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13. 9.2 Use Netflix’s 2017 annual report (https://openstax.org/l/50Netflix2017) to answer the following
questions. How many segments does Netflix have? What are the segments? The annual report also shows
selected nonfinancial and financial information for each segment. Prepare a brief presentation listing the
“Paid memberships at end of period,” “Revenues,” and “Contribution profit” (also called operating profit) for
the three most recent years (2017, 2016, and 2015). In the presentation, include any observations you notice
about the trends of each segment.
14. 9.2 Reference the Kellogg Company’s 2017 annual report (https://openstax.org/l/50Kellogg2017) to
answer the following question. In “Note 18: Reportable Segments,” you will find selected financial information
for segments within Kellogg Company. Prepare a brief presentation listing each segment, along with the “Net
Sales,” “Operating Profit,” and “Total Assets.” For Total Assets, you should ignore Corporate and Elimination
entries, and you will need to combine the U.S. divisions into a North American total. Report this information for
the three most recent years (2017, 2016, and 2015). In the presentation, include any observations you notice
about the trends of each segment. You may want to use Microsoft Excel or another spreadsheet application
for the numerical data. This information will be used in a subsequent question.
15. 9.2 Lavell started out mowing lawns in the neighborhood when he was 13 years old. He did such good
work that, without advertising, his business grew steadily each year. After college, Lavell decided to continue
the business as a full-time career. One of his concerns, however, is the number of hours he is putting in. Once
school lets out, he finds himself working long hours nearly every day of the week. Although he has added
workers, his business now handles mowing, trimming, and landscaping for residential, corporate, and
nonprofit clients. He is considering adding managers but is not quite sure how to structure the organization.
Lavell wants to focus on building the business rather than doing the daily work, so he knows a decentralized
structure will be best. He has asked you to develop a potential organizational chart to help him envision the
best way to organize the business. Describe the advantages to this approach as well as any concerns he
should have.
16. 9.3 Describe the concept of responsibility accounting.
17. 9.3 Describe the concept of a cost center and, using a specific organization, give an example of how this
might be used to achieve the strategic goals of the organization.
18. 9.3 Describe the concept of a profit center and, using a specific organization, give an example of how
this might be used to achieve the strategic goals of the organization.
19. 9.3 Explain the benefits of a return on investment structure within an investment center framework. It
may help to think of an example using an existing company.
20. 9.3 Explain the benefits of a residual income structure within an investment center framework. It may
help to think of an example using an existing company.
21. 9.4 Discuss the concept of controllable and uncontrollable costs and how they affect the evaluation of
the responsibility center’s financial performance.
22. 9.4 Discuss the concept of transfer pricing.
23. 9.4 Discuss the advantages and disadvantages of a market-based transfer pricing approach.
24. 9.4 Discuss the advantages and disadvantages of a cost-based transfer pricing approach.
25. 9.4 Discuss the advantages and disadvantages of a negotiated transfer pricing approach.
496 Chapter 9 Responsibility Accounting and Decentralization
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https://openstax.org/l/50Netflix2017
https://openstax.org/l/50Kellogg2017
Exercise Set A
EA1. 9.3 Assume you have been hired by Hilton Hotels and Resorts. As part of your new role in the
accounting department, you have been tasked to set up a responsibility accounting structure for the company.
As your first task, your supervisor has asked you to give an example of a cost center, profit center, and an
investment center within the Hilton organization. Your supervisor is a little unsure of the difference between a
profit center and investment center and would like you to explain the difference.
EA2. 9.3 Consider the national nonprofit organization the American Red Cross. Assume you are the regional
director of the organization, and you just received the quarterly financial reports. Even though the
organization is a nonprofit, assume it is set up as a profit center because it is helpful for the financial reports to
show both donations and expenses by each region/location. One particular report shows there is one location
in your region that is extremely over budget on nearly every expense item. From a management perspective,
can you think of a reason(s) when going over budget might actually be a good thing? As the regional
manager, how might you respond to the overages to help the particular location in the future?
EA3. 9.3 The following information is from Bluff Run Golf Courses. The company runs three courses and the
July income statement for each course is shown.
A. Find the missing value for outings revenue, wages, and operating income.
B. Comment on the financial performance of each course.
C. Identify a limitation of analyzing the information provided.
You may want to consider using Microsoft Excel or another spreadsheet application for the numerical data.
This information will be used in a subsequent question.
Chapter 9 Responsibility Accounting and Decentralization 497
EA4. 9.3 The following information is from Dave’s Sporting Goods. Dave’s is a Midwest sporting goods
store with three regional stores. The August income statement for all stores is shown.
A. Comment on the operating income results for each store.
B. Now assume the costs allocated from corporate is an uncontrollable cost for each store. How does this
change your assessment of each store?
EA5. 9.4 Assume you are the department B manager for Marley’s Manufacturing. Marley’s operates under
a cost-based transfer structure. Assume you receive the majority of your raw materials from department A,
which sells only to department B (they have no outside sales). After calculating the operating income in dollars
and operating income in percentage, analyze the following financial information to determine costs that may
need further investigation. (Hint: It may be helpful to perform a vertical analysis.)
EA6. 9.4 As manager of department B in Marley’s Manufacturing, based on the costs you identified in the
previous exercise for further research, how does this impact the financial performance of your department,
and what might be some questions you want to ask or solutions you might propose to Marley’s management?
EA7. 9.4 Based on your research of the market in the previous exercises, you have determined the market
price for the items your department purchase is 15% below what you are being charged by department A of
Marley’s Manufacturing. How would you view this as a manager? What steps could you take to solve this
discrepancy? What alternatives would you consider, assuming you had control over purchasing decisions?
498 Chapter 9 Responsibility Accounting and Decentralization
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EA8. 9.4 Using the information in the previous exercises about Marley's Manufacturing, determine the
operating income for department B, assuming department A “sold” department B 1,000 units during the
month and department A reduces the selling price to the market price.
B Exercise Set B
EB1. 9.3 Assume you have been hired by Cabela’s Sporting Goods. As part of your new role in the
accounting department, you have been tasked to set up a responsibility accounting structure for the company.
As your first task, your supervisor has asked you to give an example of a cost center, profitcenter, and an
investment center within the Cabela’s organization. Your supervisor is a little unsure of the difference between
a profit center and investment center and would like you to explain the difference.
EB2. 9.3 Assume you are the regional manager for a hotel chain. You receive the quarterly financial reports
and notice one particular hotel had drastically lower revenue and a corresponding high occupancy rate. Upon
further investigation, you discover the manager for the hotel provided lodging for a neighboring town that
was hit by a tornado. As the manager, how do you respond to this?
EB3. 9.3 The following information is from Dessert Dynasty. The company runs three stores and the
December Income Statement for all stores is shown.
A. Find the missing values for retail revenue, ingredients, and operating income.
B. Comment on the financial performance of each store.
C. Identify a limitation of analyzing the information provided.
You may want to consider using Microsoft Excel or another spreadsheet application for the numerical data.
This information will be used in a subsequent question.
Chapter 9 Responsibility Accounting and Decentralization 499
EB4. 9.3 The following information is from Good Read Books. Good Read is a regional book store with three
regional stores. The May income statement for all stores is shown.
A. Comment on the operating income results for each store.
B. Now assume the costs allocated from corporate is an uncontrollable cost for each store. How does this
change your assessment of each store?
EB5. 9.4 Assume you are the warehouse manager for Vinnie’s Vinyls, a multi-location business specializing
in vinyl records. Vinnies’s operates under a cost-based transfer structure and the warehouse supplies all stores
with the records. The stores can purchase records only from the warehouse, and the warehouse can only sell
to Vinnie’s stores. The manager of the West store has some concerns relating to the store’s financial
performance and has asked for your help analyzing transfer costs. After calculating the operating income in
dollars and the operating income percent, analyze the following financial information to determine costs that
may need further investigation. (Hint: it may be helpful to perform a vertical analysis.)
EB6. 9.4 As manager of the warehouse for Vinnie’s Vinyls, based on this analysis and the items you
identified for further research, what is your advice to the manager of the West store? What might be some
questions you want to ask or solutions you might propose to Vinnie’s management?
500 Chapter 9 Responsibility Accounting and Decentralization
This OpenStax book is available for free at http://cnx.org/content/col25479/1.11
	Chapter 9. Responsibility Accounting and Decentralization
	Exercise Set A
	Exercise Set B