Rocky Mountain Airlines Inc. has two divisions organized as profit centers, the Passenger Division and the Cargo Division. The following divisional income statements were prepared: Rocky Mountain Airlines Inc. Divisional Income Statements For the Year Ended December 31, 20Y9 Passenger Division Cargo Division Revenues $4,200,000 $4,200,000 Operating expenses (2,700,000) (3,500,000) Operating income before support department allocations $1,500,000 $700,000 Support department allocations: Training $(180,000) $(180,000) Flight scheduling (275,000) (275,000) Reservations (375,000) (375,000) Total support department allocations $(830,000) $(830,000) Operating income (loss) $670,000 $(130,000) The support department allocation rates for the support department costs were based on revenues. Because the revenues of the two divisions were the same, the support department allocations to each division were also the same. The following additional information is available: Passenger Division Cargo Division Total Number of personnel trained 600 200 800 Number of flights 1,000 1,500 2,500 Number of reservations requested 30,000 0 30,000 a. Does the operating income (loss) for the two divisions accurately measure performance? Explain. The reported operating income does not accurately measure performance because the support department charges are based on revenues . Revenues are not associated with the profit center manager’s use of the support department services. a. Responsibility accounting for profit centers focuses on reporting revenues, expenses and operating income. Thus, responsibility accounting reports for profit centers take the form of income statements. Consider whether the costs are correctly allocated to the Cargo Division. b. Correct the divisional income statements, using the activity bases provided in revising the service department charges. If an amount box does not require an entry, leave it blank, or enter "0". Round your interim calculations to two decimal places, if required. Rocky Mountain Airlines Inc. Divisional Income Statements For the Year Ended December 31, 20Y9 Passenger Division Cargo Division Operating income before support department allocations Support department allocations: Total support department allocations

Rocky Mountain Airlines Inc. has two divisions organized as profit centers, the Passenger Division and the Cargo Division. The following divisional income statements were prepared: Rocky Mountain Airlines Inc. Divisional Income Statements For the Year Ended December 31, 20Y9 Passenger Division Cargo Division Revenues $4,200,000 $4,200,000 Operating expenses (2,700,000) (3,500,000) Operating income before support department allocations $1,500,000 $700,000 Support department allocations: Training $(180,000) $(180,000) Flight scheduling (275,000) (275,000) Reservations (375,000) (375,000) Total support department allocations $(830,000) $(830,000) Operating income (loss) $670,000 $(130,000) The support department allocation rates for the support department costs were based on revenues. Because the revenues of the two divisions were the same, the support department allocations to each division were also the same. The following additional information is available: Passenger Division Cargo Division Total Number of personnel trained 600 200 800 Number of flights 1,000 1,500 2,500 Number of reservations requested 30,000 0 30,000 a. Does the operating income (loss) for the two divisions accurately measure performance? Explain. The reported operating income does not accurately measure performance because the support department charges are based on revenues . Revenues are not associated with the profit center manager’s use of the support department services. a. Responsibility accounting for profit centers focuses on reporting revenues, expenses and operating income. Thus, responsibility accounting reports for profit centers take the form of income statements. Consider whether the costs are correctly allocated to the Cargo Division. b. Correct the divisional income statements, using the activity bases provided in revising the service department charges. If an amount box does not require an entry, leave it blank, or enter "0". Round your interim calculations to two decimal places, if required. Rocky Mountain Airlines Inc. Divisional Income Statements For the Year Ended December 31, 20Y9 Passenger Division Cargo Division Operating income before support department allocations Support department allocations: Total support department allocations

Survey of Accounting (Accounting I)

8th Edition

ISBN:9781305961883

Author:Carl Warren

Publisher:Carl Warren

Chapter14: Decentralized Operations

Section: Chapter Questions

Problem 14.5.3P

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Rocky Mountain Airlines Inc. has two divisions organized as profit centers, the Passenger Division and the Cargo Division. The following divisional income statements were prepared:

Rocky Mountain Airlines Inc. Divisional Income Statements For the Year Ended December 31, 20Y9
	Passenger Division		Cargo Division
Revenues			$4,200,000			$4,200,000
Operating expenses		(2,700,000)		(3,500,000)
Operating income before support department allocations		$1,500,000		$700,000
Support department allocations:
	Training		$(180,000)		$(180,000)
	Flight scheduling		(275,000)		(275,000)
	Reservations		(375,000)		(375,000)
	Total support department allocations		$(830,000)		$(830,000)
Operating income (loss)			$670,000			$(130,000)

The support department allocation rates for the support department costs were based on revenues. Because the revenues of the two divisions were the same, the support department allocations to each division were also the same.

The following additional information is available:

	Passenger Division	Cargo Division	Total
Number of personnel trained	600		200	800
Number of flights	1,000		1,500	2,500
Number of reservations requested	30,000		0	30,000

a. Does the operating income (loss) for the two divisions accurately measure performance? Explain.

The reported operating income does not accurately measure performance because the support department charges are based on revenues . Revenues are not associated with the profit center manager’s use of the support department services.

a. Responsibility accounting for profit centers focuses on reporting revenues, expenses and operating income. Thus, responsibility accounting reports for profit centers take the form of income statements. Consider whether the costs are correctly allocated to the Cargo Division.

b. Correct the divisional income statements, using the activity bases provided in revising the service department charges. If an amount box does not require an entry, leave it blank, or enter "0". Round your interim calculations to two decimal places, if required.

Rocky Mountain Airlines Inc.
Divisional Income Statements
For the Year Ended December 31, 20Y9
	Passenger Division	Cargo Division


Operating income before support department allocations
Support department allocations:



Total support department allocations

Rocky Mounta in Airlines Inc.
Divisional Income Statements
For the Year Ended December 31, 20Y9
Passenger Division
Cargo Division
$ 4,200,000
(3,500,000)
$ 700,000
Revenues
$4,200,000
Operating expenses
Operating income before support department allocations
Support department allocations:
(2,700,000)
$ 1,500,000
$ (180,000)
$ (180,000)
Training
Flight scheduling
(275,000)
(275,000)
Reservations
(375,000)
$ (830,000)
$ 670,000
(375,000)
Total support department allocations
Operating income (loss)
$ (830,000)
$ (130,000)

Passenger
Division
Cargo
Division
Total
Number of personnel trained
Number of flights
Number of reservations requested
600
200
800
1,000
1,500
2,500
30,000
30,000

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