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Briefly explain two (2) potential pitfalls encountered in the design of performance indicators and measurement systems.

Briefly explain two (2) potential pitfalls encountered in the design of performance indicators and measurement systems.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Briefly explain two (2) potential pitfalls encountered in the design of performance indicators and measurement systems.

Bell Division Performance Report for the Year Ended December 31, 2020 Increase/(Decrease) from 2019 % CHANGE 2020 2019 AMOUNT Summary Data Net Income ($000 omitted) Return on Investment (ROI) Kits sold (units) $34,222 $31,573 $2,649 8.4 (6%) (14.0) (4.8) 37% 43% 2,000 2,100 (100) Production Data Kits started 2,400 1,600 800 50.0 Kits transferred to Cornish Div. 2,000 2,100 (100) (4.8) Kits in process at year-end 700 300 400 133.3 Increase (Decrease) in kits in (500) process at year-end Financial Data ($000) 400 Sales $138,000 $162,800 ($24,800) (15.2) ©The University of the West Indies Course Code: ACCT 3039 211.../ page 3 Production costs of units sold 40,000 (8,000) (11,300) (8,000) ($27,300) (20.0) (21.3) (21.6) (21.0) Raw material 32,000 Labor 41,700 53,000 Factory overhead 29,000 37,000 Cost of units sold $102,700 $130,000 Other Costs: Corporate Charges for Personnel services 228 210 18 8.6 Accounting services Financing costs (15) (225 ($222) 425 (3.4) (42.9) (18.9) 440 300 525 Total other costs $953 $1,175 Adjustments to Income Unreimbursed fire loss 52 (52) (100.0) Raw material losses due to 125 125 impropoer storage Total adjustments $125 $52 $73 (100.0) (20.9) Total Costs $103,778 $131,227 ($27,449) DIVISION INCOME $34,222 $31,573 $2,649 8.4 Division Investment $92,000 $73,000 $19,000 26.0 ROI 37% 43% (6%) (14.0)
Transcribed Image Text:Bell Division Performance Report for the Year Ended December 31, 2020 Increase/(Decrease) from 2019 % CHANGE 2020 2019 AMOUNT Summary Data Net Income ($000 omitted) Return on Investment (ROI) Kits sold (units) $34,222 $31,573 $2,649 8.4 (6%) (14.0) (4.8) 37% 43% 2,000 2,100 (100) Production Data Kits started 2,400 1,600 800 50.0 Kits transferred to Cornish Div. 2,000 2,100 (100) (4.8) Kits in process at year-end 700 300 400 133.3 Increase (Decrease) in kits in (500) process at year-end Financial Data ($000) 400 Sales $138,000 $162,800 ($24,800) (15.2) ©The University of the West Indies Course Code: ACCT 3039 211.../ page 3 Production costs of units sold 40,000 (8,000) (11,300) (8,000) ($27,300) (20.0) (21.3) (21.6) (21.0) Raw material 32,000 Labor 41,700 53,000 Factory overhead 29,000 37,000 Cost of units sold $102,700 $130,000 Other Costs: Corporate Charges for Personnel services 228 210 18 8.6 Accounting services Financing costs (15) (225 ($222) 425 (3.4) (42.9) (18.9) 440 300 525 Total other costs $953 $1,175 Adjustments to Income Unreimbursed fire loss 52 (52) (100.0) Raw material losses due to 125 125 impropoer storage Total adjustments $125 $52 $73 (100.0) (20.9) Total Costs $103,778 $131,227 ($27,449) DIVISION INCOME $34,222 $31,573 $2,649 8.4 Division Investment $92,000 $73,000 $19,000 26.0 ROI 37% 43% (6%) (14.0)
D Corporation is one of the major producers of pre-fabricated houses in the home building industry. The corporation consists of two divisions: 1. Bell Division, which acquires the raw materials to manufacture the basic house components and assembles them into kits. 2. Cornish Division, which takes the kits and constructs the homes for final home buyers. The corporation is decentralized and the management of each division is measured by its income and return on investment. Bell Division assembles seven separate house kits using raw materials purchased at the prevailing market prices. The seven kits are sold to Cornish for prices ranging from US$45,000 to US$98,000. The prices are set by corporate management of D Corporation using prices paid by Cornish when it buys comparable units from outside sources. The smaller kits with the lower prices have become a larger portion of the units sold because the final house buyer is face with prices that are increasing more rapidly than personal income. The kits are manufactured and assembled in a new plant purchased by Bell this year. The division had been located in a leased plant for the past four years. All kits are assembled upon receipt of an order from the Cornish Division. When the kit is completely assembled it is immediately taken by the Cornish Division for final construction. Thus, Bell Division has no finished goods inventory. The Bell Division's accounts and reports are prepared on an actual-cost basis. There is no budget and standards have not been developed for each product. A factory overhead rate is calculated at the beginning of each year. The rate is designed to charge all overhead to the product each year. Any under- or over- applied overhead is allocated to the cost of goods sold account and the WIP inventories. Bell Division's annual report is presented below. This report forms the basis of the evaluation of the division and its management by the corporation management. Additional information regarding corporate and division practices is as follows: The corporation office does all the personnel and accounting work for each division. The corporate personnel costs are allocated on the basis of number of employees in the division. The accounting costs are allocated to the division on the basis of total costs excluding corporate charges. The division administration costs are included in factory overhead. The finance charges include a corporate-imputed interest charge on division assets and divisional lease payments. any The division investment for the ROI calculation includes division inventory and plant and equipment at gross book value.
Transcribed Image Text:D Corporation is one of the major producers of pre-fabricated houses in the home building industry. The corporation consists of two divisions: 1. Bell Division, which acquires the raw materials to manufacture the basic house components and assembles them into kits. 2. Cornish Division, which takes the kits and constructs the homes for final home buyers. The corporation is decentralized and the management of each division is measured by its income and return on investment. Bell Division assembles seven separate house kits using raw materials purchased at the prevailing market prices. The seven kits are sold to Cornish for prices ranging from US$45,000 to US$98,000. The prices are set by corporate management of D Corporation using prices paid by Cornish when it buys comparable units from outside sources. The smaller kits with the lower prices have become a larger portion of the units sold because the final house buyer is face with prices that are increasing more rapidly than personal income. The kits are manufactured and assembled in a new plant purchased by Bell this year. The division had been located in a leased plant for the past four years. All kits are assembled upon receipt of an order from the Cornish Division. When the kit is completely assembled it is immediately taken by the Cornish Division for final construction. Thus, Bell Division has no finished goods inventory. The Bell Division's accounts and reports are prepared on an actual-cost basis. There is no budget and standards have not been developed for each product. A factory overhead rate is calculated at the beginning of each year. The rate is designed to charge all overhead to the product each year. Any under- or over- applied overhead is allocated to the cost of goods sold account and the WIP inventories. Bell Division's annual report is presented below. This report forms the basis of the evaluation of the division and its management by the corporation management. Additional information regarding corporate and division practices is as follows: The corporation office does all the personnel and accounting work for each division. The corporate personnel costs are allocated on the basis of number of employees in the division. The accounting costs are allocated to the division on the basis of total costs excluding corporate charges. The division administration costs are included in factory overhead. The finance charges include a corporate-imputed interest charge on division assets and divisional lease payments. any The division investment for the ROI calculation includes division inventory and plant and equipment at gross book value.
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