Mineral Waters Ltd. operates three divisions that process and bottle sparkling mineral water. The historical-cost accounting system

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Mineral Waters Ltd. operates three divisions that process and bottle sparkling mineral water. The historical-cost accounting system reports the following data for 2015:

Mineral Waters Ltd. operates three divisions that process and bottle

Mineral Waters estimates the useful life of each plant to be 12 years with a zero terminal disposal price. The straight-line depreciation method is used. At the end of 2015, the Calistoga plant is 10 years old, the Alpine Springs plant is 3 years old, and the Rocky Mountains plant is 1 year old. An index of construction costs of plants for mineral water production for the 10-year period that Mineral Waters has been operating (2005 year-end = 100) is:

Mineral Waters Ltd. operates three divisions that process and bottle

Given the high turnover of current assets, management believes that the historical-cost and current-cost measures of current assets are approximately the same.
Required
1. Compute the ROI (operating income to total assets) ratio of each division using historical-cost measures. Comment on the results.
2. Use the approach in Exhibit 22-3 to compute the ROI of each division, incorporating current cost estimates as of 2015 for depreciation and fixed assets. Comment on the results.
3. What advantages might arise from using current-cost asset measures as compared with historical-cost measures for evaluating the performance of the managers of the three divisions?

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Cost Accounting A Managerial Emphasis

ISBN: 978-0133138443

7th Canadian Edition

Authors: Srikant M. Datar, Madhav V. Rajan, Charles T. Horngren, Louis Beaubien, Chris Graham

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