Profit centre Y

Income statement for the peirod

Budget Actual
£'000 £'000
Sales revenue X X
Variable cost of sales (X) (X)
Contribution (Level đầu tiên có thể control được) X X
Directly attributable/ controllable fixed costs
Salaries(Share từ head office đổ xuống) (X) (X)
Stationary costs (X) (X)
… …
Gross profit (directly attributable/ controllable) X X
Share of uncontrollable costs (eg. Head office costs) (X) (X)
Net profit X X
Variance
£'000
The manager of Division D has complete autonomy regarding the purchase and use of NCA
and inventory but the payment of all suppliers is undertaken by head office which maintains
a central bank account.
The manager also has authority to establish the division's own credit policy (regard to its customer
The division operates a credit control department but all cash received from customers is remitted
immediately to head office.
Classify the following assets & liabilities to indicate whether or not they are a part of
divisional investment that is within the control of the manager of division D

Item
Part/ not part of controllable divisional investment
Non-current assets Control
Trade receivables Control
Trade payables Non-controll
Inventory Control
d use of NCA
hich maintains

gard to its customer)

ustomers is remitted
Example1
Suppose that a company has 2 investment centres, A & B, which show results for the year as:

A B
£ £
Profit 60,000 30,000
75 400,000 120,000
ROI 0.15 0.25

Example 2 - capital employed

An asset costs £100,000 has a life of 4 years, and its scrap value is nil
The asset generates annual cash flows of £34,000
Straight line depreciation 25,000 Profit
Requirement
Complete the following
(1) Annual ROI using opening carrying amount
Year 1 100,000 0.09
Year 2 75,000 0.12
Year 3 50,000 0.18
Year 4 25,000 0.36

(2) ROI using historical cost

Year 1-4 0.1

Example 3 - ROI and goal congruence

Data for an investment centre are as follows
Target ROI (=cost of capital) 0
Divisional profit £300,000
Capital employed £1m
Requirement
Would the division manager accept a project requiring capital of £100,000
and generating profits of £25,000, if the manager were paid a bonus based on ROI
Solution
Divisional ROI without the project 0.3

Divisional ROI with the project 0.295

ROI of the project 0.25

Self-test 7
On the last day of the financial year an investment centre has
Net assets (carrying amount) £1.2m
ROI 15%
Sell 1 of its non-current assets immediately before the year end Capital employee
Carrying amount £105,000
Net relisable value £80,000
What would be the division's ROI immediately after the sale of the asset at the end of the year?

Profit 180,000
Investment 1,200,000
Loss - 25,000

Profit 155,000
New ROI 13.19%
 cho thế này là controllable
w results for the year as:

9,000

based on ROI
 Capital employee 1175000

sset at the end of the year?

Example - RI and goal congruence
Data for an investment centre are as follows
Target ROI (=cost of capital) 0
Divisional profit £300,000
Capital employed £1m
Requirement
Would the division manager accept a project requiring capital of £100,000
and generating profits of £25,000, if the manager were paid a bonus based on RI
Solution
£'000
Divisional RI without the project 100,000
Divisional profit 300,000
Imputed interest charge

Divisional RI with the project 105,000

Divisional profit 5,000
Imputed interest charge

RI of the project
Profit
Imputed interest charge

Example - Using ROI and RI to measure comparative performance

A company has a target ROI and an imputed interest charge of 20% for each of its investment centr
Division 1 Division 2
Capital employed £1,000,000 £100,000
Controllable profits
Year 1 £200,000 £20,000
Year 2 £220,000 £40,000
Requirement
Which of the 2 divisions is performing better, using the following performance measures?
RI
ROI
Solution
RI Division 1 Division 2
£'000 £'000
Year 1
Divisional profit 200,000 20,000
Imputed interest charge 200,000 20,000
RI - -

Year 2
Divisional profit 220,000 40,000
Imputed interest charge 200,000 20,000
RI 20,000 20,000

ROI Division 1 Division 2

Year 1 0.2 0.2
Year 2 0.22 0.4

Example: ROI & RI

An investment centre with capital employed of £570,000 is budgeted to earn a profit of £119,700 n
A proposed non-current asset investment of £50,000, not included in the budget at present,
will earn a profit next year of £8,500 after depreciation
The company's cost of capital is 15%
ROI RI
Without investment 0.210
With investment 0.207

Profit 0
based on RI

or each of its investment centres

rformance measures?
d to earn a profit of £119,700 next year.
n the budget at present,
Interactive question
The cost factory power has behaved as follows in past years
Units of output
produced Cost of factory power
20X1 7,900 38,700
20X2 7,700 38,100
20X3 9,800 44,400
20X4 9,100 42,300
Budgeted production for 20X5 is 10,200 units
Ignore the inflation, the cost of factory power which will be incurred is estimated to be:
Total budgeted cost of factory power = fixed cost + variable cost of budgeted production
Use high - low method to estimates costs

Example: preparing a flexible budget

1. Prepare a budget for 20X6 for the variable direct labour costs and overhead expenses
of a production department flexed at the activity levels of 80%, 90% and 100%, using
the information listed below
The variable direct labour hourly rate is expected to be £7.50
100% activity represents 60,000 direct labour hours
Variable costs
Indirect labour £0.75/direct labour hour
Consumable supplies £0.375/direct labour hour

Canteen and other

welfare service 6% of direct and indirect labour costs
Semi variable costs are expected to relate to the direct labour hours
in the same manner as for the last 5 years
Year Direct labour hour Semi-variable cost (£)
20X1 64,000 20,800
20X2 59,000 19,800
20X3 53,000 18,600
20X4 49,000 17,800
20X5 40,000 (estimate) 16,000 (estimate)

Fixed cost £
Depreciation 18,000
Maintenance 10,000
Insurance 4,000
Rates 15,000
Management salaries 25,000
Inflation is to be ignored
2. Calculate the budget cost allowance for 20X6
assuming that 57,000 direct labour hours are work
Solution

Example - flexible budgets and control

suppose W Co manufactures a single product, the CL. Budgeted results and actual results
for June 20X2 are shown below
Budget Actual results

Production and sales

of the CL (units) 2,000 3,000
(£) (£)
Sales revenue (a) 20,000 30,000
Direct materials 6,000 8,500
Direct labour 4,000 4,500
Maintenance 1,000 1,400
Depreciation 2,000 2,200
Rent and rates 1,500 1,600
Other costs 3,600 5,000
Total costs (b)
Profit (a) - (b)
 VC/Unit 3
Fixed cost 15000
Total budgeted cost 45600

ed is estimated to be:
of budgeted production

Solution 48000 54000

nd overhead expenses 80% level 90% level
0% and 100%, using direct labour hours 48,000h 54,000h
£ £
pected to be £7.50 Variable direct labour $360,000 $405,000
our hours Other variable costs:
Indirect labour $36,000 $40,500
Consumable supplies $18,000 $20,250
bour hour Canteen ect $23,760 $26,730

Total variable costs

indirect labour costs (9.12/h) $437,760 $492,480
Semi-variable costs (W) 17600 18800
Fixed costs
Depreciation 18,000 18,000
Maintenance 10,000 10,000
Insurance 4,000 4,000
Rates 15,000 15,000
Management salaries 25,000 25,000
 Budgeted costs $527,360 583280

2. The budget cost allowance for 57,000 direct labour hours of work w

Variable costs
Semi-variable costs
Fixed costs
Total budget cost allowance

Example - the correct approach to control

esults and actual results Suppose:
(a) direct materials, direct labour and maintenance costs are variable
Variance = budget -actual (b) Rent and rates and depreciation are fixed costs

F - Favourable (higher profit)

A - adverse (lower profit)
(C) Other costs consist of fixed costs of £1,600 plus a variable cost of £
(£) The control analysis should therefore be based on a fexible budget as
- 10,000 Fixed budget Flexible budget
- 2,500 (a) (b)
- 500 £ £
- 400 Production & sales
- 200 Sales revenue
- 100 Variable costs
- 1,400 Direct materials
- Direct labour
- Maintenance
Semi-variable costs
Other costs
Fixed costs
Depreciation
Rent and Rates
Total costs
Profit
 60000
100% level
60,000h 450000
£
$450,000

$45,000
$22,500
$29,700

$547,200
20000

18,000
10,000
4,000
15,000
25,000
 $639,200

t labour hours of work would be as follows

ance costs are variable

plus a variable cost of £1 per unit made and sold

d on a fexible budget as follows
Actual results Budget variance
(c) (c) - (b)
£ £
 WL ,Co manufactures and sells a single product, R. Since the R is highly perishable, no
inventories are held at any time. WL Co's management uses a flexible budgeting system to
control costs. Extracts from the flexible budget are as follows
Budget cost allowance £ £
Output and sales (units) 4,000 5,500
Direct material 16,000 22,000
Direct labour 20,000 24,500
Variable production overhead 8,000 11,000
Fixed production overhead 11,000 11,000
Selling and distribution overhead 8,000 9,500
Administration overhead 7,000 7,000
Total expenditure 70,000 85,000
Production and sales of product R amounted to 5,100 units during period 5
The total budget cost allowances in the flexible budget for period 5 will be:
1 Direct material
2 Direct labour
3 Variable production overhead
4 Fixed production overhead
5 Selling and distribution overhead
6 Administration overhead
7 Production and sales of product R in period 6 amounted to 5,500 units
Budgeted output for the period was 4,000 units
Actual total expenditure was £82,400
The total expenditure variance for the period 6:
The volume variance for the period 6:
 is highly perishable, no
flexible budgeting system to

uring period 5
riod 5 will be:
Labour efficiency
Variable overhead expenditure
Variable overhead efficiency
Fixed overhead expenditure
Total variances
Actual profit