Cost Accounting unit 7

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 Budgeta

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.

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Home>Business & Finance homework help>Accounting homework help>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 Budgeta

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.

Applied Sciences
Architecture and Design
Biology
Business & Finance
Chemistry
Computer Science
Geography
Geology
Education
Engineering
English
Environmental science
Spanish
Government
History
Human Resource Management
Information Systems
Law
Literature
Mathematics
Nursing
Physics
Political Science
Psychology
Reading
Science
Social Science
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Blog
Archive
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Contact
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