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Answer questions about the incentive program at company XZ. Provide rationale for your responses.
Part 1 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 annual earnings targets 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.
Complete the following:
Prepared a budgeted income statement and balance sheet for United Mobile Corporation.
Part 2 Scenario
United Mobile Corporation appeared to be experiencing a good year. First quarter sales were one-third ahead of last year and the sales department predicted that this rate would continue throughout the year. The controller asked Megan Casey, a summer accounting intern, to draft a forecast for the year and analyze the differences from last year’s results. She based the forecast on first quarter results plus the expected production costs for the remainder of the year. She worked with production, sales, and other department heads to get the necessary information. The results of these efforts follow:
UNITED MOBILE CORPORATION | ||
Cash | $5,280 | |
Accounts Receivable | 352,000 | |
Inventory (January 1, year two) | 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 |
Adjustments for the change in inventory and for income taxes have not been made. The scheduled production for this year is 495,000 units and planned sales volume is 440,000 units. Sales and production volume was 330,000 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:
UNITED MOBILE CORPORATION | |||
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 |
Complete the following:
Prepared a budgeted income statement and balance sheet.
Calculate divisional income, operating margin, ROI, and residual income for two divisions of Wellness Pharmaceuticals. Analyze the financial performance of the two divisions based on your review of their selected financial data. Explain the current financial situation for each division in two or more paragraphs.
Part 3 Scenario
Wellness Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, which are 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 uses beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes.
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 |
Complete the following:
Review sales revenue, manufacturing costs, and all other fixed costs to prepare a flexible budget for Oak Grove, Inc.
Part 4 Scenario
Oak Grove, Inc., reports the following information concerning operations for the most recent month:
Actual (based on | Master Budget (based | |
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 |
There are no inventories.
Complete the following:
Prepare a flexible budget for Oak Grove, Inc.
Prepare a cost variance analysis for the variable costs at Delmar Products.
Part 5 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 |
Complete the following:
Prepare a cost variance analysis for the variable costs.
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Assessment 4
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