Comprehensive Responsibility Accounting, Segment Margin,and Management Compensation LO2, 4,8
Gantry Manufacturing is a medium-sized organization withmanufacturing facilities in seven locations around the southwesternUnited States. Of these facilities, Galveston and Amarillo aretreated as profit centers, with local management exercisingauthority over manufacturing costs, certain nonmanufacturing costs(e.g., advertising at local minor league baseball stadiums,sponsoring local charity events), and sales revenue. The segmentincome statements that follow were prepared by facility-levelaccountants and were provided to the corporate office in Denver,Colorado, shortly after the end of this year's second quarter. Notethat the statements are shown in parallel for convenience and arenot intended to be combined for analysis purposes.
The managers of these two facilities are former classmates atthe University of Texas at Austin and routinely stay in touch witheach other. Shortly after receiving the quarterly results from hisaccountant, the Amarillo manager, Jim Lowell, called his friend inGalveston to talk about the surprising loss shown on his facility'sincome statement. After a short conversation with the Galvestonmanager, Jim met with his accountant. He learned the following:
⢠A recent memo sent from the corporate controller to allfacility controllers indicated that new manufacturing overheadrates should be used beginning May 1, 2012. The old rate was $2.80per direct labor hour and the new rate is $3.25 per direct laborhour. The memo had a new policy statement attached to it assertingthat individual manufacturing facilities could no longer establishindividual overhead rates.
⢠An average of 210 employees worked 40 hours per week duringthe quarter. There were 13 weeks in the second quarter.
⢠Each division was required to record a onetime expenseassociated with ethics training for all new and current employees.The Amarillo facility received an expense allocation of $58,000.Sixty-five percent of the allocation is related to manufacturingemployees, and the remainder is related to administrativeemployees.
⢠The corporate office also implemented a new policy related tocertain divisional employees' retirement, insurance, and otherbenefits. In past years, all benefits were paid by the corporateoffice and were not allocated to local facilities. However, thecompany's new president believes that those costs are more properlyreflected in the expenses of the individual facilities because theyare incurred by local employees. In totai, additional retirementand insurance expenses of $46,500 were incurred for each monthduring the quarter ended June 30, 2012. Thirty percent of themonthly expenses are related to manufacturing employees, and theremainder is related to administrative employees.
Jim was immediately frustrated by all that he learned from theaccountant. Because his and other managers' bonuses depend onquarterly financial performance, he feels that the corporate memosunfairly reduce his division's profits. He asked his controller toprepare a revised income statement without the changes implementedby the corporate office during the quarter. Amarillo's revisedincome statement appeared as follows:
Jim is not particularly pleased with the financial performanceof his facility, preferring to report a small profit as opposed toa more significant loss. He now must decide how to communicate withthe corporate office about this revised income statement. Youshould bear in mind that the corporate office only providesadministrative services and does not manufacture goods; however,sales activities for five of the company's facilities are handledin the corporate office.
Required
B. What are the implications of having the corporate officeissue memos requiring the facilities to record certain expenses,given the company's bonus structure? How will the corporateoffice's new policy affect the facility management'smotivation?
Comprehensive Responsibility Accounting, Segment Margin,and Management Compensation LO2, 4,8
Gantry Manufacturing is a medium-sized organization withmanufacturing facilities in seven locations around the southwesternUnited States. Of these facilities, Galveston and Amarillo aretreated as profit centers, with local management exercisingauthority over manufacturing costs, certain nonmanufacturing costs(e.g., advertising at local minor league baseball stadiums,sponsoring local charity events), and sales revenue. The segmentincome statements that follow were prepared by facility-levelaccountants and were provided to the corporate office in Denver,Colorado, shortly after the end of this year's second quarter. Notethat the statements are shown in parallel for convenience and arenot intended to be combined for analysis purposes.
The managers of these two facilities are former classmates atthe University of Texas at Austin and routinely stay in touch witheach other. Shortly after receiving the quarterly results from hisaccountant, the Amarillo manager, Jim Lowell, called his friend inGalveston to talk about the surprising loss shown on his facility'sincome statement. After a short conversation with the Galvestonmanager, Jim met with his accountant. He learned the following:
⢠A recent memo sent from the corporate controller to allfacility controllers indicated that new manufacturing overheadrates should be used beginning May 1, 2012. The old rate was $2.80per direct labor hour and the new rate is $3.25 per direct laborhour. The memo had a new policy statement attached to it assertingthat individual manufacturing facilities could no longer establishindividual overhead rates.
⢠An average of 210 employees worked 40 hours per week duringthe quarter. There were 13 weeks in the second quarter.
⢠Each division was required to record a onetime expenseassociated with ethics training for all new and current employees.The Amarillo facility received an expense allocation of $58,000.Sixty-five percent of the allocation is related to manufacturingemployees, and the remainder is related to administrativeemployees.
⢠The corporate office also implemented a new policy related tocertain divisional employees' retirement, insurance, and otherbenefits. In past years, all benefits were paid by the corporateoffice and were not allocated to local facilities. However, thecompany's new president believes that those costs are more properlyreflected in the expenses of the individual facilities because theyare incurred by local employees. In totai, additional retirementand insurance expenses of $46,500 were incurred for each monthduring the quarter ended June 30, 2012. Thirty percent of themonthly expenses are related to manufacturing employees, and theremainder is related to administrative employees.
Jim was immediately frustrated by all that he learned from theaccountant. Because his and other managers' bonuses depend onquarterly financial performance, he feels that the corporate memosunfairly reduce his division's profits. He asked his controller toprepare a revised income statement without the changes implementedby the corporate office during the quarter. Amarillo's revisedincome statement appeared as follows:
Jim is not particularly pleased with the financial performanceof his facility, preferring to report a small profit as opposed toa more significant loss. He now must decide how to communicate withthe corporate office about this revised income statement. Youshould bear in mind that the corporate office only providesadministrative services and does not manufacture goods; however,sales activities for five of the company's facilities are handledin the corporate office.
Required
B. What are the implications of having the corporate officeissue memos requiring the facilities to record certain expenses,given the company's bonus structure? How will the corporateoffice's new policy affect the facility management'smotivation?
