Fundamentals Of Cost Accounting (6th Edition)
6th Edition
ISBN: 9781259969478
Author: WILLIAM LANEN, Shannon Anderson, Michael Maher
Publisher: McGraw Hill Education
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Chapter 16, Problem 54P
To determine
Identify the reason for why the controller wants to defer the revenue but accrue the expenses and if it is ethical or not.
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A new CEO takes control of Do-Da Industries to turn it around (to make it profitable). Based on market research she wants to focus on two specific product lines.
By the end of the first year the company exceeded budgeted profits by 18%. The company’s controller knows his annual bonus depends on exceeding budgeted profit and that next year’s performance would unlikely be similar to this year’s. Profit must exceed budget by 10% before the controller’s bonus kicks in.
The controller realizes he can accrue some of next year’s expenses and defer some of this year’s revenue while still exceeding this year’s budgeted profit by 10%.
Required:
Why would the controller want to defer revenues but accrue expenses?
Is this ethical?
Why?
Tulsa Chemical Company (TCC) produces and distributes industrial chemicals, TCC’s earnings increased sharply in 20x1, and bonuses were paid to the management staff for the first time in several years. Bonuses are based in part on the amount by which reported income exceeds budgeted income.
Jim Kern, vice president of finance, was pleased with TCC’s 20x1 earnings and thought that the pressure to show financial results would ease. However, Ellen North, TCC’s president, told Kern that she saw no reason why the 20x2 bonuses should not be double those of 20x1. As a result, Kern felt pres-sure to increase reported income in order to exceed budgeted income by an even greater amount. This would assure increased bonuses.
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know headquarters wants us to add that new product line," said Dell Havasi, manager of Billings Company's Office Products Division.
"But I want to see the numbers before I make a decision. Our division's return on investment (ROI) has led the company for three
years, and I don't want any letdown."
Billings Company is a decentralized wholesaler with five autonomous divisions. The divisions are evaluated using ROL with year-end
bonuses given to the divisional managers who have the highest ROIS. Operating results for the company's Office Products Division for
this year are given below:
Sales
Variable expenses
Contribution margin
Fixed expenses
Net operating income
Divisional average operating assets
The company had an overall return on investment (ROI) of 17.00% this year (considering all divisions). Next year the Office Products
Division has an opportunity to add a new product requiring $2,755,000 of additional average operating assets. The annual cost and
revenue estimates for the new…
Chapter 16 Solutions
Fundamentals Of Cost Accounting (6th Edition)
Ch. 16 - What are the advantages of the contribution margin...Ch. 16 - How can a budget be used for performance...Ch. 16 - The flexible budget for coats it computed by...Ch. 16 - A flexible budget is: a. Appropriate for control...Ch. 16 - What is the standard cost sheet?Ch. 16 - What is the basic difference between a mailer...Ch. 16 - Standards and budgets are the same thing. True or...Ch. 16 - Actual direct materials costs differ from the...Ch. 16 - Fixed cost variances are computed differently from...Ch. 16 - What is the advantage of preparing the flexible...
Ch. 16 - What is the link between flexible budgeting and...Ch. 16 - Actual revenues are greater than budgeted for...Ch. 16 - Pick an organization you know, such as a school,...Ch. 16 - Give two reasons why dividing production cost...Ch. 16 - Prob. 15CADQCh. 16 - My firm has a wage contract with the union....Ch. 16 - Prob. 17CADQCh. 16 - The production volume variance should be charged...Ch. 16 - Prob. 19CADQCh. 16 - Prob. 20CADQCh. 16 - Flexible Budgeting The master budget at Western...Ch. 16 - Sales Activity Variance Refer to the data in...Ch. 16 - Profit Variance Analysis Refer to the data in...Ch. 16 - Flexible Budget Given the data shown in the...Ch. 16 - Fill in Amounts on Flexible Budget Graph Fill in...Ch. 16 - Flexible Budget Label (a) and (b) in the graph and...Ch. 16 - Prepare Flexible Budget Osage, Inc., manufactures...Ch. 16 - Sales Activity Variance Refer to the data in...Ch. 16 - Profit Variance Analysis Use the information from...Ch. 16 - Sales Activity Variance The following data are...Ch. 16 - Sales Activity Variance Selected data for October...Ch. 16 - Prob. 32ECh. 16 - Prob. 33ECh. 16 - Prob. 34ECh. 16 - Prob. 35ECh. 16 - Prob. 36ECh. 16 - Prob. 37ECh. 16 - Variable Cost Variances The following data reflect...Ch. 16 - Variable Cost Variances The records of Norton,...Ch. 16 - (Appendix used in requirement [b]) Variable Cost...Ch. 16 - (Appendix used in requirement [b]) Variable Cost...Ch. 16 - Fixed Cost Variances Information on Carney...Ch. 16 - Prob. 43ECh. 16 - Prob. 44ECh. 16 - Fixed Cost Variances Mint Company applies fixed...Ch. 16 - Prob. 46ECh. 16 - Prob. 47ECh. 16 - (Appendix used in requirement [c]) Comprehensive...Ch. 16 - Comprehensive Cost Variance Analysis NSF Lube is a...Ch. 16 - Overhead Variances Brice Corporation shows the...Ch. 16 - Solve for Master Budget Given Actual Results A new...Ch. 16 - Find Missing Data for Profit Variance Analysis...Ch. 16 - Find Data for Profit Variance Analysis Required...Ch. 16 - Prob. 54PCh. 16 - Prepare Flexible Budget Odessa, Inc., reports the...Ch. 16 - Prob. 56PCh. 16 - Prob. 57PCh. 16 - Prob. 58PCh. 16 - Prob. 59PCh. 16 - Prob. 60PCh. 16 - Direct Materials Information about direct...Ch. 16 - Prob. 62PCh. 16 - Prob. 63PCh. 16 - Prob. 64PCh. 16 - Overhead Cost and Variance Relationships...Ch. 16 - Prob. 66PCh. 16 - Prob. 67PCh. 16 - Ethics and Standard Costs Farmer Franks produces...Ch. 16 - Comprehensive Variance Problem The standard cost...Ch. 16 - Prob. 70PCh. 16 - Find Actual and Budget Amounts from Variances JW...Ch. 16 - Variance Computations with Missing Data The...Ch. 16 - Comprehensive Variance Problem Sweetwater Company...Ch. 16 - Prob. 74PCh. 16 - Prob. 75PCh. 16 - Keewee Company manufactures a single product for...
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- Bill Fremont, division controller and CMA, was upset by a recent memo he received from the divisional manager, Steve Preston. Bill was scheduled to present the divisions financial performance at headquarters in one week. In the memo, Steve had given Bill some instructions for this upcoming report. In particular, Bill had been told to emphasize the significant improvement in the divisions profits over last year. Bill, however, didnt believe that there was any real underlying improvement in the divisions performance and was reluctant to say otherwise. He knew that the increase in profits was because of Steves conscious decision to produce more inventory. In an earlier meeting, Steve had convinced his plant managers to produce more than they knew they could sell. He argued that by deferring some of this periods fixed costs, reported profits would jump. He pointed out two significant benefits. First, by increasing profits, the division could exceed the minimum level needed so that all the managers would qualify for the annual bonus. Second, by meeting the budgeted profit level, the division would be better able to compete for much-needed capital. Bill objected but had been overruled. The most persuasive counterargument was that the increase in inventory could be liquidated in the coming year as the economy improved. Bill, however, considered this event unlikely. From past experience, he knew that it would take at least two years of improved market demand before the productive capacity of the division was exceeded. Required: 1. Discuss the behavior of Steve Preston, the divisional manager. Was the decision to produce for inventory an ethical one? 2. What should Bill Fremont do? Should he comply with the directive to emphasize the increase in profits? If not, what options does he have? 3. Chapter 1 listed ethical standards for management accountants. Identify any standards that apply in this situation.arrow_forwardRecently, Ulrich Company received a report from an external consulting group on its quality costs. The consultants reported that the companys quality costs total about 21 percent of its sales revenues. Somewhat shocked by the magnitude of the costs, Rob Rustin, president of Ulrich Company, decided to launch a major quality improvement program. For the coming year, management decided to reduce quality costs to 17 percent of sales revenues. Although the amount of reduction was ambitious, most company officials believed that the goal could be realized. To improve the monitoring of the quality improvement program, Rob directed Pamela Golding, the controller, to prepare monthly performance reports comparing budgeted and actual quality costs. Budgeted costs and sales for the first two months of the year are as follows: The following actual sales and actual quality costs were reported for January: Required: 1. Reorganize the monthly budgets so that quality costs are grouped in one of four categories: appraisal, prevention, internal failure, or external failure. (Essentially, prepare a budgeted cost of quality report.) Also, identify each cost as variable (V) or fixed (F). (Assume that no costs are mixed.) 2. Prepare a performance report for January that compares actual costs with budgeted costs. Comment on the companys progress in improving quality and reducing its quality costs.arrow_forwardAt the beginning of the last quarter of 20x1, Youngston, Inc., a consumer products firm, hired Maria Carrillo to take over one of its divisions. The division manufactured small home appliances and was struggling to survive in a very competitive market. Maria immediately requested a projected income statement for 20x1. In response, the controller provided the following statement: After some investigation, Maria soon realized that the products being produced had a serious problem with quality. She once again requested a special study by the controllers office to supply a report on the level of quality costs. By the middle of November, Maria received the following report from the controller: Maria was surprised at the level of quality costs. They represented 30 percent of sales, which was certainly excessive. She knew that the division had to produce high-quality products to survive. The number of defective units produced needed to be reduced dramatically. Thus, Maria decided to pursue a quality-driven turnaround strategy. Revenue growth and cost reduction could both be achieved if quality could be improved. By growing revenues and decreasing costs, profitability could be increased. After meeting with the managers of production, marketing, purchasing, and human resources, Maria made the following decisions, effective immediately (end of November 20x1): a. More will be invested in employee training. Workers will be trained to detect quality problems and empowered to make improvements. Workers will be allowed a bonus of 10 percent of any cost savings produced by their suggested improvements. b. Two design engineers will be hired immediately, with expectations of hiring one or two more within a year. These engineers will be in charge of redesigning processes and products with the objective of improving quality. They will also be given the responsibility of working with selected suppliers to help improve the quality of their products and processes. Design engineers were considered a strategic necessity. c. Implement a new process: evaluation and selection of suppliers. This new process has the objective of selecting a group of suppliers that are willing and capable of providing nondefective components. d. Effective immediately, the division will begin inspecting purchased components. According to production, many of the quality problems are caused by defective components purchased from outside suppliers. Incoming inspection is viewed as a transitional activity. Once the division has developed a group of suppliers capable of delivering nondefective components, this activity will be eliminated. e. Within three years, the goal is to produce products with a defect rate less than 0.10 percent. By reducing the defect rate to this level, marketing is confident that market share will increase by at least 50 percent (as a consequence of increased customer satisfaction). Products with better quality will help establish an improved product image and reputation, allowing the division to capture new customers and increase market share. f. Accounting will be given the charge to install a quality information reporting system. Daily reports on operational quality data (e.g., percentage of defective units), weekly updates of trend graphs (posted throughout the division), and quarterly cost reports are the types of information required. g. To help direct the improvements in quality activities, kaizen costing is to be implemented. For example, for the year 20x1, a kaizen standard of 6 percent of the selling price per unit was set for rework costs, a 25 percent reduction from the current actual cost. To ensure that the quality improvements were directed and translated into concrete financial outcomes, Maria also began to implement a Balanced Scorecard for the division. By the end of 20x2, progress was being made. Sales had increased to 26,000,000, and the kaizen improvements were meeting or beating expectations. For example, rework costs had dropped to 1,500,000. At the end of 20x3, two years after the turnaround quality strategy was implemented, Maria received the following quality cost report: Maria also received an income statement for 20x3: Maria was pleased with the outcomes. Revenues had grown, and costs had been reduced by at least as much as she had projected for the two-year period. Growth next year should be even greater as she was beginning to observe a favorable effect from the higher-quality products. Also, further quality cost reductions should materialize as incoming inspections were showing much higher-quality purchased components. Required: 1. Identify the strategic objectives, classified by the Balanced Scorecard perspective. Next, suggest measures for each objective. 2. Using the results from Requirement 1, describe Marias strategy using a series of if-then statements. Next, prepare a strategy map. 3. Explain how you would evaluate the success of the quality-driven turnaround strategy. What additional information would you like to have for this evaluation? 4. Explain why Maria felt that the Balanced Scorecard would increase the likelihood that the turnaround strategy would actually produce good financial outcomes. 5. Advise Maria on how to encourage her employees to align their actions and behavior with the turnaround strategy.arrow_forward
- Esme Company’s management is trying to decide whether to eliminate Department Z, which has produced low profits or losses for several years. The company’s departmental income statements show the following.arrow_forward“I know headquarters wants us to add that new product line,” said Dell Havasi, manager of Billings Company’s Office Products Division. “But I want to see the numbers before I make a decision. Our division’s return on investment (ROI) has led the company for three years, and I don’t want any letdown.” Billings Company is a decentralized wholesaler with five autonomous divisions. The divisions are evaluated using ROI, with year-end bonuses given to the divisional managers who have the highest ROIs. Operating results for the company’s Office Products Division for this year are given below: Sales $ 22,440,000 Variable expenses 14,094,600 Contribution margin 8,345,400 Fixed expenses 6,130,000 Net operating income $ 2,215,400 Divisional average operating assets $ 4,480,000 The company had an overall return on investment (ROI) of 18.00% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product requiring $2,430,600 of…arrow_forward“I know headquarters wants us to add that new product line,” said Dell Havasi, manager of Billings Company’s Office Products Division. “But I want to see the numbers before I make a decision. Our division’s return on investment (ROI) has led the company for three years, and I don’t want any letdown.” Billings Company is a decentralized wholesaler with five autonomous divisions. The divisions are evaluated using ROI, with year-end bonuses given to the divisional managers who have the highest ROIs. Operating results for the company’s Office Products Division for this year are given below: Sales $ 22,440,000 Variable expenses 14,094,600 Contribution margin 8,345,400 Fixed expenses 6,130,000 Net operating income $ 2,215,400 Divisional average operating assets $ 4,480,000 The company had an overall return on investment (ROI) of 18.00% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product requiring $2,430,600 of…arrow_forward
- he Pacific Division of Cullumber Industries reported the following data for the current year. Sales $4,179,930 Variable costs 2,625,000 Controllable fixed costs 825,000 Average operating assets 5,034,000 Top management is unhappy with the investment center’s return on investment. It asks the manager of the Pacific Division to submit plans to improve ROI in the next year. The manager believes it is feasible to consider the following independent courses of action. 1. Increase sales by $425,000 with no change in the contribution margin percentage. 2. Reduce variable costs by $145,986. 3. Reduce average operating assets by 4% (a) Compute the return on investment for the current year. (Round answers to 1 decimal place, e.g. 52.7%.) Return on investment enter the return on investment in percentages %arrow_forwardDivision G of a large company is approaching its year end. The division is evaluated using ROI with a target rate of return of 15%. The division has control of all aspects of its operation except that all cash balances are centralized by the company and therefore left off divisional balance sheets. The divisional manager is considering the following options. 1. (i) To delay payment of a supplier until next year, the potential prompt payment discount of 5% will be lost. The debt is for $27,500. 2. (ii) To scrap a redundant asset with a book value of $147,000. The manager has been offered $15,000 as immediate scrap proceeds, whilst he is fairly confident that he could get $25,000 in an industry auction to be held at the start of the new year. Assume that the manager is very short‐termist (i.e. only considers the implications for this year) and that the expected ROI for the year, before these options, is 18%. Which of the two options will the manager implement for this year to…arrow_forwardThe manager of the Cosmetics Division, has had a return on investment of 14% for his division for the past three years. Sanders has the opportunity to invest in a new line of cosmetics which is expected to have a return on investment of 12%. The company's minimum required rate of return is 8%. If managerial performance is evaluated using return on investment (ROI), he will: Reject the opportunity O Accept the Opportunityarrow_forward
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