RESPONSIBILITY

ACCOUNTING
1. ROI and residual income. Takito Company is a decentralized company with five autonomous division. Operating results for the
company's division A are given below.
Sales P24,500,000
Less: Variable costs 14,700,000
Contribution margin 9,800,000
Less: Fixed costs 8,000,000
Net operating income P 1,800,000
 
The company had an overall ROI of 24% last year. Division A used an investment of P6,000,000 at the start of the year. Division A had
an opportunity to add a new product line that would require an investment of P4,000,000. The cost and revenue characteristics of the
new product line per year would be:
Sales P8,000, 000
Variable costs 60% of sales
Fixed costs P2,240,000
Required:
1. Compute Division A's ROI for last year.
2. Compute Division A's ROI if the new product is added.
3. If you were the Chief Executive Officer of Takito Company, would you advise Division A’s manager to add the new product line?
4. If you were Chief Executive Officer of Takito Company, would you advise Division A manager to add the new product line?
5. Suppose that the company sets a minimum return of 20% on its invested assets, and that the divisional performance is evaluated by
the residual income approach:
a) Determine the residual income of Division A last year and its new residual income if the new product line is accepted.
b) Under these circumstances, if you are the Division A manager, would you accept the new product line?
Answer 1:
Takito Company
1.) 2.) 1,800,000 + 960,000 3.) No, I would not advice Division A 4.) No, I would not advice
1,800,000 6,000,000 + 4,000,000 manager to add the new product line. Division A manger to add
6,000,000 = 27.6% the new product line
=30%

5.)
a. 1,800,000 2,760,000 b.) Yes, I would accept the new product line
Less: 1,200,000 Less: 2,000,00
RI 600,000 RI 760,000

2. Missing data ROI. The following excerpted data were taken from a report published by retailing industry:
 
Red Company Blue Company White Company
Sales P6,000,000 P4,800,000 P?
Net operating income 1,200,000 720,000 ?
Average operating assets 3,000,000 ? 8,000,000
Return on sales (i.e., profit margin) ? ? 8%
Assets turnover ? ? 3
Return on investment ? 12% ?
 
Required: Compute for the missing information
Answer 2:
Red Company Blue Company
Return on sales = profit Average operating assets =net income Asset Turnover = net sales
net sales ROI Investment
= 1,200,000 = 720,000 = 4,800,000
6,000,000 12% 6,000,000
= 20 or 20% = 6,000,000 = .80 or 80%

Assets turnover = net sales Return on sales = profit

Investment net sales
= 6,000,000 = 720,000
3,000,000 4,800,000
= 2 or 200% = .15 or 15%

White Company
Sales = average operating unit X asset turnover
= 8,000,000 X 3
= 24,000,000

Net operating income = sales X return on sales

= 24,000,000 X 8%
= 1,920,000

Return on Investment = return on sales X asset turnover

= .08 X 3
= .24 or 24%
3. Return on Investment: comparisons of three companies, Return on investment is often expressed as follows:
Income = Revenue x Income
Investment Investment Revenue
 
Required:
What advantages are there in the breakdown of the computation into two separate components?
Fill in the blanks:
Companies in Same Industry
A B C
Revenue P1,000,000 P500,000 __­­____
Income 100,000 50,000
Investment 500,000 ________ P5,000,000
Income as a percentage of revenue _______ ________ 0.5%
Investment turnover _______ ________ 2
Return on investment _______ 1% _______
 
After filling in the blanks, comment on the relative performance of these companies as thoroughly as the data permit.
4. Income statement, regional territories. Tamiya Company’s most recent income statement is shown below. The company’s president is
disappointed with the company’s performance and is strategizing on what to do to improve profit.
 
Tamiya Corporation
Income Statement
For the month ended, June 30, 2012
 
Total NCR Southern Luzon
Sales P1,200,000 P700,000 P500,000
Less: Cost of goods sold 480,000 300,000 180,000
Gross profit 720,000 400,000 320,000
Less: Fixed costs 400,000 250,000 150,000
Net income P 320,000 P150,000 P 170,000
 
The sales and costs records of the company disclose the following:
 
1. The companies is divided into two sales territories, NCR and Southern Luzon. The NCR Region record P700,000 in sales and
P300,000 in variables costs during July; the remaining sales and variables cost were recorded in the Southern Luzon Region. Fixed
costs of P200,000 and P120,000 are traceable to the NCR and Southern Luzon Regions, respectively. The balance of the fixed costs
are common to the two regions.
2. The company sells two products, Big and Small. Sales of products Big and Small totaled P300,000 and P400,000, respectively, in
the NCR Region during June, Variable costs are 40% of the selling price of Big and 45% for Small. Costs records show that
P120,000 of the NCR Region’s fixed costs are traceable to Big and P80,000 to Small, and that P90,000 of Southern Luzon’s fixed
costs are traceable to Big and P300,000 to Small. 
3. Sixty percent of total Southern Luzon’s sales are in product Big with variable cost rate of 40%.
 
Required: Prepare a segmented income statement for the regional territories broken down into products.
 
MULTIPLE CHOICE
Basic Concepts
1. The basic purpose of a responsibility accounting system is
a. Budgeting c. Authority
b. Motivation d. Variable analysis
2. A successful responsibility accounting reporting system is dependent upon
a. The correct allocation of controllable variable costs.
b. Identification of the management level at which all costs are controllable.
c. The proper delegation of responsibility and authority
d. A reasonable separation of costs into their fixed and variable components since fixed costs are not
controllable and must be eliminated from the responsibility report.
3. To make goal setting effective and worthwhile, the goals should be
a. Just beyond what subordinates are likely to reach.
b. Quantitative and approximate.
c. Based on superior performer’s output.
d. Specific, objective and verifiable.
4. In responsibility accounting, there are two types of reports distinguished as to goals or objectives.
a. Trend analysis reporting and comparative reporting.
b. Responsibility performance reporting and information reporting
c. Operations reporting and financial condition reporting.
d. Horizontal reporting and vertical reporting.
5. Which of these assertions refer to responsibility accounting?
Costs and revenues are identified with individuals for better control and performance appraisal.
Performance report under this concept includes variance of actual amount versus plan.
Third parties who are external users and the main recipients of information.
Only expenses which are directly under the control of manager should ideally be charged to them.
 
a. Assertions 1,2 and 4 only c. Assertion 1 and 2 only.
b. Assertion 1 and 4 only d. All four assertions.
6. Responsibility accounting
a. Is the most formal communication device within an enterprise.
b. Encourages manager and other employees to achieve enterprise goals, not just their own
individual goals
c. Encourages manager to focus on a single issue of evaluation
d. Deals with the reporting of information to facilitate control of operations and evaluation of performance.
7. Decentralized firm can delegate authority and yet retain control and monitor manager’s performance by
structuring the organization into responsibility centers. Which one of the following organizational segments is
most likely an independent business?
 
a. Revenue center
b. Profit center
c. Cost center
d. Investment center
8. That kind of accounting concerned with providing information to management in making decision about the
operation of the business.
a. Responsibility accounting
b. Cost accounting
c. Management accounting
d. Answer not given
9. Which one of the following firms is likely to experience dysfunctional motivation on the part of its managers
due to its allocation methods?
a. To allocate depreciation of forklifts used by workers at its central warehouse, Shahlimar Electronics uses
predetermined amounts calculated on the basis of the long-term average use of the service provided.
b. Manhattaa Electronics uses the sales revenue of its various divisions to allocate costs connected with
the upkeep of its headquarters building. It also uses ROI to evaluate the divisional performances.
c. Rainer Industrial does not allow its service department to pass on their cost overruns to the
production departments.
d. Tashkent Auto’s MIS is operated out of headquarter and serve its various divisions. Tashkent’s allocation
of the MIS-related costs to its divisions is limited to costs the division will incur if they were to outsource their
MIS needs.
10. What is the name given to a unit or a function of an organization that is headed by a manager to who has
direct responsibility for its performance?
a. Responsibility center
b. Cost unit
c. Business entity
d. Budget center
11. When used for performance evaluation, the generated reports in a responsibility accounting system should
a. Note be related to the organization structure
b. Not include variances between actual results and budgeted amounts of controllable cost
c. Not distinguish between controllable and uncontrollable costs.
d. Not include allocated fixed manufacturing overhead
12. In deciding how or which costs should be assigned to a responsibility center is the degree of
a. Avoid ability
b. Variability
c. Controllability
d. Answer not given.