Complete a five-part assessment in which you apply your knowledge of management control systems, prepare a comprehensive budget, apply your knowledge of performance measures, prepare a flexible budget and analyze variances, and use a balanced scorecard for performance evaluation.
Introduction
The master budget is the primary output of a comprehensive budgeting system that ties together all phases of the organization’s operations. It creates many separate budgets or schedules that are interdependent and are prepared sequentially—from the sales budget to an income statement.
While the master budget is prepared for a single level of activity, a flexible budget is prepared for a range of activities within which the organization operates. The purpose of a flexible budget is to compare a budget that responds to varying sets of conditions with the organization’s actual results.
In addition to master and flexible budgets, many business organizations use standards to help manage costs and profits. By definition, a standard is a benchmark performance level. For example, manufacturing companies set standards for the amount and price they are willing to pay for direct materials, and for the amount and rate paid for direct labor used in the conversion process. At the end of the accounting period, management personnel will compare the standards to actual results, using this information to plan for the next operating cycle.
Complete a five-part assessment in which you apply your knowledge of management control systems, prepare a comprehensive budget, apply your knowledge of performance measures, prepare a flexible budget and analyze variances, and use a balanced scorecard for performance evaluation.
Preparation
Use the Assessment 4 Template [XLSX] to complete the following five parts. Each part is a different tab in the template.
- Part 1: Answer questions about the incentive program at company XZ. Provide rationale for your response
- s in a few paragraphs.
- Part 2: Prepare a budgeted income statement and balance sheet for United Mobile Corporation.
- Part 3: 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.
- Part 4: Review sales revenue, manufacturing costs, and all other fixed costs to prepare a flexible budget for Oak Grove, Inc.
- Part 5: Prepare a cost variance analysis for the variable costs at Delmar Products.
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:
- What incentives does this plan give to division managers?
- 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 draft 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
Item
Value
Value
Cash
$5,280
Accounts Receivable
$352,000
Inventory (January 1, year 2)
$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
$30,800
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
Item
Value
Value
Value
Revenues:
Sales Revenue
$1980,000
Other Income
$66,000
$1,860,000
Expenses
Cost of Goods Sold
Materials
$580,800
Direct Labor
$594,000
Variable Overhead
$356,4000
Fixed Overhead
$52,800
$1,548,000
Beginning Inventory
$211,200
$,1795,200
Ending Inventory
$211,200
$1584,000
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.
Wellness Pharmaceuticals: Selected Financial Data
Item
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
$1,680
Complete the following:
- Compute divisional income for the two divisions.
- Calculate the operating margin, which is equivalent to the return on sales, for the two divisions.
- Calculate ROI for the two divisions.
- Compute residual income for the two divisions.
- 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:
Oakgrove: Information on Operations
Item
Actual (based on actual 1,080 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.
Delmar Products: Information for the Current Period
Item
Value
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:
Delmar Products: Actual Costs and Activities for the Month
Item
Value
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.
Competencies Measured
By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:
- Competency 4: Utilize cost accounting data to evaluate management control systems.
- Explain plan incentives and determine the relevancy of the plan.
- Prepare budgeted income statement and balance sheet.
- Demonstrate financial performance analysis.
- Prepare a flexible budget.
- Prepare a variance analysis of direct materials, direct labor, and overhead.
- Competency 5: Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting.
