Using Cost Accounting Data to Evaluate Management Control Systems

Instructions

Assessment 4 Part 1: Management Control Systems and Incentives

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:

  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? Why or why not?
Assessment 4 Part 2: Comprehensive Budget Plan

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
Expected Account Balances for December 31, Year 2

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
Statement of Income and Retained Earnings
For 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

Complete the following:

Prepared a budgeted income statement and balance sheet.

Assessment 4 Part 3: Comparing Business Units Using Divisional Income, ROI, and Residual Income

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:

  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: Prepare Flexible Budget

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
actual 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

There are no inventories.

Complete the following:

Prepare a flexible budget for Oak Grove, Inc.

Assessment 4 Part 5: Manufacturing Variances

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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Business Management Assignment Help / Accounting Assigned To brittanymosher
18 Nov 2019
Due Date: 18 Nov 2019

Answers (1)

  1. Mytutionguru

    Assessment 4

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