The classification of costs between relevant costs and irrelevant costs is important in the context of managerial decision-making. Harmony Industries is a company that manufactures personal care products. It has three divisions: hair care, skin care and dental care. Following is an extract from the financial statements for the year ending 31 December 2019: Hair Care Skin Care Dental Care Revenue $900 million $600 million $300 million Net income/(loss) $210 million $100 million ($50 million) In the board meeting summoned for review of financial statements, a director proposed that the company should dispose of the dental care division because it is losing money. The CEO argued that the board can’t conclude that a segment is losing money just because it generated net loss for a period. He suggested that the company’s chief financial officer should conduct a detailed analysis for presentation in the next board meeting. Being the company’s management accountant, the CFO asked you to identify which of the following costs are relevant for the decision: CEO’s salary Salaries of Dental Care workers who can be laid-off Salaries of Dental Care workers who can’t be laid-off One-time retirement benefits to be paid to laid-off workers Cost of raw materials consumed by Dental Care division Annual directors’ fee Interest paid on loans raised for Dental Care division Salary of the Dental Care chief operating officer Company-wide quality certification fee License fee paid for the rights to manufacture dental care products Head office rent Audit fee (if it does not depend on the number of divisions) Taking into consideration the case of Harmony above, and as the company’s management accountant, provide the proper classification for each of the following costs as specified by the CFO above and briefly provide your reasoning for your choice

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Related questions

Concept explainers

Question

The classification of costs between relevant costs and irrelevant costs is important in the context of managerial decision-making. Harmony Industries is a company that manufactures personal care products. It has three divisions: hair care, skin care and dental care. Following is an extract from the financial statements for the year ending 31 December 2019:

	Hair Care	Skin Care	Dental Care
Revenue	$900 million	$600 million	$300 million
Net income/(loss)	$210 million	$100 million	($50 million)

In the board meeting summoned for review of financial statements, a director proposed that the company should dispose of the dental care division because it is losing money. The CEO argued that the board can’t conclude that a segment is losing money just because it generated net loss for a period. He suggested that the company’s chief financial officer should conduct a detailed analysis for presentation in the next board meeting. Being the company’s management accountant, the CFO asked you to identify which of the following costs are relevant for the decision:

CEO’s salary
Salaries of Dental Care workers who can be laid-off
Salaries of Dental Care workers who can’t be laid-off
One-time retirement benefits to be paid to laid-off workers
Cost of raw materials consumed by Dental Care division
Annual directors’ fee
Interest paid on loans raised for Dental Care division
Salary of the Dental Care chief operating officer
Company-wide quality certification fee
License fee paid for the rights to manufacture dental care products
Head office rent
Audit fee (if it does not depend on the number of divisions)

Taking into consideration the case of Harmony above, and as the company’s management accountant, provide the proper classification for each of the following costs as specified by the CFO above and briefly provide your reasoning for your choice

Expert Solution

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions