1. AB239 Unit 81 Welcome to AB239 Managerial Accounting Unit 8 Professor David Levenstam Unit 8 Seminar

2. AB239 Unit 82 Welcome to AB239 Managerial Accounting Unit 8 Professor David Levenstam Unit 8 Seminar

3. AB239 Unit 83 Reading: Accounting, Chapter 24 Author: Warren, Reeve, and Duchac Tech Support 866-522-7747 (or free online) Contact info: –Email: DLevenstam@kaplan.edu –AIM: LFCCEconinstruct (sign up for AIM at http://www.aim.com) http://www.aim.com –Office Hours: Thursdays 7-9 PM ET When emailing, please include your full name & course number (AB239) Reading, Help & Contact

4. 4 This Week’s Assignments Discussion (Don’t forget to post your initial response by Saturday! :-)) Quiz (You can take only once.) Homework Assignment: Submit to Dropbox We have an Excel template in Doc Sharing for each homework set Templates show you wrong answers (*) :-)

5. 5 Quiz Weeks 2-9. 8 worth 20 each for a total of 160 (16% of your grade) 10 multiple-choice questions You can take it only once You have 1 hour I recommend that you take the practice review first You can see the results 7 days after a quiz closes

6. Please Read the Announcements! :-) Located on the Course Home page Contain important administrative and accounting material Please check the announcements and the syllabus first for administrative questions you might have AB239 Unit 86

7. Please Read My “Hi Students” Posts! :-) Typically located early on the board Occasionally come later too Could say “Hi Class” or “Warning, Warning, Danger, Will Robinson!!” :-D Please give my tired old eyes a break and LABEL your multi-part answers! :-) AB239 Unit 87

8. AB114 Unit 88 Homework Assignment Reminder: For Every Journal Entry Debits MUST Equal Credits! :-)

9. Performance Evaluation For Decentralized Operations AB239 Unit 89

10. 10 What Is a Decentralized Business Operation?

11. AB239 Unit 811 What Is A Decentralized Business Operation? A decentralized business operation involves giving managers of separate divisions of the company responsibility for planning and controlling the operations of their divisions.

12. AB239 Unit 812 What Is A Decentralized Business Operation? A decentralized business operation involves giving managers of separate divisions of the company responsibility for planning and controlling the operations of their divisions. We sometimes refer to a division as a unit or a segment.

13. AB239 Unit 813 What Are Some Advantages of Decentralization?

14. AB239 Unit 814 What Are Some Advantages of Decentralization? 1.Managers closest to operations make decisions 2.Training for future upper management 3.Develops managerial expertise in the division’s type of business 4.Helps retain managers by giving them authority 5.Might improve creativity and customer relations

15. AB239 Unit 815 What Are Some Disadvantages of Decentralization?

16. AB239 Unit 816 What Are Some Disadvantages of Decentralization? 1. Decisions made by division managers can hurt the profits of the company 2. Could create duplication of assets and expenses

17. AB239 Unit 817 What Is Responsibility Accounting?

18. AB239 Unit 818 What Is a Responsibility Accounting? the process of measuring and reporting operating data by responsibility center

19. AB239 Unit 819 What Are the Three Types of Responsibility Centers?

20. AB239 Unit 820 What Are the Three Types of Responsibility Centers? 1. Cost center: managers control costs only 2. Profit center: managers control revenues and costs 3. Investment center: managers control revenues, costs and investment in assets 4. Tootsie Pop center: chocolate controls outer candy shell :-D

21. AB239 Unit 821 In Responsibility Accounting for a Cost Center, What Do Measure?

22. 22 In Responsibility Accounting for a Cost Center, What Do Measure? difference between budgeted cost and actual cost might use techniques just from Chapter 23 on budgeting, or also from Chapter 24 on standard costs and variances too AB239 Unit 8

23. 23 PE 24-1B Cost Center Responsibility Accounting (p. 1111) 1. Magic Motion Company costs exceed budget by $63,000 2. Two Divisions: Southwest and Northeast 3. Southwest Region costs under budget by $17,000 Required: Determine the amount that Northeast Region’s costs were over or under budget.

24. 24 PE 24-1B Cost Center Responsibility Accounting (p. 1111) $63,000 total over budget + $17,000 Southwest under budget = $80,000 Northeast over budget Proof: -$17,000 (favorable) + $80,000 unfavorable = $63,000 unfavorable

25. AB239 Unit 825 In Responsibility Accounting for a Profit Center, What Do Measure?

26. 26 In Responsibility Accounting for a Profit Center, What Do Measure? Controllable Revenues Controllable Costs AB239 Unit 8

27. 27 Costs of Service Departments When a division of a decentralized company uses services from another division of the same company, such as a service department, which might include Tech Support, Legal Services, and Payroll the manager of the profit center wants to include as little in costs from the service department as possible when calculating the profit of the division Managers of different divisions will try to get the costs of the service department allocated to other profit centers instead of their own

28. 28 Costs of Service Departments to avoid conflicts among profit centers of a company, someone above the divisions must allocate the cost of the service departments to the various profit centers We typically allocate the cost of a service department to profit centers based on hours (or other usage) of the service department’s time spent on each profit center AB239 Unit 8

29. 29 PE 24-2B Profit Center Responsibility Accounting (p. 1111) 1. Help Desk of Hayman Company has expenses of $140,000. 2. Help Desk provided 5,000 hours of services 3. Computer Division used 2,000 hours. 4. Peripheral Division used 3,000 hours. Required: Determine how much of the cost of the Help Desk should be allocated to each division.

30. 30 PE 24-2B Profit Center Responsibility Accounting (p. 1111) Computer Division 2,000 hours/5,000 hours x $140,000 total cost = $56,000 of Help Desk cost allocated to the Computer Division Peripheral Division 3,000 hours/5,000 hours x $140,000 total cost = $84,000 of Help Desk cost allocated to the Computer Division $56,000 + $84,000 = $140,000

31. AB239 Unit 831 In Responsibility Accounting for an Investment Center, What Do Measure?

32. 32 In Responsibility Accounting for an Investment Center, What Do Measure? 1. Rate of Return on Investment (since the investment center gets to buy its own investment assets) 2. Residual Income (to overcome a weakness in rate of return analysis) AB239 Unit 8

33. 33 How Do We Calculate Return on Investment?

34. 34 How Do We Calculate Return on Investment? Rate of Return on Investment (ROI) = Income from Operations/Invested Assets The DuPont formula further breaks down the Rate of Return on Investment

35. 35 How Do We Calculate Return on Investment? The DuPont formula further breaks down the Rate of Return on Investment It multiplies (Income from Operations/Invested Assets) by (Sales/Sales) (Anything divided by itself equals 1, so multiplying a number by Sales/Sales is the same as multiplying the number by 1—it doesn’t change the number)

36. 36 How Do We Calculate Return on Investment? Multiplying (Income from Operations/Invested Assets) x (Sales/Sales) gives you (Income from Operations/Sales) x (Sales/Invested Assets) So we have ROI = (Income from Operations/Sales) x (Sales/Invested Assets)

37. 37 How Do We Calculate Return on Investment? ROI = (Income from Operations/Sales) x (Sales/Invested Assets) (Income from Operations/Sales) actually equals the Profit Margin and (Sales/Invested Assets) actually equals the Investment Turnover

38. 38 How Do We Calculate Return on Investment? So ROI = Income from Operations/Invested Assets = (Income from Operations/Sales) x (Sales/Invested Assets) = Profit Margin x Investment Turnover

39. 39 How Do We Calculate Return on Investment? You don’t need to know how they got from ROI = Income from Operations/Invested Assets to ROI = Profit Margin x Investment Turnover as long as you can apply the DuPont formula Let’s take an example :-)

40. 40 PE 24-4B Investment Center Responsibility Accounting (p. 1112) 1. Wakelin Hayman Company has income from operations of $20,125. 2. Assets of $87,500. 3. Sales of $175,000. Required: Use the DuPont formula to compute ROI, showing (a) Profit Margin, (b), Investment Turnover, and (c) ROI.

41. 41 PE 24-2B(a) Investment Center Responsibility Accounting (p. 1112) Profit Margin (Income from Operations/Sales) = Profit Margin $20,125 operating income/$175,000 sales = 11.5%

42. 42 PE 24-2B(b) Investment Center Responsibility Accounting (p. 1112) Investment Turnover (Sales/Invested Assets) = Investment Turnover $175,000/$87,500 = 2.0

43. 43 PE 24-2B(c) Investment Center Responsibility Accounting (p. 1112) Rate of Return on Investment (ROI) ROI = Profit Margin x Investment Turnover 11.5% × 2.0 = 23.0%

44. AB239 Unit 844 In Responsibility Accounting for an Investment Center, What Do Measure Again?

45. 45 In Responsibility Accounting for an Investment Center, What Do Measure? 1. Rate of Return on Investment (since the investment center gets to buy its own investment assets) 2. Residual Income (to overcome a weakness in rate of return analysis) AB239 Unit 8

46. 46 What is the Weakness in Return on Investment?

47. 47 What is the Weakness in Return on Investment? ROI might lead a profit center manager to reject a project that has a rate of return less than the profit center’s rate of return but more than the company’s rate of return Let’s take an example:

48. 48 What is the Weakness in Return on Investment? Example: Profit Center ROI: 20% Project X Expected ROI: 14% Overall Company ROI: 10% The manager will reject the project if evaluated solely on ROI since the project will pull the profit center’s ROI down from 20%, even though the project will pull the entire company’s ROI up from 10%.

49. AB239 Unit 849 How Do We Calculate Residual Income?

50. 50 How Do We Calculate Residual Income? Income From Operations Less Minimum Acceptable Income = Residual Income Minimal Acceptable Income = Minimum % required by higher management x division’s invested assets

51. 51 PE 24-5B Investment Center Responsibility Accounting (p. 1112) 1. The Commercial Division of LaSalle Company has income from operations of $135,000. 2. Assets of $650,000. 3. Minimum acceptable rate of return on assets of 10%. Required: What is the residual income for the division?

52. 52 PE 24-5B Investment Center Responsibility Accounting (p. 1112) Minimal Acceptable Income = Minimum % required by higher management x division’s invested assets 10% x $650,000 = $65,000

53. 53 PE 24-5B Investment Center Responsibility Accounting (p. 1112) Income From Operations Less Minimum Acceptable Income = Residual Income $135,000 (65,000) =$70,000 residual income So if it generates residual income we do the project

54. AB239 Unit 854 Transfer Pricing

55. 55 Transfer Pricing Sometimes in a decentralized company you have two or more profit centers doing business with each other. The “selling” profit center would like the highest price possible for the transferred goods or provided services. The “buying” profit center would like the lowest price possible for the transferred goods or provided services.

56. 56 Transfer Pricing While a higher-level manager could set a transfer price at either market or cost, often the best solution involves letting the two division managers negotiate a transfer price. A transfer price above the variable cost of the selling division and below the market price will benefit both divisions

57. 57 How Do We Calculate the Benefits of Transfer Pricing? Increase in Selling Division’s Income from Operations = (Transfer Price – Variable Cost per Unit) × Units Transferred Increase in Buying Division’s Income from Operations = (Market Price – Transfer Price) × Units Transferred

58. 58 PE 24-6B Investment Center Responsibility Accounting (p. 1112) 1. The Kenosha Division of Ehrlich Company currently is paying $75 for materials to an outside company. 2. The High Point Division of Ehrlich can produce the materials at a variable cost of $55. 3. The Kenosha Division wants 30,000 units. 4. The High Point Division can produce 175,000 units but is producing only 140,000 units. 5. High Point Division and Kenosha Division have negotiated a transfer price of $65. Required: How much will each division’s income increase as a result of the transfer?

59. 59 PE 24-6B Investment Center Responsibility Accounting (p. 1112) Increase in High Point (Selling) Division’s Income from Operations = (Transfer Price – Variable Cost per Unit) × Units Transferred Increase in High Point (Selling) Division’s Income from Operations = ($65 – $55) × 30,000 units = $300,000 Increase in Kenosha (Buying) Division’s Income from Operations = (Market Price – Transfer Price) × Units Transferred Increase in Kenosha (Buying) Division’s Income from Operations = ($75 – $65) × 30,000 units = $300,000

60. AB239 Unit 860 In Responsibility Accounting for a Tootsie Pop Center, What Do Measure?

61. AB239 Unit 861 In Responsibility Accounting for a Tootsie Pop Center, What Do Measure? How many licks it takes to get to the center of a Tootsie Pop (3) :-D [ http://www.youtube.com/watch?v=Q8PAJKlulKQ&feature=related ]

62. AB239 Unit 862 Questions? :-)