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:

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 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:

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:

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.