91影视

Entertainment Electronics Company has two divisions, Video and Audio, and two corporate service departments, Computer Support and Accounts Payable. The corporate expenses for the year ended December 31,2006 , are as follows: The other corporate administrative expenses include officers' salaries and other expenses required by the corporation. The Computer Support Department charges the divisions for services rendered, based on the number of computers in the department, and the Accounts Payable Department charges divisions for services, based on the number of checks issued. The usage of service by the two divisions is as follows: \(\begin{array}{lll}\text { Video Division } & 180 \text { computers } & 4,200 \text { checks } \\ \text { Audio Division } & \underline{120} & \underline{7,800} \\ \text { Total } & \underline{\underline{300}} \text { computers } & \underline{12,000} \text { checks }\end{array}\) The service department charges of the Computer Support Department and the Accounts Payable Department are considered controllable by the divisions. Corporate administrative expenses are not considered controllable by the divisions. The revenues, cost of goods sold, and operating expenses for the two divisions are as follows: \begin{tabular}{lrr} & \multicolumn{1}{c}{ Video } & \multicolumn{1}{c}{ Audio } \\ \hline Revenues & \(\$ 4,000,000\) & \(\$ 3,400,000\) \\ Cost of goods sold & \(2,100,000\) & \(1,600,000\) \\ Operating expenses & 750,000 & 700,000 \end{tabular} Prepare the divisional income statements for the two divisions.

Step by step solution

01

Identify controllable service department charges

The Computer Support Department charges are distributed based on the number of computers in each division. The Accounts Payable Department charges are based on the number of checks issued by each division.

02

Allocate Computer Support Charges

The total computers are 300, with Video using 180 computers and Audio 120. The charges are proportional to the number of computers: Video gets \(180/300\) and Audio gets \(120/300\).

03

Allocate Accounts Payable Charges

The total checks issued are 12,000, with Video using 4,200 and Audio using 7,800 checks. The charges are allocated as \(4200/12000\) to Video and \(7800/12000\) to Audio.

04

Prepare Video Division Income Statement

Start with revenues of \\(4,000,000, subtract the cost of goods sold of \\)2,100,000 and operating expenses of \$750,000, and include allocated service department charges to calculate net income for Video.

05

Prepare Audio Division Income Statement

For Audio, begin with revenues of \\(3,400,000, subtract the cost of goods sold of \\)1,600,000 and operating expenses of \$700,000, then include allocated service department charges to determine net income for Audio.

Unlock Step-by-Step Solutions & Ace Your Exams!

• Full Textbook Solutions

  Get detailed explanations and key concepts

• Unlimited Al creation

  Al flashcards, explanations, exams and more...

• Ads-free access

  To over 500 millions flashcards

• Money-back guarantee

  We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Controllable Costs

Controllable costs are those that can be directly managed and influenced by a division or department manager. In the context of divisional income statements, understanding what costs are deemed controllable versus uncontrollable is crucial.
For Entertainment Electronics Company, the service department charges, i.e., costs incurred for using the Computer Support and Accounts Payable services, are considered controllable by the divisions. This means the divisions have some influence over these costs, like the number of computers they use or checks they write. On the other hand, corporate administrative expenses are not controllable, meaning the divisions can't directly manage these expenses.
Knowing which costs are controllable helps in evaluating a division's performance accurately, assigning responsibility appropriately, and fostering accountability. It encourages division managers to optimize their resources effectively, as these costs can impact the divisional net income.

Service Department Charges

Service departments provide essential internal services to other divisions or departments within a company. The charges from these departments for their services need to be distributed across the divisions they support.
In the case of Entertainment Electronics Company, the Computer Support Department and the Accounts Payable Department are the two key service departments. Computer Support charges depend on each division's computer usage, while Accounts Payable charges depend on the number of checks issued by each division.
The distribution of these service department charges to each division ensures that costs are assigned to those who actually consume the resources, promoting fair financial reporting. It also helps divisions see how their resource consumption translates into costs, aiding them in making informed operational adjustments to improve financial performance.

Allocation of Expenses

Allocating expenses effectively is critical in compiling accurate and transparent divisional income statements. While direct expenses like the cost of goods sold and direct operating expenses are straightforward, service department charges require systematic allocation.
For the Video and Audio divisions, Computer Support charges are allocated based on computer usage: 180 computers out of 300 for Video, making its allocation ratio 180/300, and 120/300 for Audio division. Similarly, for Accounts Payable charges, Video issues 4,200 checks from a total of 12,000, so its allocation ratio is 4,200/12,000. Audio, issuing 7,800 checks, gets an allocation of 7,800/12,000.
This allocation process ensures that each division is only charged based on its actual usage of services, encouraging efficient use of resources. It leads to better budget management and fosters a sense of responsibility, as divisions understand their role in controlling costs.鈥潁]}]}]}