..............
Traceable fixed expenses...
Segment margin .................
Common fixed expenses ...
Net operating income ........
East
West
$690,000 $140,000
352,000
56,000
338,000
84,000
104,000
24,000
$234,000 $60,000

Data for January for Bondi Corporation and its two major business segments, North and South, appear below:
Sales revenues, North...........................
Variable expenses, North .....................
Traceable fixed expenses, North ..........
Sales revenues, South...........................
Variable expenses, South .....................
Traceable fixed expenses, South ..........
$660,000
$383,000
$79,000
$510,000
$291,000
$66,000
In addition, common fixed expenses totaled $179,000 and were allocated as follows: $93,000 to the North
business segment and $86,000 to the South business segment.
66. The contribution margin of the South business segment is:
A) $198,000
B) $496,000
C) $219,000
D) $105,000
Level: Easy
Solution:
Sales ..............................................
12-30
AICPA FN: Reporting
$510,000
291,000
$219,000
LO: 1

segment margin of the North business segment is:
A) $105,000
B) $383,000
C) $198,000
D) $184,000
LO: 1 Level: Easy
Solution:
Sales...................................
North
$660,000
383,000
277,000
79,000
$198,000
A) -$7,000
B) $172,000
C) $351,000
D) $496,000
LO: 1 Level: Easy
Solution:
Sales...................................
Total
Company
$1,170,000
674,000
496,000
145,000
351,000
179,000
$172,000
North
South
$660,000 $510,000
383,000 291,000
277,000 219,000
79,000
66,000
$198,000 $153,000
12-31

Ferrar Corporation has two major business segments-Consumer and Commercial. Data for the segment and for
the company for March appear below:
Sales revenues, Consumer .........................
Sales revenues, Commercial ......................
Variable expenses, Consumer ....................
Variable expenses, Commercial.................
Traceable fixed expenses, Consumer .........
Traceable fixed expenses, Commercial .....
$680,000
$280,000
$394,000
$143,000
$102,000
$45,000
In addition, common fixed expenses totaled $210,000 and were allocated as follows: $122,000 to the Consumer
business segment and $88,000 to the Commercial business segment.
69. The contribution margin of the Commercial business segment is:
A) $137,000
B) $184,000
C) $62,000
D) $423,000
Level: Easy
AICPA FN: Reporting
LO: 1
Solution:
Sales...................................
$280,000
143,000
$137,000
segment margin of the Consumer business segment is:
A) $164,000
B) $62,000
C) $394,000
D) $184,000
LO: 1 Level: Easy
Solution:
Sales...................................
12-32
Consumer
$680,000
394,000
286,000
102,000
$184,000

A) $66,000
B) -$144,000
C) $423,000
D) $276,000
LO: 1 Level: Easy
Solution:
Segments
Sales...................................
Total
Company Consumer Commercial
$960,000 $680,000
$280,000
537,000
394,000
143,000
423,000
286,000
137,000
147,000
102,000
45,000
276,000 $184,000
$92,000
210,000
$66,000

The Tipton Division of Dudley Company reported the following data last year:
Return on investment ........................
20%
Minimum required rate of return ......
12%
Residual income ................................ $50,000
72. Tipton Division's average operating assets last year were:
A) $625,000
B) $250,000
C) $416,677
D) $333,333
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
Level: Hard
Solution:
Residual income = Average operating assets (ROI Minimum required rate of return)
Average operating assets = Residual income (ROI Minimum required rate of return)
= $50,000 (20% 12%) = $50,000 8% = $625,000
LO: 2; 3
73. The division's net operating income last year was:

A) $250,000
B) $125,000
C) $100,000
D) $75,000
Level: Hard
AICPA FN: Reporting

12-33
LO: 2; 3

Solution:
ROI = Net operating income Average operating assets
Net operating income = ROI Average operating assets
= 20% $625,000 = $125,000

The following data pertain to Turk Company's operations last year:
Sales ...............................................
Net operating income .....................
Contribution margin .......................
Average operating assets................
Stockholders equity ......................
Plant, property, & equipment .........
$900,000
$36,000
$150,000
$180,000
$100,000
$120,000
74. Turk's return on investment for the year was:

A) 4%
B) 15%
C) 36%
D) 20%
Level: Medium
AICPA FN: Reporting
LO: 2
Solution:
= $36,000 $180,000 = 20%
75. If the residual income for the year was $9,000, the minimum required rate of return must have been:
A) 15%
B) 4%
C) 20%
D) 36%
Level: Hard
AICPA FN: Reporting
LO: 3
Solution:
return)
= $9,000 = $36,000 ($180,000 Minimum required rate of return)
= $27,000 $180,000
Minimum required rate of return = 15%
12-34

The Hum Division of the Ho Company reported the following data for last year:
Sales .....................................................
Operating expenses ..............................
Interest expense ....................................
Tax expense .........................................
Stockholders equity ............................
Average operating assets......................
Minimum required rate of return .........
$800,000
$650,000
$50,000
$30,000
$200,000
$600,000
12%
76. The residual income for the Hum Division last year was:
A) $126,000
B) $46,000
C) $78,000
D) $22,000
Level: Medium
AICPA FN: Reporting
LO: 3
Solution:
Sales ....................................................
Operating expenses .............................
Net operating income ..........................
$800,000
650,000
$150,000
return) = $150,000 ($600,000 12%) = $150,000 $72,000 = $78,000
77. The return on investment last year for the Hum Division was:
A) 75%
B) 25%
C) 35%
D) 12%
Level: Medium
AICPA FN: Reporting
Solution:
= $150,000 $600,000 = 25%
12-35
LO: 2

The following selected data pertain to Beck Co.'s Beam Division for last year:
Sales ........................................................
Variable expenses ...................................
Traceable fixed expenses ........................
Average operating assets.........................
Minimum required rate of return ............
$2,000,000
$800,000
$900,000
$500,000
20%
Note: the traceable fixed expenses do not include any interest expense.
78. How much is the residual income?
A) $400,000
B) $200,000
C) $300,000
D) $500,000
Level: Medium Source: CPA; adapted
AICPA FN: Reporting
LO: 3
Solution:
Sales .......................................................
Variable expenses...................................
Traceable fixed expenses .......................
Net operating income .............................
$2,000,000
800,000
900,000
$ 300,000
return) = $300,000 ($500,000 20%) = $300,000 $100,000 = $200,000
79. How much is the return on the investment?
A) 25%
B) 45%
C) 20%
D) 60%
Level: Medium Source: CPA; adapted
AICPA FN: Reporting
Solution:
= $300,000 $500,000 = 60%
12-36
LO: 2

Edith Carolina is president of the Deed Corporation. The company is decentralized, and leaves investment
decisions up to the discretion of the division managers. Michael Sanders, manager of the Cosmetics Division,
has had a return on investment of 14% for his division for the past three years and expects the division to have
the same return in the coming year. Sanders has the opportunity to invest in a new line of cosmetics which is
expected to have a return on investment of 12%.
80. Suppose Deed Corporation evaluates managerial performance using return on investment. Edith
Carolina, as president of the company, may view the opportunity for taking on the cosmetics line
differently from Michael Sanders, manager of the Cosmetics Division. What action would each of them
prefer with respect to the decision of whether to take on the new cosmetics line?
A)
B)
C)
D)
Carolina Sanders
accept
reject
reject
accept
accept
accept
reject
reject

AICPA FN: Decision Making; Reporting LO: 2 Level: Easy
81. If the Deed Corporation evaluates managerial performance using residual income based on the corporate
minimum required rate of return of 8%, what decision would be preferred by Edith Carolina and
Michael Sanders?
A)
B)
C)
D)
Carolina Sanders
accept
reject
reject
accept
accept
accept
reject
reject

Level: Easy
AICPA BB: Decision Making
AICPA FN: Reporting
12-37
LO: 3

The following information relates to the Quilt Division of TDS Corporation for last year:
Sales ............................................... $200,000
Contribution margin ....................... $90,000
Net operating income ..................... $65,000
Average operating assets................ $500,000
Minimum desired rate of return .....
10%
82. What was the Quilt Division's return on investment (ROI) for last year?
A) 13%
B) 18%
C) 40%
D) 45%
Level: Easy
AICPA FN: Reporting
LO: 2
Solution:
= $65,000 $500,000 = 13%
83. Assume that Quilt was being evaluated solely on the basis of residual income. Which of the following
investment opportunities would Quilt want to invest in?
An investment that
generates a return of 12%
A)
Yes
B)
No
C)
Yes
D)
No
An investment that
generates a return of 16%
Yes
Yes
No
No

AICPA FN: Decision Making; Reporting LO: 3 Level: Medium
12-38

Cecille Products is a division of a major corporation. Last year the division had total sales of $7,940,000, net
operating income of $254,080, and average operating assets of $2,000,000. The company's minimum required
rate of return is 12%.
84. The division's margin is closest to:
A) 3.2%
B) 25.2%
C) 12.7%
D) 28.4%
Level: Easy
AICPA FN: Reporting
Solution:
Margin = Net operating income Sales = $254,080 $7,940,000 = 3.2%
85. The division's turnover is closest to:
A) 0.13
B) 3.52
C) 3.97
D) 31.25
Level: Easy
AICPA FN: Reporting
LO: 2
Solution:
Turnover = Sales Average operating assets = $7,940,000 $2,000,000 = 3.97
86. The division's return on investment (ROI) is closest to:
A) 2.6%
B) 12.7%
C) 0.4%
D) 50.4%
Level: Easy
AICPA FN: Reporting
Solution:
= $254,080 $2,000,000 = 12.7%
12-39
LO: 2

87. The division's residual income is closest to:
A) $(698,720)
B) $494,080
C) $254,080
D) $14,080
Level: Easy
AICPA FN: Reporting
LO: 3
Solution:
return) = $254,080 ($2,000,000 12%) = $254,080 $240,000 = $14,080
Deanda Products is a division of a major corporation. The following data are for the last year of operations:
Sales .............................................................................
Net operating income ...................................................
Average operating assets..............................................
The companys minimum required rate of return ........
$28,630,000
$1,145,200
$7,000,000
18%

A) 4.0%
B) 16.4%
C) 24.4%
D) 28.4%
Level: Easy
AICPA FN: Reporting
LO: 2
Solution:
Margin = Net operating income Sales = $1,145,200 $28,630,000 = 4.0%
A) 4.09
B) 0.16
C) 25.00
D) 3.51
Level: Easy
AICPA FN: Reporting
Solution:
12-40
LO: 2

A) 16.4%
B) 3.2%
C) 67.1%
D) 0.6%
Level: Easy
Solution:
= $1,145,200 $7,000,000 = 16.4%
AICPA FN: Reporting
LO: 2
91. The division's residual income is closest to:

A) $(4,008,200)
B) $2,405,200
C) $(114,800)
D) $1,145,200
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3
Level: Easy
Solution:
return) = $1,145,200 ($7,000,000 18%) = $1,145,200 $1,260,000 = $(114,800)

Last year the Uptown Division of Gorcen Enterprises had sales of $300,000 and a net operating income of
$24,000. The average operating assets at Uptown last year amounted to $120,000.
92. Last year at Uptown the return on investment was:
A) 8%
B) 12%
C) 20%
D) 40%
Level: Easy
Solution:
= $24,000 $120,000 = 20%
AICPA FN: Reporting
LO: 2
Level: Easy
Solution:
Margin = Net operating income Sales = $24,000 $300,000 = 8%
LO: 2
93. Last year at Uptown the margin amounted to:

A) 8%
B) 12%
C) 20%
D) 40%
12-41

94. At Uptown the turnover last year was:
A) 0.4
B) 2.5
C) 3.2
D) 5.0
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
Level: Easy
Solution:
Turnover = Sales Average operating assets = $300,000 $120,000 = 2.5
LO: 2

Ahartz Industries is a division of a major corporation. Data concerning the most recent year appears below:
Sales ...................................... $7,820,000
Net operating income ............
$445,740
Average operating assets....... $2,000,000
A) 22.3%
B) 25.6%
C) 5.7%
D) 31.3%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
Level: Easy
Solution:
LO: 2

A) 3.20
B) 17.54
C) 0.22
D) 3.91
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
Level: Easy
Solution:
LO: 2

A) 18.2%
B) 4.5%
C) 22.3%
D) 1.3%
Level: Easy
Solution:
= $445,740 $2,000,000 = 22.3%
12-42
AICPA FN: Reporting
LO: 2

Beade Industries is a division of a major corporation. Last year the division had total sales of $16,760,000, net
operating income of $770,960, and average operating assets of $4,000,000.
A) 28.5%
B) 23.9%
C) 4.6%
D) 19.3%
Level: Easy
AICPA FN: Reporting
LO: 2
Solution:
A) 21.74
B) 4.19
C) 3.51
D) 0.19
Level: Easy
AICPA FN: Reporting
LO: 2
Solution:
A) 16.1%
B) 0.9%
C) 19.3%
D) 3.7%
Level: Easy
AICPA FN: Reporting
Solution:
= $770,960 $4,000,000 = 19.3%
12-43
LO: 2

The West Division of Cecchetti Corporation had average operating assets of $240,000 and net operating income
of $42,200 in August. The minimum required rate of return for performance evaluation purposes is 19%.
101. What was the West Division's minimum required return in August?
A) $45,600
B) $42,200
C) $53,618
D) $8,018
Level: Easy
AICPA FN: Reporting
LO: 3
Solution:
Minimum required return = Minimum required rate of return Average operating assets = 19%
$240,000 = $45,600
102. What was the West Division's residual income in August?
A) -$8,018
B) $3,400
C) -$3,400
D) $8,018
Level: Easy
AICPA FN: Reporting
LO: 3
Solution:
return) = $42,200 ($240,000 19%) = $42,200 $45,600 = -$3,400
The Consumer Products Division of Goich Corporation had average operating assets of $800,000 and net
operating income of $81,300 in May. The minimum required rate of return for performance evaluation purposes
is 10%.
103. What was the Consumer Products Division's minimum required return in May?
A) $81,300
B) $8,130
C) $88,130
D) $80,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3
Level: Easy
Solution:
Minimum required return = Minimum required rate of return Average operating assets = 10%
$800,000 = $80,000
12-44

104. What was the Consumer Products Division's residual income in May?
A) -$1,300
B) $8,130
C) $1,300
D) -$8,130
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3
Level: Easy
Solution:
return) = $81,300 ($800,000 10%) = $81,300 $80,000 = $1,300
(Appendix 12A) Division P of the Nyers Company makes a part that can either be sold to outside customers or
transferred internally to Division Q for further processing. Annual data relating to this part are as follows:
Annual production capacity ...................................
Selling price of the item to outside customers .......
Variable cost per unit .............................................
Fixed cost per unit ..................................................
80,000 units
$35
$23
$5
Division Q of the Nyers Company requires 15,000 units per year and is currently paying an outside supplier $33
per unit. Consider each part below independently.
105. If outside customers demand only 50,000 units per year, then according to the formula in the text, what
is the lowest acceptable transfer price from the viewpoint of the selling division?
A) $35
B) $33
C) $28
D) $23
Solution:
transferred) = $23 + ($0 15,000) = $23
106. If outside customers demand 80,000 units, then according to the formula in the text, what is the lowest
acceptable transfer price from the viewpoint of the selling division?
A) $35
B) $33
C) $28
D) $23
Solution:
transferred) = $23 + [($35 $23) 15,000] 15,000 = $23 + $12 = $35
12-45

107. If outside customers demand 80,000 units and if, by selling to Division Q, Division P could avoid $4 per
unit in variable selling expense, then according to the formula in the text, what is the lowest acceptable
transfer price from the viewpoint of the selling division?
A) $35
B) $21
C) $31
D) $33
AICPA FN: Decision Making; Reporting LO: 4 Level: Hard
Solution:
transferred) = $23 + [($35 $23 $4) 15,000] 15,000 = $23 + $8 = $31
108. If outside customers demand 70,000 units, then according to the formula in the text, what is the lowest
acceptable transfer price from the viewpoint of the selling division for each of the 15,000 units needed
by Q?
A) $33
B) $27
C) $28
D) $29
AICPA FN: Decision Making; Reporting LO: 4 Level: Hard
Solution:
transferred)
= $23 + [($35 $23) 5,000*] 15,000 = $23 + ($12 3)
= $23 + $4 = $27
*Lost sales units = 15,000 (80,000 70,000) = 15,000 10,000 = 5,000
12-46

(Appendix 12A) Two of the decentralized divisions of Gamberi Electronics Corporation are the Plastics
Division and the Components Division. The Plastics Division sells molded parts to both the Components
Division and to customers outside the corporation.
109. Assume that the Plastics Division is currently operating at full capacity. Also assume that the
Components Division wants to increase the number of parts it purchases from Plastics. In order to
maintain its current level of profitability, the Plastics Division should not accept any transfer price on
these additional parts that is below the:
A) variable cost of the additional parts.
B) full (absorption) cost of the additional parts.
C) variable cost of the additional parts plus the lost contribution margin on all units that could no
longer be sold to customers outside the corporation.
D) full (absorption) cost of the additional parts plus the lost contribution margin on all units that
could no longer be sold to customers outside the corporation.
110. Assume that the Plastics Division is currently operating with idle capacity. Also assume that the
Components Division wants to purchase from Plastics all of the additional parts that could be made with
this idle capacity. In order to increase its current level of profitability, the Plastics Division should
accept any transfer price on these additional parts that is above the:
A) variable cost of the additional parts.
B) full (absorption) cost of the additional parts.
C) variable cost of the additional parts plus the lost contribution margin on all units that could no
longer be sold to customers outside the corporation.
D) full (absorption) cost of the additional parts plus the lost contribution margin on all units that
could no longer be sold to customers outside the corporation.
(Appendix 12B) Ampulla Production Studios charges the Sound Effects Department's costs to two operating
departments, Audio and Video. Charges are made on the basis of labor-hours. Information pertaining to the
labor-hours for the year follow:
Audio Video
Budgeted labor-hours for the year ............................... 18,000 27,000
Actual labor-hours for the year .................................... 14,700 27,300
Annual long-run average capacity in labor-hours ........ 15,000 25,000
The following costs pertain to the Sound Effects Department:
Variable costs .........

Fixed costs .............
Budgeted For Year Actual For Year

$315,000
$273,000
$756,000
$819,000
12-47

111. How much of the Sound Effects Department's variable cost should be charged to the Video Department
at year-end for performance evaluation purposes?
A) $175,000
B) $175,500
C) $177,450
D) $191,100
Level: Medium
AICPA FN: Reporting
LO: 5
Solution:
Variable cost charged to Video Department
= Budgeted variable cost per lab-hour Actual labor-hours
= [$315,000 (18,000 + 27,000)] 27,300 = ($315,000 45,000) 27,300
= $7 27,300 = $191,100
112. How much of the Sound Effects Department's fixed cost should be charged to the Audio department at
year-end for performance evaluation purposes?
A) $264,600
B) $283,500
C) $302,400
D) $307,125
Level: Medium
AICPA FN: Reporting
Solution:
Fixed cost charged to Audio department
= Audios percent of total capacity Budgeted fixed costs
= [15,000 (15,000 + 25,000)] $756,000 = (15,000 40,000) $756,000
= 37.5% $756,000 = $283,500
12-48
LO: 5

(Appendix 12B) Wollan Corporation has two operating divisions-an East Division and a West Division. The
company's Logistics Department services both divisions. The variable costs of the Logistics Department are
budgeted at $44 per shipment. The Logistics Department's fixed costs are budgeted at $237,600 for the year.
The fixed costs of the Logistics Department are determined based on peak-period demand.
Percentage of Peak
East Division ..........
40%
West Division .........
60%
Budgeted
Shipments
1,300
3,100
At the end of the year, actual Logistics Department variable costs totaled $332,880 and fixed costs totaled
$253,960. The East Division had a total of 4,300 shipments and the West Division had a total of 3,000
shipments for the year.
113. How much Logistics Department cost should be allocated to the West Division at the end of the year?
A) $289,176
B) $229,644
C) $241,167
D) $274,560
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5
Level: Easy
Solution:
Logistics Department cost allocated to West Division
= (Budgeted variable cost per unit Actual shipments) + (Budgeted fixed costs Percent of peak
capacity required)
= ($44 per shipment 3,000 shipments) + (($237,600 60%)
= $132,000 + $142,560 = $274,560
114. How much actual Logistics Department cost should not be allocated to the operating divisions at the end
of the year?
A) $28,040
B) $0
C) $16,360
D) $11,680
Level: Easy
Solution:
Actual cost = $332,880 + $253,960 = $586,840
Cost allocated to operating divisions
= [$44 per shipment (4,300 + 3,000 shipments)] + $237,600
= [$44 per shipment 7,300 shipments] + $237,600 = $321,200 + $237,600
= $558,800
Actual Logistics Department cost not allocated to operating divisions
= $586,840 $558,800 = $28,040
12-49
LO: 5

(Appendix 12B) Azotea Corporation has two operating divisions-a Consumer Division and a Commercial
Division. The company's Order Fulfillment Department provides services to both divisions. The variable costs
of the Order Fulfillment Department are budgeted at $56 per order. The Order Fulfillment Department's fixed
costs are budgeted at $233,700 for the year. The fixed costs of the Order Fulfillment Department are budgeted
based on the peak period orders.
Budgeted
Capacity Required
Orders
Consumer Division ............
40%
1,200
Commercial Division .........
60%
2,900
At the end of the year, actual Order Fulfillment Department variable costs totaled $237,390 and fixed costs
totaled $239,140. The Consumer Division had a total of 1,240 orders and the Commercial Division had a total
of 2,860 orders for the year.
115. How much Order Fulfillment Department cost should be allocated to the Commercial Division at the
end of the year?
A) $300,380
B) $309,078
C) $332,409
D) $323,180
Level: Easy
AICPA FN: Reporting
LO: 5
Solution:
Order Fulfillment Department cost allocated to Commercial Division
= ($56 per order 2,860 orders) + ($233,700 60%)
= $160,160 + $140,220 = $300,380
116. How much actual Order Fulfillment Department cost should not be allocated to the operating divisions
at the end of the year?
A) $7,790
B) $5,440
C) $13,230
D) $0
Level: Easy
AICPA FN: Reporting
Solution:
Actual cost = $237,390 + $239,140 = $476,530
Cost allocated to operating divisions
= [$56 per order (1,240 + 2,860 orders)] + $233,700
= [$56 per order 4,100 orders] + $233,700
= $229,600 + $233,700 = $463,300
Actual Order Fulfillment cost not allocated to operating divisions
= $476,530 $463,300 = $13,230
12-50
LO: 5

(Appendix 12B) Frame Corporation's Maintenance Department provides services to the company's two
operating divisions-the Paints Division and the Stains Division. The variable costs of the Maintenance
Department are budgeted based on the number of cases produced by the operating departments. The fixed costs
of the Maintenance Department are determined by the number of cases produced by the operating departments
during the peak period. Data appear below:
Budgeted variable cost ........................................ $6 per case
Budgeted total fixed cost ....................................
$328,000
Actual total variable cost ....................................
$254,014
Actual total fixed cost .........................................
$331,940
Paints Division
Percentage of peak period capacity required ......
Budgeted cases ....................................................
Actual cases ........................................................
35%
12,000
12,010
Stains Division
Percentage of peak period capacity required ......
Budgeted cases ....................................................
Actual cases ........................................................
65%
29,000
28,960
117. How much Maintenance Department cost should be allocated to the Stains Division at the end of the
year?
A) $395,313
B) $414,187
C) $405,610
D) $386,960
Level: Easy
AICPA FN: Reporting
Solution:
Maintenance Department cost allocated to Stains Division
= ($6 per case 28,960 cases) + ($328,000 65%)
= $173,760 + $213,200 = $386,960
12-51
LO: 5

118. How much actual Maintenance Department cost should not be allocated to the operating divisions at the
end of the year?
A) $12,134
B) $8,194
C) $0
D) $3,940
Level: Easy
AICPA FN: Reporting
Solution:
Actual cost = $254,014 + $331,940 = $585,954
Maintenance Department cost allocated to operating divisions
= [$6 per case (12,010 + 28,960 cases)] + $328,000
= [$6 per case 40,970 cases] + $328,000
= $245,820 + $328,000 = $573,820
Maintenance Department cost not allocated to operating divisions
= $585,954 $573,820 = $12,134
12-52
LO: 5

Essay Questions
119. Fausnaught Corporation has two major business segmentsRetail and Wholesale. In October, the Retail
business segment had sales revenues of $730,000, variable expenses of $409,000, and traceable fixed
expenses of $117,000. During the same month, the Wholesale business segment had sales revenues of
$400,000, variable expenses of $220,000, and traceable fixed expenses of $48,000. Common fixed
expenses totaled $218,000 and were allocated as follows: $122,000 to the Retail business segment and
$96,000 to the Wholesale business segment.
Required:
Prepare a segmented income statement in the contribution format for the company. Omit percentages;
show only dollar amounts.
Ans:
Sales ..............................................
Segment margin ............................
AACSB: Analytic
Level: Easy
Total
Retail
Wholesale
$1,130,000 $730,000 $400,000
629,000 409,000
220,000
501,000 321,000
180,000
165,000 117,000
48,000
336,000 $204,000 $132,000
218,000
$118,000
12-53
LO: 1

120. Spiess Corporation has two major business segmentsApparel and Accessories. Data concerning those
segments for December appear below:
Sales revenues, Apparel ............................
Variable expenses, Apparel .......................
Traceable fixed expenses, Apparel ...........
Sales revenues, Accessories ......................
Variable expenses, Accessories ................
Traceable fixed expenses, Accessories .....
$370,000
$185,000
$48,000
$670,000
$275,000
$114,000
Common fixed expenses totaled $309,000 and were allocated as follows: $142,000 to the Apparel
business segment and $167,000 to the Accessories business segment.
Required:
Ans:
Sales ..............................................
Segment margin ............................
AACSB: Analytic
Level: Easy
12-54
Total
Apparel Accessories
$1,040,000 $370,000
$670,000
460,000 185,000
275,000
580,000 185,000
395,000
162,000
48,000
114,000
418,000 $137,000
$281,000
309,000
$109,000
LO: 1

121. Data for September concerning Greenberger Corporation's two major business segmentsFibers and
Feedstocksappear below:
Sales revenues, Fibers ...............................
Sales revenues, Feedstocks .......................
Variable expenses, Fibers..........................
Variable expenses, Feedstocks ..................
Traceable fixed expenses, Fibers ..............
Traceable fixed expenses, Feedstocks .......
$750,000
$620,000
$368,000
$254,000
$98,000
$112,000
Common fixed expenses totaled $344,000 and were allocated as follows: $175,000 to the Fibers
business segment and $169,000 to the Feedstocks business segment.
Required:
Ans:
Sales ..................................
Variable expenses..............
Traceable fixed expenses ..
Segment margin ................
AACSB: Analytic
Level: Easy
Total
Fibers
Feedstocks
$1,370,000 $750,000
$620,000
622,000 368,000
254,000
748,000 382,000
366,000
210,000
98,000
112,000
538,000 $284,000
$254,000
344,000
$194,000
12-55
LO: 1

122. The following data pertains to Timmins Company's operations last year:
Return on investment (ROI) .............
Sales .................................................
Margin ..............................................
Minimum required rate of return......
20%
$800,000
5%
16%
Required:
a. Compute the company's average operating assets.
b. Compute the company's residual income for the year.
Ans:
a. ROI = Margin Turnover
20% = 5% Turnover
Turnover = 20% 5% = 4
Turnover = Sales Average operating assets
4 = $800,000 Average operating assets
Average operating assets = $800,000 4 = $200,000
b. Before the residual income can be computed, we must first compute the companys net operating
income for the year:
Margin = Net operating income Sales
5% = Net operating income $800,000
Net operating income = 5% $800,000 = $40,000
Average operating assets .................................
Minimum required rate of return.....................
Minimum required net operating income ........
$200,000
16%
$32,000
Actual net operating income ...........................

Minimum required net operating income ........
Residual income ..............................................
$40,000
32,000
$8,000
AACSB: Analytic
Level: Medium
12-56
AICPA FN: Reporting
LO: 2; 3

123. Ebel Wares is a division of a major corporation. The following data are for the latest year of operations:
Sales ...............................................................................
Net operating income .....................................................
Average operating assets ................................................
The companys minimum required rate of return ..........
$29,120,000
$1,514,240
$8,000,000
18%
Required:
a.
b.
c.
d.
What is the division's margin?

What is the division's turnover?
What is the division's return on investment (ROI)?
What is the division's residual income?
Ans:
a. Margin = Net operating income Sales = $1,514,240 $29,120,000 = 5.2%
b. Turnover = Sales Average operating assets = $29,120,000 $8,000,000 = 3.6
c. ROI = Net operating income Average operating assets = $1,514,240 $8,000,000 = 18.9%
d. Residual income = Net operating income Minimum required rate of return Average operating
assets = $1,514,240 18% $8,000,000 = $74,240
AACSB: Analytic
Level: Easy
AICPA FN: Reporting
LO: 2; 3
12-57

124. The Clipper Corporation had net operating income of $380,000 and average operating assets of
$2,000,000. The corporation requires a return on investment of 18%.
Required:
a. Calculate the company's return on investment (ROI) and residual income (RI).
b. Clipper Corporation is considering an investment of $70,000 in a project that will generate annual
net operating income of $12,950. Would it be in the best interests of the company to make this
investment?
c. Clipper Corporation is considering an investment of $70,000 in a project that will generate annual
net operating income of $12,950. If the division planning to make the investment currently has a
return on investment of 20% and its manager is evaluated based on the division's ROI, will the
division manager be inclined to request funds to make this investment?
d. Clipper Corporation is considering an investment of $70,000 in a project that will generate annual
net operating income of $12,950. If the division planning to make the investment currently has a
residual income of $50,000 and its manager is evaluated based on the division's residual income, will
the division manager be inclined to request funds to make this investment?
Ans:
a. Return on investment = Net operating income Average operating assets = $380,000 $2,000,000
= 19%
return) = $380,000 ($2,000,000 0.18) = $20,000
b. Return on investment = Net operating income Average operating assets = $12,950 $70,000 =
18.5%. Since the return on investment of the project exceeds the companys minimum required rate
of return, the project should be accepted. It would increase both the companys residual income and
its return on investment.
c. The manager of the division would not be inclined to request funds to make the investment in the
new project since its return on investment is only 18.5%, which is less than the divisions current
return on investment of 20%. The new project would drag down the divisions return on investment.
d. The manager of the division would be inclined to request funds for the new project. The projects
return on investment of 18.5% exceeds the minimum required rate of return of 18%, which would
result in an increase in residual income if the project were accepted.
AACSB: Analytic AICPA BB: Critical Thinking
LO: 2; 3 Level: Medium
12-58
AICPA FN: Decision Making; Reporting

125. Geballe Industries is a division of a major corporation. Last year the division had total sales of
$21,420,000, net operating income of $2,270,520, and average operating assets of $6,000,000. The
company's minimum required rate of return is 10%.
Required:
a. What is the division's margin?
b. What is the division's turnover?
c. What is the division's return on investment (ROI)?
Ans:
AACSB: Analytic
AICPA FN: Reporting
LO: 2
Level: Easy
126. Ide Industries is a division of a major corporation. The following data are for the latest year of
operations:
Required:
What is the division's residual income?
Ans:
Residual income = Net operating income Minimum required rate of return Average operating assets
= $1,743,000 - 18% $7,000,000 = $483,000
AACSB: Analytic
AICPA FN: Reporting
LO: 3
12-59
Level: Easy

127. Brodrick Corporation uses residual income to evaluate the performance of its divisions. The minimum
required rate of return for performance evaluation purposes is 19%. The Games Division had average
operating assets of $140,000 and net operating income of $25,900 in August.
Required:
What was the Games Division's residual income in August?
Ans:
Net operating income ............................................
Minimum required return (19% $140,000) ........
Residual income ....................................................
AACSB: Analytic
$25,900
26,600
($700)
AICPA FN: Reporting
LO: 3
Level: Easy
128. The Casket Division of Saal Corporation had average operating assets of $950,000 and net operating
income of $135,200 in January. The company uses residual income to evaluate the performance of its
divisions, with a minimum required rate of return of 13%.
Required:
What was the Casket Division's residual income in January?
Ans:
Net operating income ............................................
Minimum required return (13% $950,000)........
Residual income ....................................................
AACSB: Analytic
12-60
$135,200
123,500
$11,700
AICPA FN: Reporting
LO: 3
Level: Easy

129. Ulrich Company has a Castings Division which does casting work of various types. The company's
Machine Products Division has asked the Castings Division to provide it with 20,000 special castings
each year on a continuing basis. The special casting would require $12 per unit in variable production
costs.
In order to have time and space to produce the new casting, the Castings Division would have to cut
back production of another casting - the RB4 which it presently is producing. The RB4 sells for $40 per
unit, and requires $18 per unit in variable production costs. Boxing and shipping costs of the RB4 are $6
per unit. Boxing and shipping costs for the new special casting would be only $1 per unit, thereby saving
the company $5 per unit in cost. The company is now producing and selling 100,000 units of the RB4
each year. Production and sales of this casting would drop by 25 percent if the new casting is produced.
Some $240,000 in fixed production costs in the Castings Division are now being covered by the RB4
casting; 25 percent of these costs would have to be covered by the new casting if it is produced and sold
to the Machine Products Division.
Required:
According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of
the selling division? Show all computations.
Ans:
Transfer Price = Variable cost + Lost contribution margin per unit on outside sales
Variable costs:
Variable production costs.............................
Boxing and shipping ....................................
Total .............................................................
$12
1
$13
Lost contribution margin on outside sales:

RB4 selling price per unit ............................
Variable costs per unit ($18 + $6)................
Contribution margin per unit .......................
Loss in production (100,000 0.25) ............
Total lost contribution margin .....................
$40
24
$16
25,000
$400,000
$400,000 20,000 new castings = $20 per casting.

Therefore, the lower limit on the transfer price should be:
Transfer price = $13 + $20 = $33 per casting.
Appendix: 12A LO: 4 Level: Hard
12-61

130. Ishtaki Corporation has a Parts Division that does work for other Divisions in the company as well as for
outside customers. The company's Equipment Division has asked the Parts Division to provide it with
20,000 special parts each year. The special parts would require $16.00 per unit in variable production
costs.
The Equipment Division has a bid from an outside supplier for the special parts at $25.00 per unit. In
order to have time and space to produce the special part, the Parts Division would have to cut back
production of another part-the PW27 that it presently is producing. The PW27 sells for $38.00 per unit,
and requires $29.00 per unit in variable production costs. Packaging and shipping costs of the PW27 are
$2.00 per unit. Packaging and shipping costs for the new special part would be only $0.50 per unit. The
Parts Division is now producing and selling 40,000 units of the PW27 each year. Production and sales of
the PW27 would drop by 40% if the new special part is produced for the Equipment Division.
Required:
a. What is the range of transfer prices within which both the Divisions' profits would increase as a
result of agreeing to the transfer of 20,000 special parts per year from the Parts Division to the
Equipment Division?
b. Is it in the best interests of Ishtaki Corporation for this transfer to take place? Explain.
Ans:
a. From the perspective of the Parts Division, profits would increase as a result of the transfer if and
only if:
Transfer price > Variable cost + Opportunity cost
The opportunity cost is the contribution margin on the lost sales, divided by the number of units
transferred:
Opportunity cost = [($38.00-$29.00-$2.00)16,000*]/20,000 = $5.60
* 40%40,000 = 16,000
Therefore, Transfer price > ($16.00+$0.50)+$5.60 = $22.10.
From the viewpoint of the Equipment Division, the transfer price must be less than the cost of
buying the units from the outside supplier. Therefore, Transfer price < $25.00.
Combining the two requirements, we get the following range of transfer prices: $22.10 < Transfer
price < $25.00.
b. Yes, the transfer should take place. From the viewpoint of the entire company, the cost of
transferring the units within the company is $22.10, but the cost of purchasing the special parts from
the outside supplier is $25.00. Therefore, the companys profits increase on average by $2.90 for
each of the special parts that is transferred within the company, even though this would cut into
production and sales of another product.
Appendix: 12A LO: 4 Level: Hard
12-62

131. Division G has asked Division F of the same company to supply it with 5,000 units of part WD26 this
year to use in one of its products. Division G has received a bid from an outside supplier for the parts at
a price of $19.00 per unit. Division F has the capacity to produce 25,000 units of part WD26 per year.
Division F expects to sell 21,000 units of part WD26 to outside customers this year at a price of $18.00
per unit. To fill the order from Division G, Division F would have to cut back its sales to outside
customers. Division F produces part WD26 at a variable cost of $12.00 per unit. The cost of packing and
shipping the parts for outside customers is $2.00 per unit. These packing and shipping costs would not
have to be incurred on sales of the parts to Division G.
Required:
a. What is the range of transfer prices within which both the Divisions' profits would increase as a
result of agreeing to the transfer of 5,000 parts this year from Division G to Division F?
b. Is it in the best interests of the overall company for this transfer to take place? Explain.
Ans:
a. From the perspective of Division G, profits would increase as a result of the transfer if and only if:
Transfer price > Variable cost + Opportunity cost
The opportunity cost is the contribution margin on the lost sales, divided by the number of units
transferred:
Opportunity cost = [($18.00 - $12.00 - $2.00)1,000*]/5,000 = $0.80
* Demand from outside customers ...............................
Units required by Division G ....................................
Total requirements .....................................................
Capacity .....................................................................
Required reduction in sales to outside customers ......
21,000
5,000
26,000
25,000
1,000
Therefore, Transfer price > $12.00 + $0.80 = $12.80.

From the viewpoint of Division F, the transfer price must be less than the cost of buying the units
from the outside supplier. Therefore,
Transfer price < $19.00.
Combining the two requirements, we get the following range of transfer prices:
$12.80 < Transfer price < $19.00.
b. Yes, the transfer should take place. From the viewpoint of the entire company, the cost of
transferring the units within the company is $12.80, but the cost of purchasing them from the outside
supplier is $19.00. Therefore, the companys profits increase on average by $6.20 for each of the
special parts that is transferred within the company.
Appendix: 12A LO: 4 Level: Medium
12-63

132. Cannata Corporation has two operating divisions-a North Division and a South Division. The company's
Logistics Department services both divisions. The variable costs of the Logistics Department are
budgeted at $32 per shipment. The Logistics Department's fixed costs are budgeted at $372,300 for the
year. The fixed costs of the Logistics Department are determined based on peak-period demand.
North Division .......

South Division .......
Percentage of Peak
25%
75%
Budgeted
Shipments
1,700
5,600
totaled $382,850. The North Division had a total of 4,700 shipments and the South Division had a total
of 5,300 shipments for the year.
Required:
a. Prepare a report showing how much of the Logistics Department's costs should be charged to each of
the operating divisions at the end of the year.
b. How much of the actual Logistics Department costs should not be charged to the operating divisions
at the end of the year? Who should be held responsible for these uncharged costs?
Ans:
a. The amount of cost that would be charged to each of the operating divisions at the end of the year
would be as follows:
North Division South Division
Variable cost allocation:
$32 4,700 shipments .........
$150,400
$32 5,300 shipments .........
$169,600
Fixed cost allocation:
25% $372,300 ...................
93,075
75% $372,300 ...................
279,225
Total cost charged ...................
$243,475
$448,825
b. The uncharged costs are:
Total actual costs incurred ......
Costs charged ..........................
Spending variance ...................
Variable
Fixed
$335,000 $382,850
320,000 372,300
$15,000 $10,550
The spending variance represents the difference between the Logistics Departments actual costs and
what those costs should have been, given the actual level of activity. This difference is properly the
responsibility of the Logistics Department and should not be charged to the operating divisions.
12-64

133. Sauseda Corporation has two operating divisions-an Inland Division and a Coast Division. The
company's Customer Service Department provides services to both divisions. The variable costs of the
Customer Service Department are budgeted at $38 per order. The Customer Service Department's fixed
costs are budgeted at $433,200 for the year. The fixed costs of the Customer Service Department are
Inland Division ......

Coast Division .......

Capacity Required
40%
60%
Budgeted
Orders
2,400
5,200
At the end of the year, actual Customer Service Department variable costs totaled $303,240 and fixed
costs totaled $450,280. The Inland Division had a total of 2,430 orders and the Coast Division had a
total of 5,170 orders for the year.
Required:
a. Prepare a report showing how much of the Customer Service Department's costs should be charged
to each of the operating divisions at the end of the year.
b. How much of the actual Customer Service Department costs should not be charged to the operating
divisions at the end of the year? Who should be held responsible for these uncharged costs?
Ans:
Inland Division Coast Division
$38 2,430 orders .........
$92,340
$38 5,170 orders .........
$196,460
40% $433,200 .............
173,280
60% $433,200 .............
259,920
Total cost charged .............
$265,620
$456,380
Total actual costs incurred ...
Costs charged .......................
Spending variance ................
Variable
Fixed
$303,240 $450,280
288,800 433,200
$14,440 $17,080
The spending variance represents the difference between the Customer Service Departments actual
costs and what those costs should have been, given the actual level of activity. This difference is
properly the responsibility of the Customer Service Department and should not be charged to the
operating divisions.
12-65

134. Nealon Corporation's Maintenance Department provides services to the company's two operating
the Maintenance Department are determined based on the number of cases produced by the operating
Actual total variable cost....................................
Actual total fixed cost ........................................
$7 per case
$600,000
$432,072
$602,860
Paints Division
Budgeted cases ...................................................
Actual cases........................................................
30%
15,000
15,020
Stains Division
Budgeted cases ...................................................
Actual cases........................................................
70%
45,000
44,990
Required:
a. Prepare a report showing how much of the Maintenance Department's costs should be charged to
each of the operating divisions at the end of the year.
b. How much of the actual Maintenance Department costs should not be charged to the operating
divisions at the end of the year? Who should be held responsible for these uncharged costs?
Ans:
Paints Division Stains Division
$7 15,020 orders .........
$105,140
$7 44,990 orders .........
$314,930
30% $600,000 .............
180,000
70% $600,000 .............
420,000
Total cost charged .............
$285,140
$734,930
Total actual costs incurred ......
Costs charged ..........................
Spending variance ...................
Variable
Fixed
$432,072 $602,860
420,070 600,000
$12,002
$2,860
The spending variance represents the difference between the Maintenance Departments actual costs
and what those costs should have been, given the actual level of activity. This difference is the
responsibility of the Maintenance Department and should not be charged to the operating divisions.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement
12-66

Chapter 12 Segment Reporting and Decentralization: True/False Questions

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Chapter 12 Segment Reporting and Decentralization: True/False Questions

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Chapter 12 Segment Reporting and Decentralization

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5. Net operating income is earnings before interest and taxes.

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7. Margin equals Stockholders' Equity divided by Sales.

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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