Happy Times Park

Presented By Ahmed Daou

BT-230
Monroe College 2011
© Copyright 2004 South-Western, a division
PowerPoint Presentation by Douglas Cloud of Thomson Learning. All rights reserved.
Professor Emeritus of Accounting
Pepperdine University Task Force Image Gallery clip art included in this
electronic presentation is used with the permission of
NVTech Inc.
Some
Some ofof the
the action
action hashas been
been automated,
automated, soso
click
click the
the mouse
mouse whenwhen you
you see
see this
this
lightning
lightning bolt
bolt in
in the
the lower
lower right-hand
right-hand
corner
corner ofof the
the screen.
screen. YouYou can
can point
point and
and
click
click anywhere
anywhere on on the
the screen.
screen.
 Objectives
Objectives
1. List and explain the advantages and
After
disadvantages studying
After of this
decentralized
studying this
operations.chapter,
chapter, you
you should
should
2. Prepare a responsibility
be
be able to: accounting
able to:
report for a cost center.
3. Prepare responsibility accounting
reports for a profit center.
4. Compute and interpret the rate of return
on investment, the residual income, and
the balanced scorecard for an
investment center.
 Objectives
Objectives
5. Explain how the market price,
negotiated price, and cost price
approaches to transfer pricing may be
used by decentralized segments of a
business.
Centralized and
Decentralized
Operations
 Advantages
Advantages ofof
Decentralization
Decentralization
 It allows managers to focus on acquiring expertise
in their areas of responsibility.
 Decentralizing decision making provides excellent
training for managers.
 Delegation improves employee morale.
 Decentralization helps managers create good
customer relations by responding quickly to
customers’ needs.
 Managers become more creative in suggesting
operating and product improvement.
 Disadvantages
Disadvantages of
of
Decentralized
Decentralized Operations
Operations
 Decisions made by one manager may
negatively affect the profitability of the
entire organization.
 Assets and operating costs are
duplicated (e.g., each division has its
own administrative office staff).
 Responsibility
Responsibility Centers
Centers
Cost Centers
Managers are held accountable for controlling costs.

Profit Centers
Managers are held accountable for costs
and making decisions that impact revenues
favorably.
 Responsibility
Responsibility Centers
Centers

Investment Centers
Managers are held accountable for
costs and revenues and are also held
accountable for the efficient use of
assets.
 Responsibility
Responsibility Accounting
Accounting
for
for Cost
Cost Centers
Centers
COST CENTERS IN A UNIVERSITY
UNIVERSITY COLLEGE

College of Dept. of Marketing

College of Business
Engineering
College of Arts
and Sciences

Dept. of Accounting
Dept. of Management
Responsibility
Responsibility Accounting
Accounting
for
for Cost
Cost Centers
Centers
COST CENTERS IN A UNIVERSITY
DEPARTMENT

Department
of
Accounting
 Cost Centers
Budget Performance Report
Supervisor, Department 1—Plant A
For the Month Ended October 31, 2006
Over Under
Budget Actual Budget Budget
Factory wages $ 58,100 $ 58,000 $100
Materials 32,500 34,225 $1,725
Supervisory salaries 6,400 6,400
Power and light 5,750 5,690 60
Depreciation 4,000 4,000
Maintenance 2,000 1,990 10
Insurance, taxes 975 975
$109,725
$109,725 $111,280
$111,280 $1,725
$1,725 $170
$170

These
These totals
totals are
are shown
shown on
on the
the Manager,
Manager, Plant
Plant
A’s
A’s budget
budget performance
performance report
report (Slide
(Slide 13).
13).
 Cost Centers
Budget Performance Report
Manager, Plant A
For the Month Ended October 31, 2006
Over Under
Budget Actual Budget Budget

Administration $ 17,500 $ 17,350 $150

Department
Department 11 109,725
109,725 111,280
111,280 $1,555
$1,555
Department 2 190,500 192,600 2,100
Department 3 149,750 149,100 650
$467,475 $470,330 $3,655 $800
From
From the
the Supervisor—Department
Supervisor—Department 1, 1, Plant
Plant A
A
budget
budget performance
performance report
report (Slide
(Slide 12).
12).
 Cost Centers
Budget Performance Report
Manager, Plant A
For the Month Ended October 31, 2006
Over Under
Budget Actual Budget Budget

Administration $ 17,500 $ 17,350 $150

Department 1 109,725 111,280 $1,555
Department 2 190,500 192,600 2,100
Department 3 149,750 149,100 650
$467,475 $470,330
$470,330 $3,655
$3,655 $800
$800

This
This isis shown
shown on
on the
the Vice-President’s
Vice-President’s
budget
budget production
production report
report (Slide
(Slide15).
15).
 Cost Centers
Budget Performance Report
Vice-President, Production
For the Month Ended October 31, 2006
Over Under
Budget Actual Budget Budget
Administration $ 19,500 $ 19,700 $ 200
Plant
Plant A
A 467,475
467,475 470,330
470,330 2,855
2,855
Plant B 395,225 394,300 $925
$882,200 $884,330 $3,055 $925

Note that “Over Budget” is a net figure.

 Cost Centers
Budget Performance Report
Vice-President, Production
For the Month Ended October 31, 2006
Over Under
Budget Actual Budget Budget
Administration $ 19,500 $ 19,700 $ 200
Plant A 467,475 470,330 2,855
Plant B 395,225 394,300 $925
$882,200 $884,330 $3,055 $925

Each of the line items above is

supported by a cost center report.
 Responsibility
Responsibility
Accounting
Accounting for
for
Profit Centers

In a profit center, the unit manager has the

responsibility and the authority to make
decisions that affect both costs and revenues.
 Profit
Profit centers
centers may
may be
be
divisions,
divisions, departments,
departments,
or
or products.
products.
 Profit Centers

NEG,
NEG, aa diversified
diversified entertainment
entertainment company,
company,
has
has two
two profit
profit centers:
centers: the
the Theme
Theme Park
Park
Division
Division and
and the
the Movie
Movie Production
Production Division.
Division.

Theme Park Movie Production

Division Division
Revenues $6,000,000 $2,500,000
Operating expenses 2,495,000 405,000
 Profit Centers
Charging
Charging Service
Service Department
Department Costs
Costs
to
to Production
Production Divisions
Divisions
Purchasing Department: $400,000
(Activity base: number of purchase requisitions)
Theme Park Division 25,000 purchase requisitions
Movie Production Division: 15,000 purchase requisitions
Total 40,000
$400,000
= $10 per purchase
40,000 purchase requisitions requisition
 Profit Centers
Charging
Charging Service
Service Department
Department Costs
Costs
to
to Production
Production Divisions
Divisions
Payroll Accounting: $255,000
(Activity base: number of payroll checks)
Theme Park Division 12,000 payroll checks
Movie Production Division: 3,000 payroll checks
Total 15,000
$255,000
= $17 per payroll check
15,000 payroll checks
 Profit Centers
Charging
Charging Service
Service Department
Department Costs
Costs
to
to Production
Production Divisions
Divisions
Legal Department: $250,000
(Activity base: number of payroll checks)
Theme Park Division 100 billed hours
Movie Production Division: 900 billed hours
Total 1,000
$250,000
= $250 per hour
1,000 hours
 Profit Centers
Nova Entertainment Group
Service Department Charges to NEG Divisions
For the Year Ended December 31, 2006
Theme Movie
Park Production
Service Department Division Division
Purchasing $250,000 $150,000

25,000
25,000purchase
15,000
15,000purchase
purchase purchase
requisitions
requisitionsxrequisitions
$10
xrequisitions
$10 xx$10
$10
per
perpurchase
purchaseper
perpurchase
purchase
requisition
requisition requisition
requisition
 Profit Centers
Nova Entertainment Group
Service Department Charges to NEG Divisions
For the Year Ended December 31, 2006
Theme Movie
Park Production
Service Department Division Division
Purchasing $250,000 $150,000
Payroll accounting 204,000 51,000

12,000
12,000payroll3,000
payroll3,000payroll
payroll
checks
checksxx$17
$17checks
per
per xx$17
checks $17per
per
payroll
payrollcheck
checkpayroll
payrollcheck
check
 Profit Centers
Nova Entertainment Group
Service Department Charges to NEG Divisions
For the Year Ended December 31, 2006
Theme Movie
Park Production
Service Department Division Division
Purchasing $250,000 $150,000
Payroll accounting 204,000 51,000
Legal 25,000 225,000

100
100hours
hoursxx$250
900
900hours
$250 hoursxx$250
$250
per
perhour
hour per
perhour
hour
 Profit Centers
Nova Entertainment Group
Service Department Charges to NEG Divisions
For the Year Ended December 31, 2006
Theme Movie
Park Production
Service Department Division Division
Purchasing $250,000 $150,000
Payroll accounting 204,000 51,000
Legal 25,000 225,000
Total service department charges $479,000 $426,000
 Nova Entertainment Group
Divisional Income Statements
For the Year Ended December 31, 2006
Theme Park Division Movie Production Division
Revenues $6,000,000 $2,500,000
Operating expenses 2,495,000 405,000
Income from operations $3,505,000 $2,095,000

Income
Income from
fromoperations
operations before
before
service
service department
department charges.
charges.
 Nova Entertainment Group
Divisional Income Statements
For the Year Ended December 31, 2006
Theme Park Division Movie Production Division
Revenues $6,000,000 $2,500,000
Operating expenses 2,495,000 405,000
Income from operations $3,505,000 $2,095,000
Less service dept. charges:
Purchasing $ 250,000 $ 150,000
Payroll accounting 204,000 51,000
Legal 25,000 225,000
Total service department
charges $ 479,000 $ 426,000
Income from operations $3,026,000 $1,669,000
 Responsibility
Responsibility
Accounting
Accounting for
for
Investment
Investment Centers
Centers
In an investment center, the unit manager has the
responsibility and the authority to make decisions
that affect not only costs and revenues but also
the assets invested in the center.
 Investment Centers
Datalink Inc.
Divisional Income Statements
For the Year Ended December 31, 2006
Northern Central Southern
Division Division Division
Revenues $560,000 $672,000 $750,000
Operating expenses 336,000 470,400 562,500
Income from operations
before service dept. charges $224,000 $201,600 $187,500
Service department charges 154,000 117,600 112,500
Income from operations $ 70,000 $ 84,000 $ 75,000
Invested assets $350,000 $700,000 $500,000
Rate of return on investment 20%
20% 12%
12% 15%
15%
Rate
Rate of
of Return
Return on
on Investment
Investment (ROI)
(ROI)
Revenues
Rate
Rate of
of Return
Return on
on Investment
Investment (ROI)
(ROI)

Profit

Profit
Margin
Investment
Turnover
 Rate
Rate of
of Return
Return on
on Investment
Investment (ROI)
(ROI)
The profit margin
indicates the rate of profit
on each sales dollar.
The
investment
turnover
indicates
the rate of
sales on Profit
each dollar Investment
Margin
of invested Turnover
assets.
Rate
Rate of
of Return
Return on
on Investment
Investment (ROI)
(ROI)

ROI = Income from operation x Sales

Sales Invested assets
$ 70,000 $560,000
ROI = x
$560,000 $350,000
ROI = 12.5% x 1.6 = 20%
Rate
Rate of
of Return
Return on
on Investment
Investment (ROI)
(ROI)

ROI = Income from operation x Sales

Sales Invested assets

Profit
Profit Inventory
Inventory
Margin
Margin Turnover
Turnover
 Northern Central Southern
Profit Margin Division Division Division
Income from operations $ 70,000$ 84,000 $ 75,000
Revenues (Sales) $560,000$672,000$750,000
Profit margin 12.5%12.5%10.0%
Investment Turnover
Revenues (Sales) $560,000 $672,000 $750,000
Invested assets $350,000 $700,000 $500,000
Investment turnover 1.6 .96 1.5
Return on Investment (ROI)
Income from operations $ 70,000 $ 84,000 $ 75,000
Invested assets $350,000 $700,000 $500,000
Rate of return on investment 20% 12% 15%
 Minimum
Income Acceptable
from – Residual
Rate of =
Income
Operations Return on
Assets
 Baldwin Company
Divisional Income Statements
For the Year Ended December 31, 2006

Northern Central Southern

Division Division Division
Income from operations $70,000 $84,000 $75,000
Minimum acceptable income
from operations as a percent
of invested assets:
$350,000 x 10% 35,000
$700,000 x 10% 70,000
$500,000 x 10% 50,000
Residual income $35,000 $14,000 $25,000
 The
The balance
balance scorecard
scorecard isis aa set
set of
of
financial
financial and
and nonfinancial
nonfinancial measures
measures
that
that reflect
reflect multiple
multiple performance
performance
dimensions
dimensions of of aa business.
business.
 Innovation
Innovation and
and
Learning
Learning
•• R&D
R&Dinvestment
investment
•• R&D
R&Dpipeline
pipeline
•• Skills
Skillsand
andtraining
training
•• Time
Timeto tomarket
market

Customer
Customer Internal
•• Satisfaction
Satisfaction Process
•• Loyalty •• Efficiency
Efficiency
Loyalty
•• Perception •• Quality
Quality
Perception
•• Time
Time
Financial
Financial
•• ROI
ROI
•• Residual
Residualincome
income
•• Profit
Profit
•• Cost
Cost
•• Sales
Sales
Transfer
Transfer Pricing
Pricing
 Transfer
Transfer Pricing
Pricing
When
When divisions
divisions transfer
transfer products
products or or
render
render services
services toto each
each other,
other, aa
transfer
transfer pricing
pricing isis used
used to
to charge
charge forfor
the
the products
products or or services
services
 Benefits
Benefits of
of Transfer
Transfer Pricing
Pricing
1. Divisions can be evaluated as profit or
investment centers.
2. Divisions are forced to control costs and
operate competitively.
3. If divisions are permitted to buy component
parts wherever they can find the best price
(either internally or externally), transfer pricing
will allow a company to maximize its profits.
 Commonly
Commonly Used
Used Transfer
Transfer Prices
Prices
1. Market price approach sets the price at which the product
transferred could be sold to outside buyers.
2. Negotiated price approach allows decentralized managers to agree
(negotiate) among themselves.
3. Cost price approach (variable or full) uses a variety of cost
concepts for setting the transfer price.
 Commonly
Commonly Used
Used Transfer
Transfer Prices
Prices

Variable Cost Full Cost Market Price

per Unit $10 per Unit $13 per Unit $20

Negotiated Price
Transfer Pricing—Negotiated Price Approach
Assumptions
1.Division M produces a product with a variable
cost of $10 per unit. Division M has unused
capacity.
2.Division N purchases 20,000 units of the same
product at $20 per unit from an outside source.

IfIf the
the division
division managers
managers agree
agree on
on aaprice
price of
of
$15
$15 per
per unit,
unit, how
how much
much will
will each
each
division’s
division’s income
income increase?
increase?
Chapter 22

The
The End
End