Assessment 4: Using Cost Accounting Data to Evaluate Management Control Systems

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Assement 4 Part 1

Assessment 4 Part 1: Management Control Systems and Incentives

Scenario

XZ 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 challenge for division managers. The incentive plan includes an annual bonus that ranges from 7 to 20 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. Failure to meet a division’s targeted earnings has serious consequences for the division manager: the manager can lose some or all of the potential bonus and will find their job in jeopardy. Missing a target two years in a row generally means that the manager will be replaced.

REQUIRED

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

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

Assessment 4 Part 2

Assessment 4 Part 2: Comprehensive Budget Plan

Scenario:
United Mobile 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 Megan Casey, 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 department heads (production, sales, and so on) to get the necessary information. The results of these efforts follow:
UNITED MOBILE CORPORATION Expected Account Balances for December 31, Year 2
Cash	$ 5,280
Accounts receivable	352,000
Inventory (January 1, year 2)	211,200
Plant and equipment	572,000
Accumulated depreciation		$ 180,400
Accounts payable		198,000
Notes payable (due within one year)		220,000
Accrued payables		102,300
Common stock		308,000
Retained earnings		476,080
Sales revenue		2,640,000
Other income		39,600
Manufacturing costs
Materials	937,200
Direct labor	959,200
Variable overhead	572,000
Depreciation	22,000
Other fixed overhead	34,100
Marketing
Commissions	88,000
Salaries	70,400
Promotion and advertising	198,000
Administrative
Salaries	70,400
Travel	11,000
Office costs	39,600
Income taxes	—
Dividends	22,000
	$4,164,380	$ 4,164,380.00
UNITED MOBILE CORPORATION Statement of Income and Retained EarningsFor the Budget Year Ended December 31, Year 1
Revenues
Sales revenue		$1,980,000
Other income		66,000	$1,860,000
Expenses
Cost of goods sold
Materials	$ 580,800
Direct labor	594,000
Variable overhead	356,400
Fixed overhead	52,800
	$1,584,000
Beginning inventory	211,200
	$1,795,200
Ending inventory	211,200	$1,584,000
Selling
Salaries	$ 59,400
Commissions	66,000
Promotion and advertising	138,600	264,000
General and administrative
Salaries	$ 61,600
Travel	8,800
Office costs	35,200	105,600
Income taxes		36,960
			1,990,560
Operating profit			55,440
Beginning retained earnings			442,640
Subtotal			$ 498,080
Less dividends			22,000
Ending retained earnings			$ 476,080
REQUIRED
Prepared a budgeted income statement and balance sheet.

Assessment 4 Part 3

Assessment 4 Part 3: Comparing Business Units Using Divisional Income, ROI, and Residual Income
Scenario:
Wellness Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, based on the products they produce. BD Division is smaller and the life of the products it produces tend to be shorter than those produced by the larger PM Division. Selected financial data for the past year is shown below. Divisional investment is as of the beginning of the year. Wellness Pharmaceuticals uses a 9 percent cost of capital and beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes.e building. The following information (in $000s) appears in the accounting records for last year:
	BD Division	PM Division
Allocated Corporate Overhead	$660	$1,980
Cost of Goods Sold	3,520	7,700
Divisional Investment	9,900	88,000
Research and Development	2,200	3,960
Sales	8,800	2,200
SG&A	770	1,683
REQUIRED
1. Compute divisional income for the two divisions.
2. Calculate the operating margin, which is equivalent to the return on sales, for the two divisions.
3. Calculate ROI for the two divisions.
4. Compute residual income for the two divisions.
5. Assess the financial performance of the two divisions based on your analysis.

Assessment 4 Part 4

Assessment 4 Part 4: Prepare Flexible Budget
Scenario:
Oak Grove, Inc., reports the following information concerning operations for the most recent month. There are no inventories.
	Actual (based on actual of 1080 units)	Master Budget (based on budgeted 1,200 units)
Sales revenue	$176,640	$192,000
Less manufacturing costs
Direct labor	27,264	28,800
Materials	23,040	26,880
Variable overhead	15,744	19,200
Marketing	10,076	11,520
Administrative	9,600	9,600
Total variable costs	$85,824	$96,000
Contribution margin	$90,816	$96,000
Fixed costs
Manufacturing	9,380	9,600
Marketing	19,968	19,200
Administrative	19,122	19,200
Total fixed costs	$ 48,420	$48,000
Operating profits	$ 42,396	$48,000
REQUIRED
Prepare a flexible budget for Oak Grove, Inc.

Assessment 4 Part 5

Assessment 4 Part 5: Manufacturing Variances
Scenario:
Delmar Products prepares its budgets on the basis of standard costs. A responsibility report is prepared monthly, showing the differences between master budget and actual results. Variances are analyzed and reported separately. There are no materials inventories. The following information relates to the current period:
Standard costs (per unit of output)
Direct materials, 6 gallons @ $4.00 per gallon	$24
Direct labor, 4 hours @ $40 per hour	160
Factory overhead
Variable (25% of direct labor cost)	40
Total standard cost per unit	$224
Actual costs and activities for the month follow:
Materials used	15,120 gallons at $3.60 per gallon
Output	2,280 units
Actual labor costs	6,400 hours at $44 per hour
Actual variable overhead	$72,900
REQUIRED
Prepare a cost variance analysis for the variable costs.