Question

Prepare a responsibility report for an investment centre, and calculate ROI.

Alosio Manufacturing Company manufactures a variety of tools and industrial equipment. The company operates three divisions. Each division is an investment centre. Operating data for the home division for the year ended December 31, 2016, and relevant budget data are as follows:

	Actual	Comparison with Budget
Sales	$1,400,000	$ 100,000 favourable
Variable cost of goods sold	675,000	55,000 unfavourable
Variable selling and administrative expenses	125,000	25,000 unfavourable
Controllable fixed cost of goods sold	170,000	On target
Controllable fixed selling and administrative expenses	80,000	On target

Average operating assets for the year for the home division were $2 million, which was also the budgeted amount.

Instructions

(a)  

Prepare a responsibility report (in thousands of dollars) for the home division.

Controllable margin: Budget $330,000; Actual $350,000

(b)   

Evaluate the manager's performance. Which items will likely be investigated by top management?

(c)  

Calculate the expected ROI in 2017 for the home division, assuming the following independent changes to actual data:

The variable cost of goods sold decrease by 5%.

The average operating assets decrease by 10%.

Sales increase by $200,000, and this increase is expected to increase the contribution margin by $85,000.

Answer 1

Budgeted sales = 1400000 - 100000 favorable =1300000

Budgeted Variable cost of goods sold = 675000 - 55000 Unfavorable = 620000

Budgeted Variable selling and administrative expenses = 125000 - 25000 Unfavorable = 100000

Responsibility report (in thousands of dollars) for the home division

Actual

Budget

Variance

Remarks

Sales

         1,400,000

         1,300,000

      100,000

Favorable

Less:

Variable cost of goods sold

             675,000

             620,000

         55,000

Unfavorable

Variable selling and administrative expenses

             125,000

             100,000

         25,000

Unfavorable

Controllable fixed cost of goods sold

             170,000

             170,000

                   0

None

Controllable fixed selling and administrative expenses

               80,000

               80,000

                   0

None

Total Controllable cost

         1,050,000

             970,000

         80,000

Unfavorable

Controllable margin

             350,000

             330,000

         20,000

Favorable

Manager's performance is Good, actual Controllable margin is 20000 More than budgeted Controllable margin.

For Comparison Purpose, we reacquired to Compare Flexible Budgeted data for Analysis Of investigation purpose.

Budget

Revised Budget At 1400000 Sales

Remarks

Sales

         1,300,000

         1,400,000

Variable cost of goods sold

             620,000

             667,692

(620000/1300000)*1400000

Variable selling and administrative expenses

             100,000

             107,692

(100000/1300000)*1400000

Revised Budget At 1400000 Sales

Actual Data

Difference

Variable cost of goods sold

             667,692

             675,000

           7,308

Variable selling and administrative expenses

             107,692

             125,000

         17,308

Which items will likely be investigated by top management?

Variable selling and administrative expenses will likely be investigated by top management because higher Difference compare to Flexible budget data.

ROI

Budgeted Controllable margin

             330,000

Add: increase the contribution margin

               85,000

Budgeted Controllable margin for 2017

             415,000

Divided by: Average operating assets (2000000-(2000000*10%))

         1,800,000

Expected ROI

23.056%