Cost Accounting unit 7

After reading information on the fundamentals of cost control systems in Chapter 12 of the Fundamentals of Cost Accounting text, complete the following exercise and problem. In the exercise you will apply your knowledge of management control systems, and in the problem you will analyze a performance report.

Complete the following exercise and problem:

· Exercise 12-31, "Management Control Systems and Incentives," page 487.

· Problem 12-43, "Analyze Performance Report for Decentralized Organization," page 490.

12-31. Management Control Systems and Incentives

( LO 12-1 , 3 , 5 )

A company that we call “DC” is a Fortune 100 diversified conglomerate with operations in many industries around the world. Top management focuses on the annual earnings in evaluating the performance of division managers. Each year is a new ballgame for division managers.

The incentive plan includes an annual bonus that ranges from 7 to 40 percent of division managers’ salaries. There is an element of relative performance evaluation in that the target earnings for each year are based on how well companies in the same industry are performing. Once the target is set, it is not changed during the year.

Failing to meet a division’s target has serious consequences for the division manager. First, the manager loses some or all of the potential bonus. Second, a manager who misses a target will find her job in jeopardy. Missing a target two years in a row generally means that the manager will be fired.

Required

a. What incentives does this plan give to division managers?

b. Is this a good plan? Would you want to be a division manager in this company?

12-43. Analyze Performance Report for Decentralized Organization

( LO 12-5 )

Hall O’ Fame Products is a nationwide sporting goods manufacturer. The company operates with a widely based manufacturing and distribution system that has led to a highly decentralized management structure. Each division manager is responsible for producing and distributing corporate products in one of eight geographical areas of the country.

Division managers are evaluated using a performance measure that is calculated as the division’s contribution to corporate profits before taxes less a 20 percent investment charge on the division’s investment base. The investment base of each division is the sum of its year-end balances of accounts receivable, inventories, and net plant fixed assets (cost less accumulated depreciation). Corporate policies dictate that divisions minimize their investments in receivables and inventories. Investments in fixed plant assets are decisions jointly made by the division and corporate based on proposals made by division plant managers, available corporate funds, and general corporate policy.

James Davenport, division manager for the California sector, prepared the year 2 and preliminary year 3 budgets for his division late in year 1. Final approval of the year 3 budget took place in late year 2 after adjustments for trends and other information developed during year 2. Preliminary work on the year 4 budget also took place at that time. In early October of year 3, Davenport asked the division controller to prepare a report that presents performance for the first nine months of year 3. The report follows:

Hall O’ Fame Products California Sector
	Year 3	Year 2
	Annual Budget	Nine-Month Budget a	Nine-Month Actual	Annual Budget	Actual Budget
Sales	$19,600	$14,700	$15,400	$17,500	$17,010
Divisional costs and expenses
Direct materials and labor	$ 7,448	$ 5,586	$ 6,965	$ 6,300	$ 6,230
Supplies	308	231	245	245	301
Maintenance and repairs	1,400	1,050	420	1,225	1,120
Plant depreciation	840	630	630	770	770
Administration	840	630	630	630	700
Total divisional costs and expenses	$10,836	$ 8,127	$ 8,890	$ 9,170	$ 9,121
Divisional margin	$ 8,764	$ 6,573	$ 6,510	$ 8,330	$ 7,889
Allocated corporate fixed costs	2,520	1,890	1,680	2,380	2,240
Divisional profits	$ 6,244	$ 4,683	$ 4,830	$ 5,950	$ 5,649
	Year 3	Year 2
	Budgeted Balance 12/31/Year 3	Budgeted Balance 9/30/Year 3	Actual Balance 9/30/Year 3	Budgeted Balance 12/31/Year 2	Actual Balance 12/31/Year 2
Divisional investment
Accounts receivable	$ 1,960	$ 2,030	$ 1,750	$ 1,750	$ 1,750
Inventories	3,500	3,500	4,550	3,150	3,325
Plant fixed assets (net)	9,240	9,450	7,700	8,050	7,700
Total	$14,700	$14,980	$14,000	$12,950	$12,775

Required

a. Evaluate the performance of James Davenport for the nine months ending September 30, year 3. Support your evaluation with pertinent facts from the problem.

b. Identify the features of Hall O’ Fame’s division performance measurement reporting and evaluation system that need to be revised if it is to effectively reflect the responsibilities of the divisional managers.

After reading information on planning and budgeting in Chapter 13 of the Fundamentals of Cost Accounting text, complete the following problem. The problem will help you apply your knowledge of a comprehensive budget planning cycle.

Complete the following problem:

· Problem 13-58, "Comprehensive Budget Plan," page 539.

13-58. Comprehensive Budget Plan

(LO 13-4, 5, 6)

Panther Corporation appeared to be experiencing a good year. Sales in the first quarter were one-third ahead of last year, and the sales department predicted that this rate would continue throughout the entire year. The controller asked Janet Nomura, a summer accounting intern, to prepare a draft forecast for the year and to analyze the differences from last year’s results. She based the forecast on actual results obtained in the first quarter plus the expected costs of production to be completed in the remainder of the year. She worked with various Page 540department heads (production, sales, and so on) to get the

PANTHER CORPORATION Expected Account Balances for December 31, Year 2
Cash	$ 4,800
Accounts receivable	320,000
Inventory (January 1, year 2)	192,000
Plant and equipment	520,000
Accumulated depreciation		$ 164,000
Accounts payable		180,000
Notes payable (due within one year)		200,000
Accrued payables		93,000
Common stock		280,000
Retained earnings		432,800
Sales revenue		2,400,000
Other income		36,000
Manufacturing costs
Materials	852,000
Direct labor	872,000
Variable overhead	520,000
Depreciation	20,000
Other fixed overhead	31,000
Marketing
Commissions	80,000
Salaries	64,000
Promotion and advertising	180,000
Administrative
Salaries	64,000
Travel	10,000
Office costs	36,000
Income taxes	—
Dividends	20,000
	$3,785,800	$3,785,800

Adjustments for the change in inventory and for income taxes have not been made. The scheduled production for this year is 450,000 units, and planned sales volume is 400,000 units. Sales and production volume was 300,000 units last year. The company uses a full-absorption costing and FIFO inventory system and is subject to a 40 percent income tax rate. The actual income statement for last year follows:

PANTHER CORPORATION Statement of Income and Retained Earnings For the Budget Year Ended December 31, Year 1
Revenues
Sales revenue		$1,800,000
Other income		60,000	$1,860,000
Expenses
Cost of goods sold
Materials	$ 528,000
Direct labor	540,000
Variable overhead	324,000
Fixed overhead	48,000
	$1,440,000
Beginning inventory	192,000
	$1,632,000
Ending inventory	192,000	$1,440,000
Selling
Salaries	$ 54,000
Commissions	60,000
Promotion and advertising	126,000	240,000
General and administrative
Salaries	$ 56,000
Travel	8,000
Office costs	32,000	96,000
Income taxes		33,600	1,809,600
Operating profit			50,400
Beginning retained earnings			402,400
Subtotal			$ 452,800
Less dividends			20,000
Ending retained earnings			$ 432,800

Prepared a budgeted income statement and balance sheet.