Managerial accounting solutions
Exercise 11-1 (10 minutes)
1.
2.
3.
Exercise 11-2 (10 minutes)
Average operating assets
£2,200,000
Net operating income
£400,000
Minimum required return:
16% × £2,200,000 352,000
Residual income
£ 48,000
Exercise 11-3 (20 minutes) 1.
Throughput time
=
Process time + Inspection time + Move time + Queue time
=
2.8 days + 0.5 days + 0.7 days + 4.0 days
=
8.0 days
2. Only process time is value-added time; therefore the manufacturing cycle efficiency (MCE) is:
3. If the MCE is 35%, then 35% of throughput time was spent in value-added activities, the other 65% was spent in non-value-added activities.
4.
Delivery cycle time
=
Wait time + Throughput time
=
16.0 days + 8.0 days
=
24.0 days
5. If all queue time is eliminated, then the throughput time drops to only 4 days (0.5 + 2.8 + 0.7). The MCE becomes: Thus, the MCE increases to 70%. This exercise shows quite dramatically how lean production approach can improve operations and reduce throughput time.
Exercise 11-6 (15 minutes)
1.
2.
Exercise 11-6 (continued)
3.
Exercise 11-7 (20 minutes) 1. ROI computations: Perth: Darwin:
2.
Perth
Darwin
Average operating assets
$3,000,000
$10,000,000
Net operating income
$630,000
$1,800,000
Minimum required return on average operating assets—16% × Average operating assets 480,000 1,600,000
Residual income
$150,000
$ 200,000
3. No, the Darwin Division is simply larger than the Perth Division and for this reason one would expect that it would have a greater amount of residual income. Residual income can’t be used to compare the performance of divisions of different sizes. Larger divisions will almost always look better. In fact, in the case above, Darwin does not appear to be as well managed as Perth. Note from Part (1) that Darwin has only an 18% ROI as compared to 21% for Perth.
Exercise 11-11 (45 minutes)
1.
2.
3.
Exercise 11-2 (10 minutes)
Average operating assets
£2,200,000
Net operating income
£400,000
Minimum required return:
16% × £2,200,000 352,000
Residual income
£ 48,000
Exercise 11-3 (20 minutes) 1.
Throughput time
=
Process time + Inspection time + Move time + Queue time
=
2.8 days + 0.5 days + 0.7 days + 4.0 days
=
8.0 days
2. Only process time is value-added time; therefore the manufacturing cycle efficiency (MCE) is:
3. If the MCE is 35%, then 35% of throughput time was spent in value-added activities, the other 65% was spent in non-value-added activities.
4.
Delivery cycle time
=
Wait time + Throughput time
=
16.0 days + 8.0 days
=
24.0 days
5. If all queue time is eliminated, then the throughput time drops to only 4 days (0.5 + 2.8 + 0.7). The MCE becomes: Thus, the MCE increases to 70%. This exercise shows quite dramatically how lean production approach can improve operations and reduce throughput time.
Exercise 11-6 (15 minutes)
1.
2.
Exercise 11-6 (continued)
3.
Exercise 11-7 (20 minutes) 1. ROI computations: Perth: Darwin:
2.
Perth
Darwin
Average operating assets
$3,000,000
$10,000,000
Net operating income
$630,000
$1,800,000
Minimum required return on average operating assets—16% × Average operating assets 480,000 1,600,000
Residual income
$150,000
$ 200,000
3. No, the Darwin Division is simply larger than the Perth Division and for this reason one would expect that it would have a greater amount of residual income. Residual income can’t be used to compare the performance of divisions of different sizes. Larger divisions will almost always look better. In fact, in the case above, Darwin does not appear to be as well managed as Perth. Note from Part (1) that Darwin has only an 18% ROI as compared to 21% for Perth.
Exercise 11-11 (45 minutes)