Question

(9-43) Responsibility Accounting, Profit Centers, and Contribution Approach

Bloomington Honda had the following data for the year’s operations:

Sales of vehicles

$ 2,400,000

Sales of parts and service

600,000

Cost of vehicle sales

1,920,000

Parts and service materials

180,000

Parts and service labor

240,000

Parts and service overhead

60,000

General dealership overhead

200,000

Advertising of vehicles

120,000

Sales commissions, vehicles

48,000

Sales salaries, vehicles

60,000

The president of dealership has long regarded the markup on material and labor for the parts

and service activity as the amount that is supposed to cover all parts and service overhead

plus some general overhead of the dealership. In other words, the parts and service

department is viewed as a cost-recovery operation, while the sales of vehicles is viewed as the

income-producing activity.

(1) Prepare a departmentalized operating statement that harmonizes with the views of the

president.

(2) Prepare an alternative operating statement that would reflect a different view of the

dealership operations. Assume that $24,000 and $120,000 of the $200,000 general

overhead can be allocated with confidence to the parts and service department and to

sales of vehicles, respectively. The remaining $56,000 cannot be allocated except in some

highly arbitrary manner.

(3) Comment on the relative merits of numbers 1 and 2.

Answer 1

1). The below is the departmental operating statement of bloomington:

$	Total	Unallocated	Sale of vehicles	Parts and service
Revenues	3000000	-	2400000	600000
Cost of Sales	1920000		1920000	-
Cost of Material	180000		-	180000
Cost of Labor	240000	-	-	240000
Overheads	60000	-	-	60000
Advertising	120000	-	120000	-
Sales Commission	48000	-	48000	-
Salary	60000	-	60000	-
Total cost	2628000	-	2148000	480000
Gross profit	372000	-	252000	120000
General overhead (Since General, not allocated to any department)	200000	200000	-	-
Net profit	172000	-	252000	120000

2). The below is the alternative departmental operating statement of bloomington:

3. The operating statement in case 1 assume that the general overheads can not be distributed to department and hence the profitability is calculated. In case, the operating statement present more realistic picture as the general overheads of dealership are distributed on both department and some portion is kept as non alllocable.