InstructionsAssessment 4 Part 1 Management Control Systems and IncentivesAnswer questions about the incentive program at company XZ. Provide rationale for your responses.Part 1 ScenarioXZ 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.

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 publish 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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