Wayne Coyle, the controller of PEI Potato Co., is disillusioned with the company’s system of evaluating the performance of divisional profit centers and their managers. The present system focuses on a comparison of budgeted to actual income from operations. Coyle’s major concern with the current system is the ease with which profit center managers can manipulate the measure “Income from operations.” Most corporate sales are made on credit and most purchases are made on account. The profit centers are organized according to product line. Following is the second quarter 2010 income statement for one of the company’s profit centers: Sales …………………………………………………….$31,500,000 Cost of goods sold ………………………………..(25,500,000) Gross profit …………………………………………..$ 6,000,000 Selling and administrative expenses ……..(4,500,000) Income from operations ………………………..$ 1,500,000 Coyle has suggested that company management replace the accrual-based income from operations evaluation measure with a cash flow from operations measure. He believes this measure will be less susceptible to manipulation by profit center managers. To defend his position, he compiles a cash flow income statement for the same profit center: Cash receipts from customers …………………………………………………….$26,400,000 Cash payments for production labor, materials, and overhead ……..(21,600,000) Cash payments for selling and administrative activities …………………(4,200,000) Cash flow from operations ……………………………………………………………...$ 600,000 a. If Coyle is correct that profit center managers are manipulating the income measure, where are manipulations likely taking place? b. Explain whether the proposed cash flow measure would be less subject to manipulation than the income measure. c. Explain whether manipulation would be reduced if both the cash flow and income measures were utilized. d. Do the cash and income measures reveal different information about profit center performance? Explain. e. How could the existing income statement be used more effectively in evaluating performance?
> Why is the trend in U.S. business away from automatic pay increases and toward increased use of incentive compensation plans?
> A local businesswoman, Jane Aire, has hired you and a colleague, Joanna, from your cost accounting class to advise her regarding her small manufacturing business that makes leather valises. The business was organized just two years ago and has failed to
> What are the benefits of organizational mission and values statements? How are organizational missions and strategies related to performance measures?
> What problems might be encountered when attempting to implement a cost-based transfer pricing system? A market-based transfer pricing system?
> What are transfer prices, and why do companies use them? How could the use of transfer prices improve or impair goal congruence?
> Compare and contrast the direct, step, and algebraic methods of allocating support department costs. What are the advantages and disadvantages of each method?
> The four criteria for selecting an allocation base for support department costs should be applied equally.” Discuss the merits of this statement.
> Why are support department costs often allocated to operating departments? Is such an allocation process always useful from a decision-making standpoint? How might support department cost allocation create a feeling of cost responsibility among managers
> What is suboptimization, and what factors contribute to it in a decentralized firm?
> Why are responsibility reports prepared? Is it appropriate for a single responsibility report to be prepared for a division of a major company? Why or why not?
> Explain why the determination of transfer prices is more complex in a multinational, rather than in a domestic, setting.
> How can support departments use transfer prices, and what advantages do transfer prices have over cost allocation methods?
> Identify which of the CVP assumptions is violated in each of the circumstances described below. a. Price per unit declines as the volume of sales and production increase. b. Labor productivity increases as the volume of production declines. c. The sales
> What type of transfer price would you recommend be used in each of the following selling and buying responsibility centers: cost, revenue, profit, and investment? How and why would such prices be set?
> Wayne Litcomb is the president and chief operating officer of Litcomb Electronics. He founded the company and has led it to its prominent place in the electronics field. He has manufacturing plants or retail outlets in 40 states. Litcomb is finding, howe
> In the present highly competitive environment, why has cost management risen to such a high level of concern whereas price management has declined in importance?
> How does a product’s life cycle stage influence the nature of information required to successfully manage costs of that product?
> How could an organization’s culture be used as a control mechanism?
> What information could be generated by a cost management system that would help an organization manage its core competencies?
> How does the choice of organizational form influence the design of a firm’s cost management system?
> Why does a cost management system necessarily have both a short-term and longterm focus?
> What is a control system? What purpose does a control system serve in an organization?
> What is CAM-I, and why is it organized? Appendix: Most companies combine many materials and various classes of direct labor to produce goods. In such settings, the material and labor variance computations presented in this chapter are insufficient. Whe
> Niobrara Pesticide Company’s new president has learned that, for the past four years, the company has been dumping its industrial waste into the local river and falsifying reports to authorities about the levels of suspected carcinogens in that waste. Th
> Why must not-for-profit organizations determine when it is appropriate to allocate any cost for a joint activity among fund-raising, program, and administrative activities?
> When is by-product/scrap cost considered in setting the predetermined overhead rate in a job order costing system? When is cost not considered?
> Which of the two common approaches used to account for by-product/scrap provides better information to management? Discuss the rationale for your answer.
> Why are approximated, rather than actual, net realizable values at split-off sometimes used to allocate joint cost?
> Compare the advantages and disadvantages of the two primary methods used to allocate joint cost to joint products.
> Why is cost allocation necessary in accounting? Why is it necessary in a joint process?
> In a company that engages in a joint production process, will all processing stop at the split-off point? Discuss the rationale for your answer.
> How does management determine how to classify each type of output from a joint process? Is this decided before or after production?
> What is the objective of managing the sales mix of products? What are the major factors that influence sales mix?
> What is a scarce resource? Why is an organization’s most scarce resource likely to change from time to time?
> Compute the answers to each of the following independent situations. a. Orlando Ray sells liquid and spray mouthwash in a sales mix of 1:2, respectively. The liquid mouthwash has a contribution margin of $10 per unit; the spray’s CM is $5 per unit. Annua
> What is outsourcing? Why is the practice heatedly debated in the United States?
> What are opportunity costs and why are they often the most difficult costs to analyze in decision making?
> How does the passage of time affect the set of costs that is relevant to a decision?
> What is segment margin? How is segment margin used in the quantitative analysis of a decision to drop or keep a product line?
> What is a special order decision? Under what circumstances would a company refuse to accept a special order?
> Define and explain the relationship between margin of safety and degree of operating leverage.
> A multiproduct company has a sales mix of nine widgees to three squigees. Widgees have a contribution margin ratio of 45 percent, and squigees have a contribution margin ratio of 80 percent. If the sales mix changes to six widgees to six squigees, will t
> How is the “bag” assumption used in CVP analysis for a multiproduct firm? What additional assumption must be made in multiproduct CVP analysis that doesn’t pertain to a single-product CVP situation?
> Why is CVP analysis generally used as a short-run tool? Would CVP ever be appropriate as a long-run model?
> What is the contribution margin ratio? How is it used to calculate the break-even point?
> A friend of yours, attending another university, states she learned that CVP is a short-run-oriented model and is, therefore, of limited usefulness. Your professor, however, has often discussed CVP in presentations about long-run planning to your cost ac
> How is “break-even point” defined? What are the differences among the formula, graph, and income statement approaches for computing breakeven?
> What information provided by a variable costing income statement is used in computing the break-even point? Is this information on an absorption costing income statement? Explain your answer.
> How is the accounting rate of return computed? How does this rate differ from the discount rate and the internal rate of return? Appendix 2: Accounting Rate of Return The accounting rate of return (ARR) measures the rate of earnings obtained on the aver
> Many domestic companies have chosen to “offshore” their production operations to countries with lower wage rates. Some of the countries being used have been accused of allowing sweatshops, child labor, and polluting conditions that would not be allowed d
> Assume you are the newly appointed CFO of an international engineering services firm. As one of your first assignments you need to appoint a new controller for the branch of your firm located in Buenos Aires. You have identified an assistant controller i
> Family Fun Vehicle Co. (FFV), a subsidiary of Drummondville Automotive, manufactures go-carts and other recreational vehicles. Family recreational centers that feature go-cart tracks, miniature golf, batting cages, paint ball wars, and arcade games have
> Anthem Manufacturing has just initiated a formula bonus plan that rewards plant managers for various achievements. One of the current criteria for bonuses is the improvement of asset turnover. The plant manager of the Eastern Plant asked Sam Jensen, his
> A recent survey of U.S. chief financial officers provides compelling evidence that managers are willing to take extraordinary measures to achieve financial earnings targets. For example, the survey found 26 percent were willing to sacrifice some long-ter
> San Francisco Sea Salt’s controller prepared the following cash flow statements (in thousands of dollars) for the past two years, the current year (2010), and the upcoming year (2011): After preparation of the budgeted cash flow statem
> A group of prospective investors has asked for your help in understanding the comparative advantages and disadvantages of starting a company that is either labor intensive or, in contrast, one that uses significant cutting-edge technology and is therefor
> In 2010, the lead story in your college newspaper reports the details of the hiring of the current football coach. The previous football coach was fired for failing to win games and attract fans. In his last season, his record was 1 win and 11 losses. Th
> Relative to worker compensation, no topic is more hotly debated than the minimum wage law. Using concepts from this chapter, prepare a report in which you explain why increases in the minimum wage are not desirable and how alternative mechanisms could be
> In September 2010, Lyon Precision Corporation (LPC) decided to launch an expansion plan for some product lines. To finance this expansion, the firm has decided to issue $400,000,000 of new common stock in November 2010. Historically, the firm’s innovativ
> Chesterville Manufacturing makes a variety of glass products having both commercial and household applications. One of its newest divisions, ColOptics, manufactures fiber optic cable and other high-tech products. Recent annual operating results (in milli
> For each of the following items, indicate two performance measurements that could be obtained from a cost management system. Classify each item into one of the four balanced scorecard perspectives. a. Quality b. Cost c. Production line flexibility d. Peo
> Terry Travers is the manufacturing supervisor of the Aurora Manufacturing Company, which produces a variety of plastic products. Some of these products are standard items that are listed in the company’s catalog, whereas others are made to customer speci
> The Mergers & Acquisitions Division (M&A) of Global Financial Services is evaluated by corporate management based on a comparison of budgeted and actual pre-tax income. For 2010, M&A’s budgeted income statement was as follows: Sales ……………………………………………$ 36
> Cardiff Sports sells footballs and shoulder pads. For 2010, company management budgeted the following: At the end of 2010, management was told that actual sales of footballs were 21,000 units and the sales price variance was $63,000 unfavorable. Sales o
> Many companies provide on-site child care facilities for employees’ children. In some situations, this service is provided free of charge; in other situations, employees are charged, usually on a sliding scale basis relative to pay, for such services. a.
> Organizational spending on outsourced contact centers (previously referred to as call centers) continues to increase. Contact centers are critical to organizational success because these units often have primary responsibility for interactions with custo
> Tennessee Tonic makes a high-energy protein drink. The selling price per gallon is $7.20, and variable cost of production is $4.32. Total fixed cost per year is $316,600. The company is currently selling 125,000 gallons per year. a. What is the margin of
> The accounting department at Kerrville College has decided to offer a three-day ethics workshop for local CPAs in March 2010. Rose Morris, a tenured professor, will supervise the seminar’s planning process and has submitted the followin
> Swimmingly Corp. buys raw fish, cooks and processes it, and then cans it in single-portion containers. The canned fish is sold to several wholesalers, who specialize in providing food to school lunch programs in the northwest United States and western Ca
> To respond to increased competition and a reduction in profitability, the nationwide law firm of O’Brien New & Cave recently instituted a responsibility accounting system. One of the several responsibility centers established was th
> Hippolito Inc. manufactures industrial tools and has annual sales of approximately $3.5 million with no evidence of cyclical demand. R&D is very important to Hippolito because its market share expands only in response to product innovation. The compa
> APAs are determined in advance of the time in which they are used. Discuss problems that may be generated in a recessionary business climate for companies that have preapproved APAs.
> Des Moines Industries consists of eight divisions that are evaluated as profit centers. All transfers between divisions are made at market price. I-O-WoW, a division of Des Moines, sells approximately 20 percent of its output externally. The remaining 80
> Rowling Inc. is a decentralized company, and each investment center has its own sales force and production facilities. Top management uses return on investment (income divided by assets) for performance evaluation. Potter Division has just been awarded a
> Eekaydo Inc. is organized on a divisional basis with considerable vertical integration. Mary Sue Oehlke is the new controller of the CarryOn! Division of Eekaydo. CarryOn! Division makes a variety of leather products, including a portfolio. Product sales
> Tobias & Barfield LLC has three revenue departments: litigation (Lit.), family practice (FP), and legal consulting (LC). In addition, the company has two support departments, administration and EDP. Administration costs are allocated to the three rev
> The president of Charlottetown Inc. has given the managers of the company’s three decentralized divisions (O’Leary, Alberton, and Summerside) the authority to decide whether to sell externally or internally at a transfer price the division managers deter
> Racine Tire Co. manufactures tires for all-terrain vehicles. The tires sell for $60 and variable cost per tire is $30; monthly fixed cost is $450,000. a. What is the break-even point in units and sales dollars? b. If Ronnie Rice, the company’s CEO, wants
> Because of a monumental error committed by its purchasing department, Corner Grocery ordered 5,000 heads of lettuce rather than the 1,000 that should have been ordered. The company paid $0.65 per head for the lettuce. Although management is confident tha
> Cookie Delight Company has two divisions: Plain Cookies and Decorated Cookies. Lars Linden is the manager of Plain Cookies Division and Theresa Davis is the manager of Decorated Cookies Division. Company president Marie Strauss wants to develop a transfe
> Worldly Traveler’s Roll-Em-On Division makes computer bags. The bags are sold to another internal division, SkyWheels, for inclusion in a luggage set and to external buyers. During the month just ended, SkyWheels acquired 4,000 bags from the Roll-Em-On D
> Although centralization and decentralization are commonly discussed in the context of business organizations and distinct, often “far-flung” subunits, the concepts are also applicable within a single building! Consider that, in the 1970s, most hospitals
> Ludmilla Corp. has two divisions: Engine and Mobile Systems. The Engine Division produces engines used by both the Mobile Systems Division and a variety of external industrial customers. External sales orders are generally produced in 50-unit lots. Using
> In each of the following cases, the Speaker Division can sell all of its production of audio speakers externally or some internally to the Sound System Division and the remainder to outside customers. The Speaker Division’s production c
> Kensington Corporation is a diversified manufacturing company with corporate headquarters in Easton, Massachusetts. The three operating divisions are Kennedy Division, Consumer Products Division, and Outerspace Products Division. Much of Kennedy Division
> Management at C. Pier Press has decided to allocate costs of the paper’s two support departments (administration and human resources) to the two revenue-generating departments (advertising and circulation). Administration costs are to b
> Leyh Management Co. classifies its operations into three departments: commercial sales, residential sales, and property management. The owner, Ellen Leyh, wants to know the full cost of operating each department. Direct departmental costs and several all
> Management of Shreveport Community Hospital has decided to allocate the budgeted costs of its three support departments (administration, public relations, and maintenance) to its three operating programs (surgery, in-patient care, and out-patient service
> Folsom Fashions sells a line of women’s dresses. Folsom’s performance report for November 2010 is shown below. The company uses a flexible budget to analyze its performance and measure the effect on operating income of
> Sid Simon wants to cash in on the increased demand for ethanol. Accordingly he purchased a corn farm in Iowa. Simon believes his corn crop can be sold to an ethanol plant for $4.80 per bushel. Variable cost associated with growing and selling a bushel of
> Kessla Taub manages the marketing department at Electronic Village. Company management has been concerned about the sales of three products and has informed Taub that, regardless of other sales, her performance in 2010 will be evaluated on whether she ha
> A large U.S. corporation participates in a highly competitive industry. Company management has decided that decentralization will best allow the company to meet the competition and achieve profit goals. Each responsibility center manager is evaluated on
> Laura Thompson, newly appointed controller of Allied Networking Services Inc. (ANSI), a rapidly growing company, has just been asked to serve as lead facilitator of a team charged with designing a cost management system (CMS) at ANSI. Also serving on the
> In August 2007, Heelys, a Texas-based maker of wheeled shoes, reported quarterly profits that beat the street estimates by three cents per share. Upon receiving the news, the market price of Heelys dropped 48 percent. Why? Although the profit reported fo
> After graduating last year from an Ivy League university, Joe Tyler was hired as a stock analyst. Wanting to make his mark on the industry, Tyler issued a scathing report on a major discount department store retailer, Smart-Mart. The basis of his attack
> Ohio Steel produces steel products for a variety of customers. One division of the company is the Garage Door Division, created in the late 1940s. Since that time, this division’s principal products have been galvanized steel components used in garage do
> Companies sometimes experience difficult financial times —often so drastic that bankruptcy is declared. If a firm does not invest sufficient resources in its growth, then at some point it will experience diminishing revenues as its product revenues decli
> In 1993, Procter & Gamble (P&G) management tried to control costs by eliminating many of its brands’ coupons while increasing print advertising. Only a miniscule portion of the hundreds of billions of coupons distributed annually by P&G were ever redeeme
> You are the product manager at a silicone chip manufacturer. One of your products is a commodity chip that the electronics industry widely uses in cell phones, printers, digital cameras, and computers. As product manager, you have full profit responsibil
> New England Bottling was founded in the late 1800s and was owned by the same family until 1960 when the firm went public. Throughout its life as a public firm, the company has been continuously profitable and recorded slow, but steady, growth. Historical
