BOR CPAS, Inc BOR CPAS, Inc. is a dosely held corporation owned by the stockholders who used the initials of their last names to form the corporation numerous Bley, John Ogder, and Samuel Rogers. The fim Cortid Public Accountant (CPAs perform audits of both public companies and privately owned companies. BORS CPAS to provide a nice to both individuals and businesses The corporation is divided into two profit centers the Audit Division and the Tax Division Bachdivision is composed of two cost center The Audit Division.composed of two cout-cente departments Company Audits and Private Company Audits. The Tax Division is composed of two cost center departments als Individual Tax and Business Tax BOR, a decentralized organization, it Interested in evaluating the performance of the two divisions. The stockholders are responsible for deciding an investment in the two dissions. Cyrus en charge of the performance evaluation, and turns to you for altance. Mr. Balley is only interested in eving operations at the profit center (division) level and not at the cost center (Department level Mr. Baley is convidering temporarily ting some of the start from the Tax Division to assist the Audit Division during the upcoming bully audit soton, and would be to evaluate the effect of this on niet income. The Tax Division estimated to have 800 hours of excess capacity The unit for determining sales revenus in both division is the engagement, which means the total agreed-condik for a givenches in the suditor tax forgivenyew. The company charpes on average for of $75,000 per audit engagement and $15.750 per tak engagement. The company has its own Payroll Office, which provides payroll services to both disons and will allocate its total expenses to the the diversas suport desertentu The following chart shows on bonic data for the company Hourly market rate for staff (the price the company would have to pay from an outside $110 contractor for start services) Average hourly cost rate for stall the average price the company pays to its statt Number of paydrecks Hoved by Audit Division Number of paycheck out by Tax Division Total expense for Payroll once $29,250 Amount of assets invested in Audit Division by BORCPAS, Inc $10,000,000 Amount of assets invested in Tax Division by BORCPAS, Inc $5,000,000 110 3:40 Payroll Mr. Balley would you to start by analyzing the Pyrexons, and allocating the total expenses to each indicided to use the number or wyrol checks as the city base for the section in the following thanks allocating the total expense for the Pros office to each of the two division Payroll Charge Rates per payroll check Support Department Division Allocations Audit Division Tax DIVISION Performance Evaluation A profit center manager has the responsity and they for making decisions that we and costs and trots. The manager of room make invested in the center Response accounting for profit centers such as the Audition and Tax Divine the form of interesants, which would included Although it is not technically decentralized, OR CPAS, te us who may be considered an Westment comer. Thus, Mr. Boley also interested in on the performance of the many a Two performance measures that are used at the investment center level are return on investment and on.com My would like to useme upotomu, composed of primary and intumover, to beak down the return on investment in order to valutathion Acme console would to use turn on investment to evabate the overall performance of the company and its westmenttecens with regard to each Answer the following questions (1) and (2) 1. What the most likely reason Mr Bailey chose the DuPont formule to weate the divisions Mr. By wants to focus on whether the profit centers are spending accordance with their bus Mr. Gays that the investment tumover wil grovide a good of schovision's profile CM Bailey would totale diferentes the rium investment advis 1. What the mostly reasonable the oturto Miley wants to focus on whether the proces are in the budgets b. M. Bale televes that the investment over wat provide a good pro C.M.Babey would be to analyze differences in the movemento 2. What is the most el recon M. Holey dhe return on investment to the who? Botey would to determine which is on the highest et income Return on investment wit low Mr. Bay to measure the income (return on each invested is the one and decide whettonestler PUTY Bailey has prepared the following divisional income statement for you to review, assuming to transfer of excene capacity hours occurrenouded the total amounts for BOR CPAS, Inc. in the night column Complete the following Dictional income Statements with your data from the Payroll BOR CPAS, Inc. Divisional income Statements For the Year Ended December 31, 2018 Audit Division Tax Division Total Company 5900,000 900,000 708,750 $700.750 0 (380,000) (235,250) Pescared Audies (12 engagements) Taxes (45 g Transferproof Expense Variable Audit hours provided by Auditivi Tax hours provided by Tax Division Excess capacity hours and to started stall Audit nous provided by Tax Olvido Find Operating income before support department location Sportpartment allocations for payroll Operating income (180,000) (23.750) (40,000) O (65,500) 50,000) 1670,000 115,500) $1.039,000 367.000 Mr. Balley ask that you repare Division Income Statements showing what you would have been to the Audition that the rest of the Tax Division, una marca refer The citional managers tell you that with the excets capacity of the tox Division 10 hours, the Audition can perform mores during the year, and the Tex Division would charoit the Auditoria the market rate of 6110 per hour for the additional hours roure, eling at its excess capacity to the Most Division The Tax Division would still be responsible for saying the water employer Complete the following Divisional Income Statements at there is no amount or an amount o, entero BOR CPAS, Inc. Divisional Income Statements For the Year Ended December 31, 2018 Audit Division Tax Division Total Company Fees earned: Audit fees (16 engagements) 11.200,000 SL 200.000 Tax fees (45 engagements) 3,750 700.750 Transfer pricing fees Expenses var Authors provided by Audit Division (180.000) (180,000) (236,250) 236 2501 Tax heurs provided by Tax Division Excess Capacity has paid to salariedai Audit nours provided by Tax Division (50,000 165,50) (115.500 Fixed expens Operating income before soportament locations Support department allocations for payroll Operating income IHOM 10:01 Me Bailey asks that you tirpare vom Statens show what 105 dit wat verband the Audit purch Tranh pre The visional managers tell you that they of the taxon of hours, the disa perform a more dhe two rate of 500 per hour to be ped to the other addonat hours, with the taxon dating all ti con capacity to the theo stane their employees Complete the income to the art or an amount is en BOR CPA, Inc Divisional Income Statements For the Year Ended December , 200 Audit Division Tax Division Total Company $1,200.000 1.200.000 70,250 708,750 (10,0001 1. Fees and Audit Tees (16 engagement) Taxes (45 engagement Transfer pricing Expenses Varble Audit hours provided by Audit Division Tak hours provided by Tex Dion Excess capacity hours paid the Audit hours provided by Tax Division Fixed expenses Operating income before support de la Support department allocations for part Operating income 1236,250 1256,250 DON'UN (50,000) 165,500) 115.50 Complete the following Divisional Income Statements, there is no amount or an amount is zero, entero" BOR CPAS, Inc. Divisional Income Statements For the Year Ended December 31, 2018 Audit Division Tax Division Total Company Fees earned $1,200,000 Audit fees (16 engagements) Tax fees (45 engagements) Transfer pricing fees $1,200,000 708,750 $708.750 (180,000) Expenses Variablet Audit hours provided by Audit Division Tax hours provided by Tax Division Excess capacity hours paid to salaried statt (180,000) (236,250) (236,250) Audit hours provided by Tax Division {50,000) 165,500) (115,500) Fixed expenses Operating income before support department allocations Support department alocations for payroll Operating income www.Youve collected and analyze the data in the following table ROI stands for "Return on investment Complete the following tables using the information from the other requirements and selection provided. Audit Division Profit Margin x Investment Turnover ROL No Transfer Market Price Negotiated Price Cost Price X Tax Division Profit Margin Investment Turnover ROI No Transfer x Market Price Negotiated Price Cost Price BOR CPAS, Inc x Investment Turnover ROI Profit Margin No Transfer Market Price Negotiated Price Cost Price hapter 24 Mastery (Mastery) After analyzing the data, you are able to answer Mr. Boy's questions (1) - (4) that follow 1. Given that Mr. Daley is evaluating BOR CPA, Inc., which is an investment Center, what transfer pricing Option would he most prefer to the divine .. No transfer between division Market transfer price of $110 per hout Negotiated transfer orios of $80 per hour d. Vanable standard cost transfer price of $50 per hour 2. Which transfer pricing otion would the manager of the Audit Division prefer? a. No transfer between divisions b. Market transfer price of $110 per hour Negotiated transfer price of $50 per hour Vanable standard cost transfer price of $50 per hour 3. Which transfer pricing option would the manager of the Tax Division prefer? .. No transfer between din b. Market transfer price of 5110 per hour Negotiated transfer price of a per hour d. Variable standard cost transfer price of $50 per hour 4. Given the preferences of the managers of the Audit and Tax Division, we cadering the power to come. We were moght be the decision that provides the best outcome to www the company shows the matter, portant for the taste werel The company should be cotton tietovi BOR CPAs, Inc. BOR CPAS, Inc. is a closely held corporation owned by three stockholders who used the initials of their last names to form the corporation's name: Cyrus Bailey, John Ogden, and Samuel Rogers. The firm's Certified Public Accountants (CPA) perform audits of both public companies and privately owned companies. BOR'S CPAS also provide tax services to both individuals and businesses. The corporation is divided into two profit centers: the Audit Division and the Tax Division. Each division is composed of two cost centers, The Audit Division is composed of two cost-center departments: Public Company Audits and Private Company Audits. The Tax Division is composed of two cost-center departments also: Individual Tax and Business Tax. BOR, a decentralized organization, is interested in evaluating the performance of the two divisions. The stockholders are responsible for deciding on investment in the two divisions. Cyrus Bailey is in charge of the performance evaluation, and turns to you for assistance. Mr. Bailey is only interested in evaluating operations at the profit center (division) level, and not at the cost center (department) level. Mr. Bailey is considering temporarily using some of the staff from the Tax Division to assist the Audit Division during the upcoming busy audit season, and would like to evaluate the effect of this on net income. The Tax Division is estimated to have 800 hours of excess capacity. The unit for determining sales revenue in both divisions is the "engagement", which means the total agreed-upon work for a given client in either audit or tax for a given year. The company charges on average a fee of $75,000 per audit engagement, and $15,750 per tax engagement. The company has its own Payroll Office, which provides payroll services to both divisions and will allocate its total expenses to the two divisions as support department allocations. The following chart shows some basic data for the company: Hourly market rate for staff (the price the company would have to pay from an outside contractor for staff services) Average hourly cost rate for staff (the average price the company pays to its staff) Number of paychecks issued by Audit Division Number of paychecks issued by Tax Division Total expense for Payroll Office Amount of assets invested in Audit Division by BOR CPAS, Inc. Amount of assets invested in Tax Division by BOR CPAS, 1110 130 340 510.000.000 $5.000.000 Inc. Chapter 34 Master Masteri Inc. Amount of assets invested in Tax Division by BOR CPAS, $5.000.000 Inc. Payroll Mr. Bailey would like you to start by analyzing the Payroll Office expenses, and allocating the total expenses to each division. He has decided to use the number of payroll checks as the activity base for the allocation. Fill in the following blanks, allocating the total expense for the Payroll Office to each of the two divisions. Payroll Charge Rates per payroll check Support Department Allocation Division AGED Performance Evaluation A profit center manager has the responsibility and authority for making decisions that affect revenues and costs and thus, profits. The manager of a profit center does not make decisions concerning the fixed assets invested in the center. Responsibility accounting for profit centers such as the Audit Division and Tax Division take the form of income statements, which should include only controllable revenues and controllable expenses. Although it is not technically a decentralized unit, BOR CPAS, Inc. as a whole may be considered as an investment center. Thus, Mr. Bailey is also interested in evaluating the performance of the company as a whole. Two performance measures that are used at the investment center level are return on investment and residual income. Mr. Bailey would like to use the DuPont formula, composed of profit margin and investment turnover, to break down the return on investment, in order to evaluate each division. At the company level, Mr. Bailey would like to use return on investment to evaluate the overall performance of the company and its investment decisions with regard to each division Answer the following questions (1) and (2). 1. What is the most likely reason Mr. Bailey chose the DuPont formula to evaluate the divisions? a. Mr. Bailey wants to focus on whether the profit centers are spending in accordance with their budgets b. Mr. Bailey believes that the investment turnover will provide a good assessment of each division's profitability C. Mr. Bailey would like to analyze differences in the return on investment across divisions. 2. What is the most likely reason Mr. Bailey chose return on investment to evaluate the company as a whole? a. Mr. Bailey would like to determine which division has the highest net income. b. Return on investment will allow Mr. Bailey to measure the income (return) on each dollar invested in the divisions, and decide where to invest additional assets or expand operations No Transfer Mr. Balley has prepared the following divisional income statement for you to review, assuming no transfer of excess capacity hours occurs. He has also included the total amounts for BOR CPAS, Inc. in the rightmost column. Complete the following Divisional Income Statements with your data from the Payroll. BOR CPAS, Inc. Divisional Income Statements For the Year Ended December 31, 2048 Audit Division Tax Total Company 500.000 100,000 . 180.000 (500,000 2.250 0.0001 0 25.500 Fees earned: Audit fees (12 engagements) Tax fees (45 engagements) 700.750 Transfer pricing fees Expenses: Variable: Audit hours provided by Audit Division Tax hours provided by Tax Division Excess capacity hours paid to salaried staff Audit hours provided by Tax Division Fixed expenses Operating income before support department allocations Support department allocations for payroll Operating income Market Transfer Price Mr. Bailey asks that you prepare Divisional Income Statements showing what 2048 results would have been had the Audit Division purchased all the excess capacity of the Tax Division, using a market transfer price. The divisional managers tell you that, with the excess capacity of the Tax Division of 800 hours, the Audit Division can perform 4 more audits during the year, and the Tax Division would charge the Audit Division the market rate of $110 per hour for the additional hours required, selling all its excess 567.00 SL27,000 CHICTORIOS you prepare COCOCHOWTO results would have been had the Audit Division purchased all the excess capacity of the Tax Division, using a market transfer price. The divisional managers tell you that, with the excess capacity of the Tax Division of 800 hours, the Audit Division can perform 4 more audits during the year, and the Tax Division would charge the Audit Division the market rate of $110 per hour for the additional hours required, selling all its excess capacity to the Audit Division. The Tax Division would still be responsible for paying the salaries of their employees. Complete the following Divisional Income Statements. If there is no amount or an amount is zero, enter "0" BOR CPAs, Inc. Divisional Income Statements For the Year Ended December 31, 20Y8 Audit Division Tax Division Total Company $1,200,000 $1,200,000 Fees earned: Audit fees (16 engagements) Tax fees (45 engagements) Transfer pricing fees Expenses: $700.750 700.750 Variable: (10,000 180.000) (22.250 (231.250) Audit hours provided by Audit Division Tax hours provided by Tax Division Excess capacity hours paid to salaried staff Audit hours provided by Tax Division Fixed expenses Operating income before support department allocations Support department allocations for payroll Operating income (50.0001 65.500 CISSO) Negotiated Transfer Price Mr. Bailey asks that you prepare Divisional Income Statements showing what 20Y8 results would have been had the Audit Division purchased all the excess capacity of the Tax Division, using a negotiated transfer price. The divisional managers tell you that, with the excess capacity of the Tax Division of 800 hours, the Audit Division can perform 4 more audits during the year, and the Audit Division would agree to a negotiated rate of $80 per hour to be paid to the Tax Division for the additional hours required, with the Tax Division selling all its excess capacity to the Audit Division. The Tax Division would still be responsible for paying the salaries of their employees, Complete the following Divisional Income Statements. If there is no amount or an amount is zero, enter "O". Total Company $1,200,000 301.750 798,750 BOR CPAs, Inc. Divisional Income Statements For the Year Ended December 31, 2048 Audit Division Tax Division Fees earned: Audit fees (16 engagements) 51.200.000 Tax fees (45 engagements) Transfer pricing fees Expenses: Variable: Audit hours provided by Audit Division (180,000) Tax hours provided by Tax Division Excess capacity hours paid to salaried staff Audit hours provided by Tax Division Fixed expenses Operating income before support department allocations Support department allocations for payroll Operating income (180.000 1236,250) (236,250) (50.0001 165.00 (15.500 Cost Transfer Price Mr. Bailey asks that you prepare Divisional Income Statements showing what 2048 results would have been had the Audit Division purchased all the excess capacity of the Tax Division, using a cost transfer price. The divisional managers tell you that, with the excess capacity of the Tax Division of 800 hours, the Audit Division can perform 4 more audits during the year, and the Audit Division would pay the Tax Division's internal hourly rate of $50 per hour for the additional hours required, with the Tax Division selling all its excess capacity to the Audit Division. The Tax Division would still be responsible for paying the salaries of their employees. Complete the following Divisional Income Statements. If there is no amount or an amount is zero, enter "o BOR CPAS, Inc. Divisional Income Statements For the Year Ended December 31, 20Y8 Audit Division Tax Division Fees earned: Audit fees (16 engagements) $1.200.000 Tax fees (45 engagements) Transfer pricing fees Expenses: Variable: Total Company 51.200.000 $700.750 700.750 Total Commy $1.200.000 1.200.000 750 Chapter 24 Mastery stay! BOR CPAs, Inc. Divisional Income Statements For the Year Ended December 31, 2048 Audit Division Tax Division Fees earned: Audit fees (16 engagements) Tax fees (45 engagements) Transfer pricing fees Expenses: Variable: Audit hours provided by Audit Division Tax hours provided by Tax Division Excess capacity hours paid to salaried staff Audit hours provided by Tax Division Fixed expenses Operating income before support department allocations Support department allocations for payroll Operating income (150.0001 (235.250 50.000 165.500 200 Analysis You are now able to put together all the information you've collected and analyze the data. In the following table, "ROI" stands for "Return on Investment." Complete the following tables using the information from the other requirements and selection lists provided. Audit Division Profit Hargin Investment Turnover No Transfer Market Price Negotiated Price Cast Price ROI Tax Division fnvestment Turnover Profit margin ROI No Transfer Market Price Negotiated Price Cost Price BOR CPAs, Inc. Investment Turnover Profit Hargin ROE tin The BOR CPAs, Inc. Profit Marin Investment Turnover ROE No Transfer Market Price Negotiated Price Cost Price Final Questions After analyzing the data, you are able to answer Mr. Bailey's questions (1) - (4) that follow. 1. Given that Mr. Balley is evaluating BOR CPAS, Inc., which is an investment center, what transfer pricing option(s) would he most prefer that the divisions use? a. No transfer between divisions b. Market transfer price of $110 per hour C. Negotiated transfer price of $80 per hour d. Variable standard cost transfer price of $50 per hour CODE 2. Which transfer pricing option would the manager of the Audit Division prefer? a. No transfer between divisions b. Market transfer price of $110 per hour c. Negotiated transfer price of $80 per hour d. Variable standard cost transfer price of $50 per hour 3. Which transfer pricing option would the manager of the Tax Division prefer? a. No transfer between divisions b. Market transfer price of $110 per hour c. Negotiated transfer price of $80 per hour d. Variable standard cost transfer price of $50 per hour 4. Given the preferences of the managers of the Audit and Tax Divisions, and also considering the preferences of BOR CPAs, Inc, what might be the decision that provides the best outcome for all levels and entities within the company? a. Use the negotiated transfer price, so that each entity is better off than it would be without any transfers between divisions. b. If the divisional managers cannot come to an agreement, it's best to forgo any transfers between divisions in order to reduce conflict within the company. C. The company should use the market transfer price, since it's important for the divisions to operate under real market conditions, d. The company should use the variable standard cost transfer price because it would