September/December 2017 question number 32

KKanan6y ago

Hi Dear Tutor, I have another question. Note 1 says that 30% of depreciation relates to assets controlled but not owned by head office. Division C ( for understanding I just take one of them) Fixed cost 945000 include 165000 let us assume Fixed cost without depreciation is 945000-165000=780000 30% of 1650000=49500 70% of 165000=115500 the question says head office has little intervention on both divisions. if 70% of depreciation belongs to head office and 30% is controlled by the division why do I deduct 30%of depreciation?Iif we deduct 30% of depreciation this means that head office more intervention over both divisions. So confusing could you explain it please? External sales-------------X internal sales-------------X total sales-----------------X fixed cost-----------------(x)-------------controllable variable cost-------------(x)--------------controllable controllable profit--------x fixed cost-----------------(x)---------------non-controllable variable cost-------------(x)----------------non-controllable traceable profit----------(x) head office cost---------(x) residual profi--------------x

John MoffatTutor6y ago#1

You can deduct the 30% depreciation from the fixed costs if you want (although it is rather wasting time) and you will get the same answer. We would do it because the 30% expense is not controllable by the division and we want the profit controllable by the division. More sensible and faster is to do as in the examiners answer. The profits given in the question will be after charging the full depreciation. To get the profit that is controllable by the division, we add back the 30% because that part of the depreciation expense is controlled by the head office.