Budgetary control and responsibility accounting involve accumulating and reporting costs on the basis of the manager who controls them. This allows managers to be evaluated on costs and revenues they can control. Responsibility accounting distinguishes between controllable and noncontrollable costs to focus performance reports on items a manager can influence. It is used to maximize profits in companies and minimize costs in non-profits by holding managers accountable for results.

1. 24-1
Learning Objectives
Describe budgetary control and static budget reports.1
Prepare flexible budget reports.2
Apply responsibility accounting to cost and profit centers.3
Evaluate performance in investment centers.4
Budgetary Control and
Responsibility Accounting24

2. 24-2
The use of budgets in controlling operations is known as
budgetary control.
 Takes place by means of budget reports which compare
actual results with planned objectives.
 Provides management with feedback on operations.
 Budget reports can be prepared as frequently as needed.
 Management analyzes differences between actual and
planned results and determines causes.
LEARNING
OBJECTIVE
Describe budgetary control and static budget
reports.
1
LO 1

3. 24-3
Budgetary control involves the following activities.
Illustration 24-1
Budgetary Control
LO 1

4. 24-4
Works best when a company has a formalized reporting
system which:
1. Identifies the name of the budget report.
2. States the frequency of the report.
3. Specifies the purpose of the report.
4. Indicates the primary recipient(s) of the report.
Budgetary Control
LO 1

5. 24-5
Partial budgetary control system for manufacturing company.
Illustration 24-2
Budgetary Control
LO 1

6. 24-6
Budgetary control involves all but one of the following:
a. Modifying future plans.
b. Analyzing differences.
c. Using static budgets.
d. Determining differences between actual and planned
results.
Budgetary Control
Question
LO 1

7. 24-7
A Static budget is a projection of budget data at one level
of activity.
 When used in budgetary control, each budget included
in the master budget is considered to be static.
 Ignores data for different levels of activity.
 Compares actual results with budget data at the activity
level used in the master budget.
Static Budget Reports
LO 1

8. 24-8
Illustration 24-3
Illustration: Budget and actual sales data for the Rightride
product in the first and second quarters of 2017 are as
follows.
Static Budget Reports
LO 1

9. 24-9
Illustration: Sales budget report for Hayes Company’s first
quarter.
Illustration 24-3
Illustration 24-4
Static Budget Reports
LO 1

10. 24-10
Illustration: Budget report for the second quarter contains
one new feature: cumulative year-to-date information.
Illustration 24-5
Static Budget Reports
Illustration 24-3
LO 1

11. 24-11
 Appropriate for evaluating a manager’s effectiveness in
controlling costs when:
► Actual level of activity closely
approximates master budget
activity level, and/or
► Behavior of costs is fixed in
response to changes in activity.
 Appropriate for fixed costs.
 Not appropriate for variable costs.
USES AND LIMITATIONS
Static Budget Reports
LO 1

12. 24-12
A static budget is useful in controlling costs when cost
behavior is:
a. Mixed.
b. Fixed.
c. Variable.
d. Linear.
Static Budget Reports
Question
LO 1

13. 24-13
Lawler Company expects to produce 5,000 units of product CV93
during the current month. Budgeted variable manufacturing costs per
unit are direct materials $6, direct labor $15, and overhead $24.
Monthly budgeted fixed manufacturing overhead costs are $10,000 for
depreciation and $5,000 for supervision.
In the current month, Lawler actually produced 5,500 units and
incurred the following costs: direct materials $33,900, direct labor
$74,200, variable overhead $120,500, depreciation $10,000, and
supervision $5,000.
Prepare a static budget report. (Hint: The Budget column is based on
estimated production of 5,000 units while the Actual column is the
actual costs incurred during the period.)
DO IT! Static Budget Report1
LO 1

14. 24-14
DO IT! Static Budget Report1
Solution
LO 1

15. 24-15
Flexible budget projects budget data for various levels of
activity.
 Essentially a series of static budgets at
different activity levels.
 Budgetary process more useful if it is
adaptable to changes in operating
conditions.
 Can be prepared for each type of
budget in the master budget.
LEARNING
OBJECTIVE Prepare flexible budget reports.2
LO 2

16. 24-16
Illustration: Barton Robotics, static budget based on a production
volume of 10,000 units of robotic controls.
Illustration 24-6
Why Flexible Budgets?
LO 2

17. 24-17 Illustration 24-7
Illustration: Overhead Static Budget report assuming 12,000 units
were actually produced, rather than 10,000 units.
LO 2

18. 24-18
 Over budget in three of six overhead costs.
► Unfavorable difference of $132,000 – 12% over budget.
 Comparison based on budget data for 10,000 units - the
original activity level which is not relevant.
► Meaningless to compare actual variable costs for 12,000
units with budgeted variable costs for 10,000 units.
► Variable cost increase with production.
Budgeted variable amounts should increase
proportionately with production
Why Flexible Budgets?
LO 2

19. 24-19
Illustration: Analyzing the budget data for these costs at 10,000 units,
you arrive at the following per unit results.
Illustration 24-8
Variable costs
per unit
Illustration 24-9
Budgeted variable
costs, 12,000
units
Why Flexible Budgets?
LO 2

20. 24-20
Illustration: Prepare the budget report based on the flexible budget for
12,000 units of production.
Illustration 24-10

21. 24-21
1. Identify the activity index and the relevant range of
activity.
2. Identify the variable costs and determine the budgeted
variable cost per unit of activity for each cost.
3. Identify the fixed costs and determine the budgeted
amount for each cost.
4. Prepare the budget for selected increments of activity
within the relevant range.
Developing the Flexible Budget
LO 2

22. 24-22
Just What the Doctor Ordered?
Nobody is immune from the effects of declining revenues—not even
movie stars. When the number of viewers of the television show
“House,” a medical drama, declined by almost 20%, Fox Broadcasting
said it wanted to cut the license fee that it paid to NBC Universal by
20%. What would NBC Universal do in response? It might cut the size of
the show’s cast, which would reduce the payroll costs associated with
the show. Or, it could reduce the number of episodes that take
advantage of the full cast. Alternatively, it might threaten to quit
providing the show to Fox altogether and instead present the show on
its own NBC-affiliated channels.
Source: Sam Schechner, “Media Business Shorts: NBCU, Fox Taking Scalpel to
‘House’,” Wall Street Journal Online (April 17, 2011).
Service Company Insight NBC Universal
LO 2

23. 24-23
Illustration: Fox Company’s management uses a flexible budget
for monthly comparisons of actual and budgeted manufacturing
overhead costs of the Finishing Department. The master budget
for the year ending December 31, 2017, shows expected annual
operating capacity of 120,000 direct labor hours and the following
overhead costs.
Illustration 24-11
Flexible Budget – A Case Study
LO 2

24. 24-24
Four steps for developing the flexible budget.
1. Identify the activity index and the relevant range of activity.
► Activity index: direct labor hours.
► Relevant range: 8,000 – 12,000 direct labor hours per month.
2. Identify variable costs and determine the budgeted variable
cost per unit of activity for each cost.
Illustration 24-12
Flexible Budget – A Case Study
LO 2

25. 24-25
Four steps for developing the flexible budget.
3. Identify the fixed costs and determine the budgeted amount
for each cost.
► Three fixed costs per month:
 Depreciation $15,000.
 Supervision $10,000.
 Property taxes $5,000.
4. Prepare the budget for selected increments of activity within
the relevant range.
► Prepared in increments of 1,000 direct labor hours.
Flexible Budget – A Case Study
LO 2

26. 24-26
Monthly overhead flexible budget
Illustration 24-13
LO 2

27. 24-27
Determine total budgeted costs for Fox Manufacturing Company with
fixed costs of $30,000 and total variable cost $4 per direct labor
hour:
 9,000 direct labor hours : $30,000 + ($4 x 9,000) = $66,000
 8,622 direct labor hours: $30,000 + ($4 x 8,622) = $64,488
Fox uses the formula below to determine total budgeted costs at
any level of activity.
Illustration 24-14
Flexible Budget – A Case Study
LO 2

28. 24-28
Graphic flexible budget data highlighting 10,000 and 12,000
activity levels.
Illustration 24-15
Flexible Budget – A Case Study
LO 2

29. 24-29
 Widely used in production and service departments.
 A type of internal report.
 Consists of two sections:
► Production data for a selected activity index, such as
direct labor hours.
► Cost data for variable and fixed costs.
 Widely used in production and service departments to
evaluate a manager’s performance.
Flexible Budget Reports
LO 2

30. 24-30 Illustration 24-16 LO 2

31. 24-31
Budgets and the Exotic Newcastle Disease
Exotic Newcastle Disease, one of the most infectious bird diseases in
the world, kills so swiftly that many victims die before any symptoms
appear. When it broke out in Southern California, it could have spelled
disaster for the San Diego Zoo. “We have one of the most valuable
collections of birds in the world, if not the most valuable,” says Paula
Brock, CFO of the Zoological Society of San Diego, which operates the
zoo. Bird exhibits were closed to the public for several months (the
disease, which is harmless to humans, can be carried on clothes and
shoes). The tires of arriving delivery trucks were sanitized, as were the
shoes of anyone visiting the zoo’s nonpublic areas. Zookeeper uniforms
had to be changed and cleaned daily. And ultimately, the zoo, with $150
million in revenues, spent almost half a million dollars on quarantine
Service Company Insight San Diego Zoo
LO 2

32. 24-32
Budgets and the Exotic Newcastle Disease
measures. It worked: No birds got sick. Better yet, the damage to the
rest of the zoo’s budget was minimized by another protective measure:
the monthly budget reforecast. “When we get a hit like this, we still have
to find a way to make our bottom line,” says Brock. Thanks to a new
planning process Brock had introduced a year earlier, the zoo’s
scientists were able to raise the financial alarm as they redirected
resources to ward off the disease. “Because we had timely awareness,”
she says, “we were able to make adjustments to weather the storm.”
Source: Tim Reason, “Budgeting in the Real World,” CFO Magazine (July 12,
2005),www.cfodirect.com/cfopublic.nsf/vContentPrint/
649A82C8FF8AB06B85257037004 (accessed July 2005).
Service Company Insight San Diego Zoo
LO 2

33. 24-33
At 9,000 direct labor hours, the flexible budget for indirect
materials is $27,000. If $28,000 of indirect materials costs are
incurred at 9,200 direct labor hours, the flexible budget report
should show the following difference for indirect materials:
a. $1,000 unfavorable.
b. $1,000 favorable.
c. $400 favorable.
d. $400 unfavorable.
Question
Flexible Budgets
LO 2

34. 24-34
In Strassel Company’s
flexible budget graph,
the fixed cost line and
the total budgeted cost
line intersect the
vertical axis at $36,000.
The total budgeted cost
line is $186,000 at an
activity level of 50,000
direct labor hours.
Compute total budgeted
costs at 30,000 direct
labor hours.
DO IT! Flexible Budgets2
LO 2

35. 24-35
Variable costs:
Total budgeted cost line $ 186,000
Fixed costs - 36,000
Variable costs at 50,000 hours 150,000
Activity level at intersect (hours) ÷ 50,000
Variable costs per direct labor hour $ 3
Direct labor hours x 30,000
Total variable costs 90,000
Total fixed costs + 36,000
Total budgeted costs $ 126,000
In Strassel Company’s flexible budget graph, the fixed cost line and the
total budgeted cost line intersect the vertical axis at $36,000. The total
budgeted cost line is $186,000 at an activity level of 50,000 direct labor
hours. Compute total budgeted costs at 30,000 direct labor hours.
DO IT! Flexible Budgets2
LO 2

36. 24-36
Accumulating and reporting costs (and revenues, where
relevant) on the basis of the manager who has the authority to
make the day-to-day decisions about the items.
Conditions:
1. Costs and revenues can be directly associated with the
specific level of management responsibility.
2. Costs and revenues can be controlled by employees at the
level of responsibility with which they are associated.
3. Budget data can be developed for evaluating the manager’s
effectiveness in controlling the costs and revenues.
LEARNING
OBJECTIVE
Apply responsibility accounting to cost and
profit centers.
3
LO 3

37. 24-37
Levels of responsibility for controlling costs.
Responsibility Accounting
Illustration 24-17
LO 3

38. 24-38
 Responsibility center - any individual who has control and
is accountable for activities.
 May extend to any level of management.
 Especially valuable in a decentralized company.
► Control of operations delegated to many managers
throughout the organization.
► Segment – area of responsibility for which reports are
prepared.
Responsibility Accounting
LO 3

39. 24-39
 Two differences from budgeting in reporting costs and
revenues:
1. Distinguishes between controllable and noncontrollable
costs.
2. Emphasizes or includes only items controllable by the
individual manager in performance reports.
 Applies to both profit and not-for-profit entities.
► Profit entities: maximize net income.
► Not-for-profit: minimize cost of providing services.
Responsibility Accounting
LO 3

40. 24-40
Competition versus Collaboration
Many compensation and promotion programs encourage competition
among employees for pay raises. To get ahead, you have to perform
better than your fellow employees. While this may encourage hard work,
it does not foster collaboration, and it can lead to distrust and disloyalty.
Such negative effects have led some companies to believe that
cooperation and collaboration, not competition, are essential in order to
succeed in today’s work environment. As a consequence, many
companies now explicitly include measures of collaboration in their
performance measures. For example, Procter & Gamble measures
collaboration in employees’ annual performance reviews. At Cisco
Systems, the assessment of an employee’s teamwork can affect the
annual bonus by as much as 20%.
Source: Carol Hymowitz, “Rewarding Competitors Over Collaboration No
Longer Makes Sense,” Wall Street Journal (February 13, 2006).
Management Insight Proctor & Gamble
LO 3

41. 24-41
Critical issue is whether the cost or revenue is controllable at
the level of responsibility with which it is associated. A cost
over which a manager has control is called a controllable cost.
1. All costs are controllable by top management.
2. Fewer costs are controllable as one moves down to each
lower level of managerial responsibility.
Costs incurred indirectly and allocated to a responsibility level
are noncontrollable costs.
Controllable Versus Noncontrollable
Revenues and Costs
LO 3

42. 24-42
 Management function that compares actual results
with budget goals.
 Includes both behavioral and reporting principles.
Principles of Performance Evaluations
LO 3

43. 24-43
Management by exception means that top management’s
review of a budget report is focused primarily on differences
between actual results and planned objectives.
 MATERIALITY - Without quantitative guidelines,
management would have to investigate every budget
difference regardless of the amount.
 CONTROLLABILITY OF THE ITEM - Exception guidelines
are more restrictive for controllable items than for items the
manager cannot control.
MANAGEMENT BY EXCEPTION
Principles of Performance Evaluation
LO 3

44. 24-44
1. Managers of responsibility centers should have direct input
into the process of establishing budget goals of their area of
responsibility.
2. The evaluation of performance should be based entirely on
matters that are controllable by the manager being
evaluated.
3. Top management should support the evaluation process.
4. The evaluation process must allow managers to respond to
their evaluations.
5. The evaluation should identify both good and poor
performance.
BEHAVIORAL PRINCIPLES
Principles of Performance Evaluation
LO 3

45. 24-45
1. Contain only data controllable by manager of responsibility
center.
2. Provide accurate and reliable budget data to measure
performance.
3. Highlight significant differences between actual results and
budget goals.
4. Be tailor-made for intended evaluation.
5. Be prepared at reasonable intervals.
REPORTING PRINCIPLES
Principles of Performance Evaluation
LO 3

46. 24-46
Flexible Manufacturing Requires Flexible Accounting
Flexible budgeting is useful because it enables managers to evaluate
performance in light of changing conditions. But the ability to react quickly to
changing conditions is even more important. Among automobile manufacturing
facilities in the U.S., few plants are more flexible than Honda. The manufacturing
facilities of some auto companies can make slight alterations to the features of a
vehicle in response to changes in demand for particular features. But for most
plants, to switch from production of one type of vehicle to a completely different
one typically takes months and costs hundreds of millions of dollars. At the
Honda plant, however, the switch takes minutes. For example, it takes about five
minutes to install different hand-like parts on the robots so they can switch from
making Civic compacts to the longer, taller CR-V crossover. This ability to adjust
quickly to changing demand gave Honda a huge advantage when gas prices
surged and demand for more fuel-efficient cars increased quickly.
Source: Kate Linebaugh, “Honda’s Flexible Plants Provide Edge,” Wall Street Journal
Online (September 23, 2008).
Management Insight Honda
LO 3

47. 24-47
 Involves preparation of a report for each level of
responsibility in the company's organization chart.
 Begins with the lowest level of responsibility and moves
upward to higher levels.
 Permits management by exception at each level of
responsibility.
 Each higher level can obtain the detailed report for
each lower level.
Responsibility Reporting System
LO 3

48. 24-48
Illustration 24-18
Partial organization chart
LO 3

49. 24-49
Report B
Vice president sees
summary of controllable
costs in his/her functional
area.
Report C
Plant manager sees
summary of controllable
costs for each department
in the plant.
Report D
Department manager sees
controllable costs of his/her
department.
Illustration 24-19
Responsibility reporting system
 Permits comparative
evaluations.
 Plant manager can rank
each department
manager’s effectiveness
in controlling
manufacturing costs.
 Comparative rankings
provide incentive for a
manager to control costs.
Responsibility
Reporting
Report A
President sees
summary
data of vice
presidents.

50. 24-50
Report B
Vice president sees
summary of
controllable costs in
his/her functional
area.
Illustration 24-19
Responsibility reporting
system
Report A
President sees
summary data of
vice presidents.

51. 24-51
Report C
Plant manager sees
summary of
controllable costs
for each department
in the plant.
Illustration 24-19
Responsibility reporting
system
Report B
Vice president
sees summary of
controllable costs
in his/her
functional area.

52. 24-52
Report D
Department
manager sees
controllable costs of
his/her department.
Illustration 24-19
Responsibility reporting
system
Report C
Plant manager
sees summary of
controllable costs
for each
department in the
plant.
LO 3

53. 24-53
Three basic types:
 Cost center
► Incurs costs but does not directly generate revenues.
► Managers have authority to incur costs.
► Managers evaluated on ability to control costs.
► Usually a production department or a service
department.
 Profit center
 Investment center
Types of Responsibility Centers
LO 3

54. 24-54
Three basic types:
 Cost center
 Profit center
► Incurs costs and generates revenues.
► Managers judged on profitability of center.
► Examples include individual departments of a retail
store or branch bank offices.
 Investment center
Types of Responsibility Centers
LO 3

55. 24-55
Three basic types:
 Cost center
 Profit center
 Investment center
► Incurs costs, generates revenues, and has investment
funds available for use.
► Manager evaluated on profitability of the center and rate
of return earned on funds.
► Often a subsidiary company or a product line.
► Manager able to control or significantly influence
investment decisions such as plant expansion.
Types of Responsibility Centers
LO 3

56. 24-56
Illustration 24-20
Types of Responsibility Centers
LO 3

57. 24-57
Under responsibility accounting, the evaluation of a
manager’s performance is based on matters that the
manager:
a. Directly controls.
b. Directly and indirectly controls.
c. Indirectly controls.
d. Has shared responsibility for with another manager.
Question
Types of Responsibility Centers
LO 3

58. 24-58
 Based on a manager’s ability to meet budgeted goals
for controllable costs.
 Results in responsibility reports which compare actual
controllable costs with flexible budget data.
► Include only controllable costs in reports.
► No distinction between variable and fixed costs.
RESPONSIBILITY ACCOUNTING FOR COST
CENTERS
Types of Responsibility Centers
LO 3

59. 24-59
Illustration: The following report is adapted from the flexible budget
report for Fox Company in Illustration 24-16.
Illustration 24-21
Types of Responsibility Centers
LO 3

60. 24-60
Illustration: This report assumes:
 Finishing Department manager is able to control all
manufacturing overhead costs except depreciation,
property taxes, and his own monthly salary of $6,000.
 Remaining $4,000 ($10,000 - $6,000) of supervision
costs are assumed to apply to other supervisory
personnel within the Finishing Department, whose
salaries are controllable by the manager.
Types of Responsibility Centers
LO 3

61. 24-61
 Based on detailed information about both controllable
revenues and controllable costs.
 Manager controls operating revenues earned, such as
sales.
 Manager controls all variable costs incurred by the
center because they vary with sales.
RESPONSIBILITY ACCOUNTING FOR PROFIT
CENTERS
Types of Responsibility Centers
LO 3

62. 24-62
 Direct fixed costs
► Relate specifically to one responsibility center.
► Incurred for the sole benefit of the center.
► Called traceable costs since they can be traced
directly to one center.
► Most direct fixed costs are controllable by the profit
center manager.
DIRECT AND INDIRECT FIXED COSTS
RESPONSIBILITY ACCOUNTING FOR
PROFIT CENTERS
LO 3

63. 24-63
 Indirect fixed costs
► Pertain to a company's overall operating activities.
► Incurred for the benefit of more than one profit center.
► Called common costs since they apply to more than
one center.
► Most are not controllable by the profit center manager.
DIRECT AND INDIRECT FIXED COSTS
RESPONSIBILITY ACCOUNTING FOR
PROFIT CENTERS
LO 3

64. 24-64
 Budgeted and actual controllable revenues and costs.
 Uses cost-volume-profit income statement format:
► Deduct controllable fixed costs from the contribution
margin.
► Controllable margin - excess of contribution margin over
controllable fixed costs.
► Noncontrollable fixed costs are not reported.
RESPONSIBILITY REPORT
RESPONSIBILITY ACCOUNTING FOR
PROFIT CENTERS
LO 3

65. 24-65
Note the report does not show the noncontrollable fixed costs of $60,000. These
costs would be included in a report on the profitability of the profit center.
Illustration 24-22
LO 3

66. 24-66
In a responsibility report for a profit center, controllable fixed
costs are deducted from contribution margin to show:
a. Profit center margin
b. Controllable margin
c. Net income
d. Income from operations
Question
Types of Responsibility Centers
LO 3

67. 24-67
Midwest Division operates as a profit center. It reports the following for
the year:
Prepare a responsibility report for December 31, 2017.
DO IT! Profit Center Responsibility Report3

68. 24-68
Return on investment (ROI) is the primary basis for
evaluating the performance of a manager of an investment
center.
 Shows the effectiveness of the manager in using the
assets at his/her disposal.
 Factors in ROI formula are controllable by manager.
LEARNING
OBJECTIVE
Evaluate performance in investment
centers.
4
LO 4

69. 24-69
Illustration 24-23
 Operating assets include current assets and plant
assets used in operations by the center and controlled
by the manager.
 Base average operating assets on the beginning and
ending cost or book values of the assets.
Return on Investment (ROI)
LO 4

70. 24-70
 Scope of manager’s responsibility affects content.
 Investment center is an independent entity for operating
purposes.
 All fixed costs are controllable by center manager.
 Shows budgeted and actual ROI below controllable
margin.
Responsibility Report
LO 4

71. 24-71
Illustration: The Marine Division is an investment center. It has budgeted and
actual average operating assets of $2,000,000.
Illustration 24-24
LO 4

72. 24-72
 Valuation of operating assets.
► Acquisition cost, book value, appraised value, or fair
value.
► Each provides a reliable basis for evaluating
performance.
 Margin (income) measure.
► Controllable margin, income from operations, or net
income.
► Only controllable margin is a valid basis for evaluating
performance of investment center manager.
Judgmental Factors in ROI
LO 4

73. 24-73
Improve ROI by increasing controllable margin, and/or
reducing average operating assets.
Illustration 24-25
Assumed data for Laser Division
Improving ROI
LO 4

74. 24-74
Increase ROI by increasing sales or by reducing variable
and controllable fixed costs.
1. Increase sales by 10%.
► Sales increase $200,000 and contribution margin
increases $90,000 ($200,000 X .45).
► Thus, controllable margin increases to $690,000
($600,000 + $90,000).
► New ROI is 13.8%.
Illustration 24-26
INCREASING CONTROLLABLE MARGIN
LO 4

75. 24-75
Increase ROI by increasing sales or by reducing variable and
controllable fixed costs.
2. Decrease variable and fixed costs 10%.
► Total costs decrease $140,000 [($1,100,000 + $300,000)
X 10%].
► Controllable margin becomes $740,000.
► New ROI becomes 14.8%.
Illustration 24-27
INCREASING CONTROLLABLE MARGIN
LO 4

76. 24-76
► Assume that average operating assets are reduced 10%
or $500,000 ($5,000,000 x .10).
► Average operating assets become $4,500,000.
► Controllable margin remains unchanged at $600,000.
► New ROI is 13.3%.
Illustration 24-28
REDUCING AVERAGE OPERATING
ASSETS
LO 4

77. 24-77
In the formula for return on investment (ROI), the factors for
controllable margin and operating assets are, respectively:
a. Controllable margin percentage and total operating
assets.
b. Controllable margin dollars and average operating
assets.
c. Controllable margin dollars and total assets.
d. Controllable margin percentage and average operating
assets.
Question
Improving ROI
LO 4

78. 24-78
Does Hollywood Look at ROI?
If Hollywood were run like a real business, where things like return on
investment mattered, there would be one unchallenged, sacred principle that
studio chieftains would never violate: Make lots of G-rated movies. No matter
how you slice the movie business—by star vehicles, by budget levels, or by
sequels or franchises—by far the best return on investment comes from the not-
so-glamorous world of G-rated films. The problem is, these movies represent
only 3% of the total films made in a typical year. On the flip side are the R-rated
films, which dominate the total releases and yet yield the worst return on
investment. A whopping 646 R-rated films were released in a recent year—69%
of the total output—but only four of the top-20 grossing movies of the year were
R-rated films. This trend—G-rated movies are good for business but
underproduced, R-rated movies are bad for business and yet overdone—is
something that has been driving economists batty for the past several years.
Source: David Grainger, “The Dysfunctional Family-Film Business,” Fortune (January 10,
2005), pp. 20–21.
Accounting Across the Organization
LO 4

79. 24-79
The service division of Metro Industries reported the following results for
2017.
Sales $400,000
Variable costs 320,000
Controllable fixed costs 40,800
Average operating assets 280,000
Management is considering the following independent courses of action in
2018 in order to maximize the return on investment.
1. Reduce average operating assets by $80,000, with no change in
controllable margin.
2. Increase sales $80,000, with no change in the contribution margin
percentage.
a. Compute controllable margin and the return on investment for 2017.
b. Compute controllable margin and the expected return on investment.
DO IT! Performance Evaluation4
LO 4

80. 24-80
a. Compute controllable margin and the return on investment for
2017.
DO IT! Performance Evaluation4
LO 4

81. 24-81
b. Compute controllable margin and the expected return on
investment.
DO IT! Performance Evaluation4
LO 4

82. 24-82
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