Asian Style Industries is a diversified company whose products are marketed both domestically and internationally. The company's major product lines include furniture. sports equipment and household appliances. At a recent meeting of the board of directors, there was a lengthy discussion on ways to improve overall corporate profitability. The members of the board decided that they required additional financial information about individual corporate operations in order to target areas for improvement. Danielle Murphy, the financial controller, has been asked to provide additional data that would assist the board in its investigation. Murphy believes that profit statements, prepared along both product lines and geographic areas, would provide the directors with the required insight into operations. Murphy had several discussions with the division managers for each product line and compiled the following information from these meetings:

Item Furniture Sports Housewares Total

Production and Sales $($units$)80,00090,00080,000250,000$

Average Selling Price per Unit $$16\mathrm{.}00$ $$40\mathrm{.}00$ $$30\mathrm{.}00$

Average Variable Manufacturing Cost per Unit $$8\mathrm{.}00$ $$19\mathrm{.}00$ $$16\mathrm{.}50$

Average Variable Selling Expense per Unit $$4\mathrm{.}00$ $$5\mathrm{.}00$ $$4\mathrm{.}50$

Fixed Manufacturing Overhead $($excluding depreciation$)$ $$500,000$

Depreciation of Plant and Equipment $$400,000$

Administrative and Selling Expense $$1,160,000$

The division managers concluded that Murphy should allocate fixed manufacturing overhead to both product lines and geographic areas based on the ratio of the variable costs expended to of $5$ total variable costs. Each of the division managers agreed that a reasonable basis for the allocation of depreciation on plant and equipment would be the ratio of units produced per product line $($or per geographical area$)$ to the total number of units produced. There was little agreement on the allocation of administrative and selling expenses, so Murphy decided to allocate only those expenses that were traceable directly to an area. For example, sales staff salaries would be allocated to geographical areas. Murphy used the following data for this allocation:

Product Line Amount Country Amount

Furniture $$180,000$ Australia $$340,000$

Sports $$140,000$ New Zealand $$60,000$

Housewares $$180,000$ Singapore $$100,000$

Total $$500,000$ Total $$500,000$

The division managers were able to provide reliable sales percentages for their product lines by geographical area.

Product Line$/$Country Australia New Zealand Singapore

Furniture $40\%40\%20\%$

Sports $40\%10\%20\%$

Housewares $20\%50\%60\%$

Murphy prepared the following product$-$line profit statement based on the above data

Item Furniture Housewares Sports Total

Sales in Units $80,00080,00090,000$

Sales $$1,280,000$ $$2,400,000$ $$3,600,000$ $$7,280,000$

Variable Manufacturing and Selling Costs $$960,000$ $$1,680,000$ $$2,160,000$ $$4,800,000$

Contribution Margin $$320,000$ $$720,000$ $$1,440,000$ $$2,480,000$

Fixed Costs $$500,000$

$-$ Fixed Manufacturing Overhead $$100,000$ $$175,000$ $$225,000$ $$500,000$

$-$ Depreciation $$128,000$ $$128,000$ $$144,000$ $$400,000$

$-$ Administrative and Selling Expenses $$120,000$ $$80,000$ $$140,000$ $$340,000$

Total Fixed Costs $$348,000$ $$383,000$ $$509,000$ $$1,240,000$

Profit $($Loss$)$ $$(28,000)$ $$337,000$ $$931,000$ $$1,240,000$

Part I

One of the managerial accounting functions in a decentralised organisation is to develop a responsibility accounting system for the purposes of managerial performance measurement. Critically evaluate how responsibility accounting is related to the purposes of performance measurement systems. Provide appropriate and relevant references in your discussion, analysis and evaluation.

Part II

The contribution margin format is highly useful in developing financial performance reports in a decentralised organisation. Discuss, with explanations, the advantages of using this format for performance evaluation of business units and managers. Provide appropriate and relevant references in your discussion and explanation.

Part III

Prepare a profit statement $($by geographical area$)$ measuring the financial performance and profitability of the company$$s three geographical areas.

Part IV

Based on the profit statement $($by geographical area$)$ you prepared in Part III and the profit statement $($by product line$)$ prepared by the financial controller $($see previous page$),$ provide specific comments about the business performance of the company and make recommendations and suggestions on where the company should focus its attention to improve its overall profitability.