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    Exercise 1: Performance Evaluation: Types of Responsibility Centers

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    1. Decentralization is the process of distributing planning and decision making away from a central location to other parts of an organization. 2. There are four main types of responsibility centers: cost centers, revenue centers, profit centers, and investment centers. Cost centers are responsible for costs, revenue centers for revenues, profit centers for both revenues and costs, and investment centers for profits, revenues, expenses, and asset investments. 3. Job costing, process costing, break-even analysis, and master budgeting are important accounting tools for planning and control. Job costing tracks direct and overhead costs for specific jobs or orders. Process costing is used for manufacturing where units are continuously produced. Break

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    Exercise 1: Performance Evaluation: Types of Responsibility Centers

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    1. Decentralization is the process of distributing planning and decision making away from a central location to other parts of an organization. 2. There are four main types of responsibility centers: cost centers, revenue centers, profit centers, and investment centers. Cost centers are responsible for costs, revenue centers for revenues, profit centers for both revenues and costs, and investment centers for profits, revenues, expenses, and asset investments. 3. Job costing, process costing, break-even analysis, and master budgeting are important accounting tools for planning and control. Job costing tracks direct and overhead costs for specific jobs or orders. Process costing is used for manufacturing where units are continuously produced. Break

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    1. Decentralization is the process of distributing planning and decision making away from a central location to other parts of an organization. 2. There are four main types of responsibility centers: cost centers, revenue centers, profit centers, and investment centers. Cost centers are responsible for costs, revenue centers for revenues, profit centers for both revenues and costs, and investment centers for profits, revenues, expenses, and asset investments. 3. Job costing, process costing, break-even analysis, and master budgeting are important accounting tools for planning and control. Job costing tracks direct and overhead costs for specific jobs or orders. Process costing is used for manufacturing where units are continuously produced. Break

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    Download as docx, pdf, or txt
    43 views8 pages

    Exercise 1: Performance Evaluation: Types of Responsibility Centers

    Uploaded by

    AneelaMalik
    1. Decentralization is the process of distributing planning and decision making away from a central location to other parts of an organization. 2. There are four main types of responsibility centers: cost centers, revenue centers, profit centers, and investment centers. Cost centers are responsible for costs, revenue centers for revenues, profit centers for both revenues and costs, and investment centers for profits, revenues, expenses, and asset investments. 3. Job costing, process costing, break-even analysis, and master budgeting are important accounting tools for planning and control. Job costing tracks direct and overhead costs for specific jobs or orders. Process costing is used for manufacturing where units are continuously produced. Break

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    of 8

    EXERCISE 1: PERFORMANCE EVALUATION

    Decentralization is the process by which the activities of an organization, particularly those


    regarding planning and decision making, are distributed or delegated away from a central,
    authoritative location or group.

    Types of Responsibility Centers:


    Responsibility centers can be classified by the scope of responsibility assigned and decision-
    making authority given to individual managers.

    The following are the four common types of responsibility centers:

    1. Cost Centre:

    A cost or expense center is a segment of an organization in which the managers are held re-
    sponsible for the cost incurred in that segment but not for revenues. Responsibility in a cost
    center is restricted to cost. For planning purposes, the budget estimates are cost estimates; for
    control purposes, performance evaluation is guided by a cost variance equal to the difference
    between the actual and budgeted costs for a given period. Cost center managers have control
    over some or all of the costs in their segment of business, but not over revenues. Cost centers are
    widely used forms of responsibility centers.

    2. Revenue Centre:

    A revenue center is a segment of the organization which is primarily responsible for generating
    sales revenue. A revenue center manager does not possess control over cost, investment in assets,
    but usually has control over some of the expense of the marketing department. The performance
    of a revenue center is evaluated by comparing the actual revenue with budgeted revenue, and
    actual marketing expenses with budgeted marketing expenses. The Marketing Manager of a
    product line, or an individual sales representative are examples of revenue centers.

    3. Profit Centre:

    A profit center is a segment of an organization whose manager is responsible for both revenues
    and costs. In a profit center, the manager has the responsibility and the authority to make
    decisions that affect both costs and revenues (and thus profits) for the department or division.
    The main purpose of a profit center is to earn profit. Profit center managers aim at both the
    production and marketing of a product.
    4. Investment Centre:

    An investment center is responsible for both profits and investments. The investment center
    manager has control over revenues, expenses and the amounts invested in the center’s assets. He
    also formulates the credit policy which has a direct influence on debt collection, and the
    inventory policy which determines the investment in inventory.

    EXERCISE 2: JOB COSTING


    The company XOXO is specialized in producing treadmills. The company allocates
    manufacturing overhead based on direct labor hours. XOXO estimated a total of $4,600 of
    manufacturing overhead that can be dispatched on all jobs. Moreover, the total direct labor hours
    that has been recorder during the period raises up to 460 hours.
    Job 12 consists of 30 sets of treadmills. The company’s records show that the following direct
    costs were requisitioned for Job 12:

     Electronic parts: 40 units at $20 per unit


     Plastic: 10 kilograms at $10 per kilogram
     Labor hours: 60 hours at $25 per hour

    Requirement:
    Calculate the predetermined manufacturing overhead (MOH) rate.
    Predetermined overhead rate: Estimated manufacturing overhead cost / estimated total units in
    the allocation base.

    Predetermined overhead rate: $4600 / 460

    = $10.00 per direct labor hour


    Chart
    Char Title
    t Title Chart Title
    2. Analyze the cost 70
    60 60 per set 60
    50
    40 40
     Electronic 30
    20 25
    parts: 40 20
    0 Labor hours
    Labor hours unit
    unit
    units at 10
    0
    $20 per Labor hours unit
    unit
    =40 units / 20 units
    = 20 units

     Plastic: 10 kilograms at $10 per kilogram


    =10 kilograms / 10 kilograms
    =10 kilograms

     Labor hours: 60 hours at $25 per hour


    =60 hours / $25 per hour
    =2.4 hours

    EXERCISE 3: PROCESS COSTING


    Company JOJO prepares and packages perfumes in bottles. The company has two departments:
    (1) Mixing and (2) Bottling. Direct materials are added at the beginning of the Mixing process
    (perfume concentrate) and at the end of the Bottling process (bottles). Conversion costs are
    added evenly throughout each process. Data from the current month for the Mixing Department
    are as follows:
    Quantity during the current month:

    Beginning work in process inventory................................................... 0

    Started production................................................................................... 2,400 liters

    Completed and transferred out to Bottling………….......................... 1,800 liters

    The ending work in process inventory is 60% of the way through the Mixing process.

    Costs in the Mixing department during the month:

    Beginning work in process inventory................................................... $ 0

    Costs added:

    Direct materials (perfume concentrate)............................................... $ 1,230

    Direct labor............................................................................................... $ 540

    Manufacturing overhead........................................................................ $ 1,120

    Requirement:

    Calculate the quantity of work in process (WIP) inventory in the Mixing department, and analyze
    the conversion cost (after computing it)

    1-

    Direct materials (perfume concentrate)............................................... $ 1,230

    Direct labor............................................................................................... $ 540

    Manufacturing overhead........................................................................ $ 1,120


     Total WIP costs: =$ 2890
    60% of the way through the Mixing process. =$1734

    = $ 2890 -$ 1734

    = $1156

     Conversion cost = Direct labour + Manufacturing overhead = $ 540 + $ 1120 =


    $1160

    2- Cost per liter

    Completed and transfer to bottling = 1800 liters

    Total costs = $ 2890 / 1800

    = $1.27

    EXERCISE 4: COST-VOLUME-PROFIT ANALYSIS


    Company YOYO is specialized in manufacturing a single type of perfume made from Rose
    scent. The general manager has hired you as a financial analyst in order to study the cost
    structure and provide the board of shareholders with pertinent recommendations.

    After careful investigation, you discovered that the variable cost per manufactured unit is at $40.
    Furthermore, the company incurs the following expenses:

    - Rent: $10,000
    - Electricity: $5,000
    - Depreciation of the machines: $6,000
    - Salary of administrative employees: $19,000
    - Rose scent employed in the manufacturing process (variable cost): 100 liters at $400 per
    liter
    Each bottle of perfume consumes 50 ml (0.05 liter) of Rose scent.

    Requirements:

    1- Calculate the total fixed cost for company YOYO


    Total fixed cost

    - Rent: $10,000
    - Electricity: $5,000
    - Depreciation of the machines: $6,000
    - Salary of administrative employees: $19,000

    =$10000 + $ 5000 + $6000 + 19000

    = $40000

    2- Find the produced quantity (in bottle) of perfumes.


    Each bottle contain 0.05 liter

    So, 1800 / 0.05 = 36000 bottles

    3- In reality, the company YOYO has produced 2,000 bottles of perfume. Evaluate the
    minimum price P the company should sell one bottle of perfume in order to start
    realizing a net profit?

    $2890 + $40000 + $400= $43290

    1800 liters

    =$43290 / 1800

    = 24.05 is the price one bottle should sell in order to start realizing a net profit.

    4- The Company decided to sell each bottle of perfume at $80 per unit. Draw in the
    same figure the sales and total cost (note: the x-axis represents the quantity Q).
    costs
    60000

    50000

    40000

    30000

    20000

    10000

    0
    200 400 600 800 1000 1200 1400 1600 1800 2000 2200
    Quantity

    Sold at $80 per unit

    5- Given that selling price is P = $80 per bottle, evaluate the breakeven point (in
    quantity) for company YOYO.

    costs
    60000

    50000

    40000

    30000

    20000

    10000

    0
    200 400 600 800 1000 1200 1400 1600 1800 2000 2200
    Quantity

    Selling price is P = $80 per bottle the breakeven point (in quantity) for company YOYO
    is at 1100 quantity of bottles and 30000 of cost.
    EXERCISE 5: MASTER BUDGET
    Making a budget and sticking to it is important to a strong financial future and can help
    you achieve your financial goals. In fact, creating a budget can reduce stress and improve
    your health because it allows you to take control of your life. Best practices are those
    methods that have, over time, been shown to work the best and be the most efficient. 

    This is Tucson Tortilla Monthly production budget. Unit sales in January is 30000 and as
    ending inventory equal to 10% of the next month’s projected sales. 20000 sales in
    February and desired ending inventory is 10% which is 2000 and in March 25000 is the
    unit sales and its desired ending inventory is 2500. Projected April sales is 32000 and its
    10% is 3200. The first quarter begins on January 1 and it’s ended on March 31.
    The total number of units produced in January, February and March is 29000, 20500 and
    25700 by adding desired ending inventory and less beginning inventory. Total produced in
    1 quarter 75000 by adding 3200 of ending inventory and less 3000 beginning.

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