Management Accounting II (BA1016)

Tay Zhi En Matthew DAC/FT/3B/02 0754664

Tutorial 7

07/08 Sessional Exams

(a)

Division A ($'000) Division B ($'000) Total

Sales 1000 1200 2200
Less:Variable Costs
Variable COGS .45*1000k 450 .5*1200k 600 1050
Variable Selling and Admin. .05*1000k 50 .06*1200k 72 122
Deemed to be 500 672 1172
Controllable

Total CM 1000k-500k 500 1200k-672k 528 1028

Less: Direct Controllable FC 60 40 100
CM Controllable by Seg. Manager 500k-60k 440 528k-40k 488 928
Less: FC not Controllable by Seg. Manager 50 120 170
Contribution of Seg. To Common Costs 440k-50k 390 488k-120k 368 758
Less: Common Costs for All Seg. 55 65 120
Net Income 390k-55k 335 368k-65k 303 638

(bi) Division B manager had performed better as Division B has a higher ‘contribution controllable by segment
manager’, which is $488,000 as compared to Division A having $440,000. This means that Division B manager
is more efficient (by $48,000) in controlling its discretionary FC and certain committed FC which is a fair
measure because only costs that are deemed to be controllable by the segment manager are taken into
account.

(bii) Contribution of segment to common costs represents the income that each segment would earn on its
own if it were an independent company rather than one division of a multi-division company.

Since Division A has a higher contribution of segment to common costs, as compared to Division B ($368,000),
it is more profitable and therefore had performed better.

(c)

Division A Division B
Contribution of Segment to Common Costs 390,000 368,000
Total Assets 3,500,000 3,000,000
390,000 368,000
ROI 11.1% 12.3%
3,500,000 3,000,000

(d) Residual Income Division A = Segment Income - (Investment X Cost of Capital)

=390,000 - (3,500,000 X 0.1)

1
Management Accounting II (BA1016)
Tay Zhi En Matthew DAC/FT/3B/02 0754664
=$40,000

Residual Income Division B = Segment Income - (Investment X Cost of Capital)

=368,000 - (3,000,000 X 0.1)

=$68,000