Cost Accounting (14th Edition)

CHOOSING THE DETAILS OF THE PERFORMANCE MEASURES 817
Exhibit 23-2 ROI for Hospitality Inns: Computed Using Current-Cost Estimates as of the End of 2012
for Depreciation Expense and Long-Term Assets
A B C D E F G H I J
1 Step 1: Restate long-term assets from gross book value at historical cost to gross book value at current cost as of the end of 2012.
Construction Gross book value of
Gross book value of Construction
cost index in
long-term assets at × cost index in ÷
=
long-term assets at
year of current cost at end of
historical cost
2012
2
construction
2012
3 San Francisco $ 1,400,000 × (180 ÷ 100) = $ 2,520,000
4 C hicago
$ 2,100,000 × (180 ÷ 144) = $ 2,625,000
5 New Orleans $ 2,730,000 × (180 ÷ 160) = $ 3,071,250
6
7 Step 2: Derive net book value of long-term assets at current cost as of the end of 2012. (Assume estimated useful life of each hotel is 14 years.)
Gross book value of
Net book value of
Estimated
long-term assets at
Estimated total long-term assets at
× remaining ÷
=
current cost at
useful life
current cost at
useful life
8
end of 2012
end of 2012
9 San Francisco $ 2,520,000 × (6 ÷ 14) = $ 1,080,000
10 C hicago
$ 2,625,000 × (10 ÷ 14) = $ 1,875,000
11 New Orleans $ 3,071,250 × (12 ÷ 14) = $ 2,632,500
12
13 Step 3: Compute current cost of total assets in 2012. (Assume current assets of each hotel are expressed in 2012 dollars.)
Current assets at Long-term Current cost of
end of 2012 + assets from = total assets at
14
(from Exhibit 23-1)
Step 2 end of 2012
15 San Francisco
16 C hicago
17 New Orleans
$ 400,000
$ 500,000
$ 660,000
+
+
+
$1,080,000
$1,875,000
$2,632,500
=
=
=
$ 1,480,000
$ 2,375,000
$ 3,292,500
18
19 Step 4: Compute current-cost depreciation expense in 2012 dollars.
Gross book value of
Current-cost
Estimated
long-term assets at
depreciation
÷ total useful =
current cost at end of
expense in 2012
life
20
2012 (from Step 1)
dollars
21 San Francisco $ 2,520,000 ÷ 14 = $ 180,000
22 C hicago
$ 2,625,000 ÷ 14 = $ 187,500
23 New Orleans $ 3,071,250 ÷ 14 = $ 219,375
24
25 Step 5: Compute 2012 operating income using 2012 current-cost depreciation expense.
Current-cost
Operating income for
depreciation Historical-cost 2012 using currentcost
depreciation
Historical-cost
– expense in – depreciation =
operating income
2012 dollars expense
expense in 2012
(from Step 4)
26
dollars
27 San Francisco
28 Chicago
$ 240,000
$ 300,000
–
–
($ 180,000
($ 187,500
–
–
$ 100,000)
$ 150,000)
=
=
$ 160,000
$ 262,500
29 New Orleans $ 510,000 – ($ 219,375 – $ 195,000) = $ 485,625
30
31 Step 6: Compute ROI using current-cost estimates for long-term assets and depreciation expense.
Operating income for
2012 using currentcost
depreciation
expense in 2012
32
dollars (from Step 5)
33 San Francisco $ 160,000
34 Chicago
$ 262,500
35 New Orleans $ 485,625
÷
÷
÷
÷
Current cost
of total assets
at end of 2012
(from Step 3)
$1,480,000
$2,375,000
$3,292,500
=
ROI using
current-cost
estimate
= 10.8%
= 11.1%
= 14.7%