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CMA Intermediate · Management Accounting · Responsibility Accounting

Sabarmati Auto Ltd.'s Division P has an investment of Rs 40,00,000. Its sales are Rs 30,00,000, variable costs Rs 14,00,000, controllable fixed costs Rs 4,00,000, and non-controllable fixed costs traceable to the division Rs 2,00,000. Cost of capital is 10%. Management evaluates the manager on controllable residual income and the division on residual income after traceable costs. What are these two figures respectively?

The two figures are Rs 8,00,000 and Rs 6,00,000. Controllable margin is Rs 12,00,000, and after a Rs 4,00,000 capital charge the manager's residual income is Rs 8,00,000. Deducting Rs 2,00,000 traceable non-controllable costs gives the division's residual income of Rs 6,00,000.

  1. ARs 8,00,000 and Rs 6,00,000
  2. BRs 12,00,000 and Rs 10,00,000
  3. CRs 8,00,000 and Rs 2,00,000Correct
  4. DRs 6,00,000 and Rs 2,00,000

Explanation

Contribution = 16,00,000; controllable margin = 12,00,000; capital charge = 4,00,000. Manager's controllable RI = 12,00,000 - 4,00,000 = 8,00,000. Segment margin = 12,00,000 - 2,00,000 = 10,00,000; RI = 10,00,000 - 4,00,000 = 6,00,000? Recheck: 10,00,000 - 4,00,000 = 6,00,000, so the pair is 8,00,000 and 6,00,000.

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