Question

The Dinkle and Frizell Dental Clinic provides both preventive and orthodontic dental services. The two owners, Reese Dinkle and Anita Frizell, operate the clinic as two separate investment centers: Preventive Services and Orthodontic Services. Each of them is in charge of one of the centers: Reese for Preventive Services and Anita for Orthodontic Services. Each month, they prepare an income statement for the two centers to evaluate performance and make decisions about how to improve the operational efficiency and profitability of the clinic.

Recently, they have been concerned about the profitability of the Preventive Services operations. For several months, it has been reporting a loss. The responsibility report for the month of May 2020 is shown below.

		Actual			Difference from Budget
Service revenue		$39,920			$1,130	Favorable
Variable costs:
Filling materials		5,180			110	Unfavorable
Novocain		4,050			90	Unfavorable
Supplies		1,910			430	Favorable
Dental assistant wages		2,430			–0–	Neither Favorable nor Unfavorable
Utilities		550			80	Unfavorable
Total variable costs		14,120			150	Favorable
Fixed costs:
Allocated portion of receptionist’s salary		3,120			260	Unfavorable
Dentist salary		9,680			560	Unfavorable
Equipment depreciation		5,980			–0–	Neither Favorable nor Unfavorable
Allocated portion of building depreciation		14,990			1,060	Unfavorable
Total fixed costs		33,770			1,880	Unfavorable
Operating income (loss)		$(7,970	)		$600	Unfavorable

In addition, the owners know that the investment in operating assets at the beginning of the month was $83,290, and it was $70,060 at the end of the month. They have asked for your assistance in evaluating their current performance reporting system.

Prepare an investment center responsibility report for the Preventative Services segment for May 2020.

Answer 1

Investment center responsibility report depicts the returns on investment made during the year. In this report all expenses are differentiated as per varying nature and controllable margin is deduced to arrive at return on investment.

Investment center responsibility report

	Budget	Actual	Differences	favorable (F) Unfavorable (U)
Service revenue (A)	38790	39920	1130	F
Variable costs
Filling materials	5070	5180	110	U
novocain	3960	4050	90	U
supplies	2340	1910	430	F
Dental assistant wages	2430	2430	0	Neither
Utilities	470	550	80	U
Total variable costs (B)	14270	14120	150	F
Contribution margin C = A-B	24520	25800	1280	F
Controllable fixed costs
Equipment depreciation	5980	5980	0	Neither
Dentist salary	9120	9680	560	U
Total controllable fixed costs (D)	15100	15660	560	U
Controllable margin (C-D)	9420	10140	720	F
Average investment = (83290+70060)/2	76675	76675	76675
Return on investment	12.29%	13.22%	0.94%