Exam 18: Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard

As a strategic issue, "budget slack" could represent a:

Which of the following is an advantage of decentralization?

Harrison Hartwell & Zenith is a successful law firm employing 26 professionals. There is an internal controversy over allocation of the $104,000 purchase cost of a highly sophisticated electronic law library. Each professional employee of the firm has been assessed $4,000 as a charge against the profit distribution account of each of the 26 members affected. In addition, it is expected to cost about $2,600 per month to update information for the library system, resulting in a monthly $100 assessment against each professional in the firm. Required: (a) As a new junior member of the professional legal group of 26, why might you not like the proposed electronic library cost allocation? (b) Propose an alternate allocation method for both the initial purchase cost and the updating charge that is more equitable (fair). (c) Could one argue for no allocation at all in this case? On what basis?

SBUs that include the assets they employ as well as profits in the performance evaluation are:

Divisional managers of SIU Incorporated have been expressing growing dissatisfaction with the current methods used to measure divisional performance. Divisional operations are evaluated every quarter by comparison with the static budget prepared during the prior year. Divisional managers claim that many factors are completely out of their control but are included in this comparison. This results in an unfair and misleading performance evaluation. The managers have been particularly critical of the process used to establish standards and budgets. The annual budget, stated by quarters, is prepared six months prior to the beginning of the operating year. Pressure by top management to reflect increased earnings has often caused divisional managers to overstate revenues and/or understate expenses. In addition, once the budget had been established, divisions were required to "live with the budget." Frequently, external factors such as the state of the economy, changes in consumer preferences, and actions of competitors have not been adequately recognized in the budget parameters that top management supplied to the divisions. The credibility of the performance review is curtailed when the budget cannot be adjusted to incorporate these changes. Top management, recognizing the current problems, has agreed to establish a committee to review the situation and to make recommendations for a new performance evaluation system. The committee consists of each division manager, the Corporate Controller, and the Executive Vice President who serves as the chairman. At the first meeting one division manager outlined an Achievement of Objectives System (AOS). In this performance evaluation system, divisional managers would be evaluated according to three criteria: ● Doing better than last year - Various measures would be compared to the same measures of the prior year. ● Planning realistically - Actual performance for the current year would be compared to realistic plans and/or goals. ● Managing current assets - Various measures would be used to evaluate the divisional management's achievements and reactions to changing business and economic conditions. A division manager believed this system would overcome many of the inconsistencies of the current system because divisions could be evaluated from three different viewpoints. In addition, managers would have the opportunity to show how they would react and account for changes in uncontrollable external factors. A second division manager was also in favor of the proposed AOS. However, he cautioned that the success of a new performance evaluation system would be limited unless it had the complete support of top management. Further, this support should be visible within all divisions. He believed that the committee should recommend some procedures which would enhance the motivational and competitive spirit of the divisions. Required: (1) Explain whether or not the proposed AOS would be an improvement over the measure of divisional performance now used by SIU Incorporated. (2) Develop specific performance measures for each of the three criteria in the proposed AOS which could be used to evaluate divisional managers. (3) Discuss the motivational and behavioral aspects of the proposed performance system. Also, recommend specific programs which could be instituted to promote morale and give incentives to divisional management.

Costs such as depreciation, taxes and insurance usually extending beyond one year are considered:

What is an appropriate performance evaluation measure for the early stage of a product's life cycle?

Which one of the following is a drawback of decentralization?

The balanced scorecard measures the SBU's performance in all of the following areas except:

Doctors Health Care System has integrated health networks in three different regions: northern California, southern Florida, and Oklahoma. These three markets have vast regional differences. Because of the increasing penetration of the U.S. health-care market by managed care companies, Doctors Health Care System must create a system that offers continuity of care across the continuum for a set price in order to remain competitive. Its board of directors set the system's goal as being a leader in developing and maintaining integrated health networks that improve the health status of their communities. Required: To meet this goal in the three regions, should the health system's management structure be decentralized or centralized? What are the advantages and disadvantages of each option?

Organic Laboratories allocates research and development costs to its three research facilities based on each facility's total annual revenue from new product developments: Facility location Kentucky Arizona Illinois Total New product revenue \5 6,000,000 \1 00,000,000 \8 4,000,000 \2 40,000,000 Research \& ( Development \6 0,000,000 Using revenue as an allocation base, the amount of costs allocated to the Arizona research facility is calculated to be:

Profit center income statements are most meaningful to managers when they are prepared:

Order-filling costs:

Zhender Inc. manufactures hair brushes that sell at wholesale for $2.60 per unit. Budgeted production in both 2018 and 2019 was 3,000 units. There was no beginning inventory in 2018. The following data summarized the 2018 and 2019 operations: 2018 2019 Units sold 2,500 3,200 Units produced 3,000 3,000 Costs: Variable factory overhead per unit \ 0.65 \ 0.65 Fixed factory overhead \ 1,290 \ 1,290 Variable marketing per unit \ 0.80 \ 0.80 Fixed Selling and Administrative \ 650 \ 650 Variable costing operating income for 2018 is calculated to be:

The type of strategic business unit (SBU) where the focus is on the selling function of a specific product line or by a geographical location is referred to as a(n):

Zhender Inc. manufactures hair brushes that sell at wholesale for $2.60 per unit. Budgeted production in both 2018 and 2019 was 3,000 units. There was no beginning inventory in 2018. The following data summarized the 2018 and 2019 operations: 2018 2019 Units sold 2,500 3,200 Units produced 3,000 3,000 Costs: Variable factory overhead per unit \ 0.65 \ 0.65 Fixed factory overhead \ 1,290 \ 1,290 Variable marketing per unit \ 0.80 \ 0.80 Fixed Selling and Administrative \ 650 \ 650 Full costing operating income for 2018 is calculated to be:

Which one of the following is not an order-filling cost?

Zhender Inc. manufactures hair brushes that sell at wholesale for $2.60 per unit. Budgeted production in both 2018 and 2019 was 3,000 units. There was no beginning inventory in 2018. The following data summarized the 2018 and 2019 operations: 2018 2019 Units sold 2,500 3,200 Units produced 3,000 3,000 Costs: Variable factory overhead per unit \ 0.65 \ 0.65 Fixed factory overhead \ 1,290 \ 1,290 Variable marketing per unit \ 0.80 \ 0.80 Fixed Selling and Administrative \ 650 \ 650 Variable costing operating income for 2019 is calculated to be:

The Daniels Tool & Die Corporation has been in existence for a little over three years; its sales have been increasing each year as it has built a reputation. The company manufactures dies to its customers' specifications; as a consequence, a job order cost system is employed. Factory overhead is applied to the jobs based on direct labor hours. Actual variable overhead is the same as applied variable overhead. Overapplied or underapplied overhead is treated as an adjustment to cost of goods sold. The company's income statements for the last two years are presented below.Daniels used the same predetermined overhead rate in applying overhead to production orders in both 2018 and 2019. The rate was based on the following estimates: Fixed factory overhead \ 25,000 Variable factory overhead \ 155,000 Direct labor hours 25,000 Direct labor costs \ 150,000 In 2018 and 2019, actual direct labor hours expended were 20,000 and 23,000, respectively. Raw materials put into production were $292,000 in 2018 and $370,000 in 2019. Actual fixed overhead was $42,300 for 2018 and $37,400 for 2019, and the planned direct labor rate was the direct labor rate achieved. For both years, all of the reported administrative costs were fixed, while the variable portion of the reported selling expenses result from a commission of five percent of sales revenue. Required: (1) For the year December 31, 2019, prepare a revised income statement for Daniels Tool & Die Corporation utilizing the variable costing method. (2) Prepare a numerical reconciliation of the difference in operating income between Daniels Tool & Die Corporation's costing and the revised 2019 income statement prepared on the basis of variable costing. (3) Describe both the advantages and disadvantages of using variable costing.

Controllable margin is determined by subtracting short-term controllable fixed costs from the: