Linda Butler is the new division controller of thesnack-foods division of Daniel Foods. Daniel Foods has reported a minimum 15% growth in annual earningsfor each of the past 5 years. The snack-foods division has reported annual earnings growth of more than20% each year in this same period. During the current year, the economy went into a recession. The corporatecontroller estimates a 10% annual earnings growth rate for Daniel Foods this year. One month beforethe December 31 fiscal year-end of the current year, Butler estimates the snack-foods division will report anannual earnings growth of only 8%. Rex Ray, the snack-foods division president, is not happy, but he notesthat the “end-of-year actions” still need to be taken.Butler makes some inquiries and is able to compile the following list of end-of-year actions that weremore or less accepted by the previous division controller:a. Deferring December’s routine monthly maintenance on packaging equipment by an independent contractoruntil January of next year.b. Extending the close of the current fiscal year beyond December 31 so that some sales of next yearare included in the current year.c. Altering dates of shipping documents of next January’s sales to record them as sales in December ofthe current year.d. Giving salespeople a double bonus to exceed December sales targets.e. Deferring the current period’s advertising by reducing the number of television spots run in Decemberand running more than planned in January of next year.f. Deferring the current period’s reported advertising costs by having Daniel Foods’ outside advertisingagency delay billing December advertisements until January of next year or by having the agencyalter invoices to conceal the December date.g. Persuading carriers to accept merchandise for shipment in December of the current year even thoughthey normally would not have done so. Why might the snack-foods division president want to take these end-of-year actions?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Linda Butler is the new division controller of the
snack-foods division of Daniel Foods. Daniel Foods has reported a minimum 15% growth in annual earnings
for each of the past 5 years. The snack-foods division has reported annual earnings growth of more than
20% each year in this same period. During the current year, the economy went into a recession. The corporate
controller estimates a 10% annual earnings growth rate for Daniel Foods this year. One month before
the December 31 fiscal year-end of the current year, Butler estimates the snack-foods division will report an
annual earnings growth of only 8%. Rex Ray, the snack-foods division president, is not happy, but he notes
that the “end-of-year actions” still need to be taken.
Butler makes some inquiries and is able to compile the following list of end-of-year actions that were
more or less accepted by the previous division controller:
a. Deferring December’s routine monthly maintenance on packaging equipment by an independent contractor
until January of next year.
b. Extending the close of the current fiscal year beyond December 31 so that some sales of next year
are included in the current year.
c. Altering dates of shipping documents of next January’s sales to record them as sales in December of
the current year.
d. Giving salespeople a double bonus to exceed December sales targets.
e. Deferring the current period’s advertising by reducing the number of television spots run in December
and running more than planned in January of next year.
f. Deferring the current period’s reported advertising costs by having Daniel Foods’ outside advertising
agency delay billing December advertisements until January of next year or by having the agency
alter invoices to conceal the December date.
g. Persuading carriers to accept merchandise for shipment in December of the current year even though
they normally would not have done so.
Why might the snack-foods division president want to take these end-of-year actions?
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