Question

Evaluating Profit and Investment Center Performance P3.The managing partner of the law firm Sewell, Bagan, and Clark, LLP, makes asset acquisition and disposal decisions for the firm. As managing partner, she supervises the partners in charge of the firm's three branch offices. Those partners have the authority to make employee compensation decisions. The partners' compensation depends on the profitability of their branch office. Vanessa Smith manages the City Branch, which has the following master budget and actual results for the year ended December 31. Master Budget Actual Results Billed hours 5,000 4,900 Revenue $ 250,000 $ 254,800 Controllable variable costs: Direct labor (120,000) (137,200) Variable overhead (90,000) (34,300) Contribution margin $ 90,000 $ 83,300 Controllable fixed costs: Rent (30,000) (30,000) Other administrative expenses (45,000) (42,000) Branch operating income $ 15,000 $ 11,300 REQUIRED 1. Assume that the City Branch is a profit center. Prepare a performance report that includes a flexible budget. Determine the variances between actual results, the flex- ible budget, and the master budget. 2. ACCOUNTING CONNECTION Evaluate Vanessa Smith's performance as manager of the City Branch. 3. Assume that the branch managers are assigned responsibility for capital expenditures and that the branches are thus investment centers. City Branch is expected to gener ate a desired ROI of at least 30 percent on average invested assets of $40,000. a. Compute the branch's return on investment and residual income. (Round per- centages to two decimal places.) b. ACCOUNTING CONNECTION Using the ROI and residual income, evaluate Vanessa Smith's performance as branch manager.

Please NOTE:

There is a printing error in the textbook for Variable Overhead in the Master Budget Column, it should be (40,000) instead of (90,000)

Use this format BELOW to tabulate your answers

Answer 1

Please find below table useful to compute desired results: -

А B F 1 Master Budget Actual Result 2 Billed hours 5000 4900 3 Revenue 250000 254800 4 Controllable Variable costs: 5 Direct Labor - 120000 -137200 6 Variable Overhead -40000 |-34300 7 Contribution margin =B3+B5+B6 =C3+C5+C6 8 Controllable fixed costs: 9 Rent -30000 -30000 10 Other Administrative Expenses - 45000 -42000 11 Branch operating income =B7+B9+B10 =C7+C9+C10 12 Performance Report 13 Actual Results Variance Flexible Budget Variance Master Budget 14 Billed hours 4900 =B14-E14 4900 =E14-H14 U 5000 15 Revenue 254800 =B15-E15 =(H15/H14)*E14 =E15-H15 U 250000 16 Controllable Variable costs: 17 Direct Labor -137200 =B17-E17 U =E14*( H17/H14) =E17-H17 F - 120000 18 Variable Overhead -34300 =B18-E18 F =E14*(H18/H14) =E18-H18 F -40000 19 Contribution margin =B15+B17+B18 =B19-E19 =E15+E17+E18 1=E19-H19 U =H15+H17+H18 20 Controllable fixed costs: 21 Rent |-30000 =B21-E21 =H21 =E21-H21 -30000 22 Other Administrative Expenses |-42000 =B22-E22 =H22 =E22-H22 -45000 23 Branch operating income =B19+B21+B22 =B23-E23 =E19+E21+E22 =E23-H23 U =H19+H21+H22 24 Actual results Flexible Master 25 ROI= =B23 40000 =E23 40000 =H23 26 = =B25/D25 =E25/G25 =H25/J25 27 Residual Income= 11300 =D25*30% 13200 =G25*30% =H23 =B27-D27 =E27-G27 =H27-J27 કે ન તો 40000 I=J25*30% 28 =

End results would be as follows: -

A D C Master Budget Actual Result 5,000 4.900 250,000 254.800 2 Billed hours 3 Revenue 4. Controllable Variable costs: 5 Direct Labor 6 Variable Overhead 7 Contribution margin 8 Controllable fixed costs: 9 Rent 10 Other Administrative Expenses 11 Branch operating income (120,000) (40.000) 90.000 (137,200) (34.300) 83,300 (30,000) (45,000) 15,000 12 (30,000) (42,000) 11 300 Performance Report Variance Flexible Budget 4.900 9.800 F 245.000 Actual Results 4.900 254.800 Variance (100) U (5,000) U Master Budget 5,000 250,000 (137,200) (34.300) 83.300 (19.600) U 4.900F (4,900) U (117,600) (39.200) 88,200 2.400 F 800 F (1.800) U (120,000) (40,000) 90.000 13 14 Billed hours 15 Revenue 16 Controllable Variable costs: 17 Direct Labor 18 Variable Overhead 19 Contribution margin 20 Controllable fixed costs: 21 Rent 22 Other Administrative Expenses 23 Branch operating income 24 25 ROI= 26 = 27 Residual Income= 28 = 3.000 F (1.900) U (1,800) U (30.000) (42,000) 11,300 Actual results 11,300/ 28.25% 11,300 (700) (30,000) (45,000) 13.200 Flexible 13,200 33.00% 13,200 1.200 (30,000) (45,000) 15.000 Master 15.000 1 37.50% 15,000 3,000 40,000 / 40,000 40,000 12.000 12.000 . | 12.000 L