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Fixing compensation for merchandising divisional manager

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C&DS6-5, Chapter 6 in "Fundamentals of Financial Accounting". Assume you work as an Accountant in the merchandising division of a large public company that makes and sells athletic clothing. To encourage the merchandising division to earn as much profit on each individual sale as possible, the division manager's pay is based, in part, on the division's gross profit percentage. Include the requirements in the assignment and complete a 500-750 word paper.
Properly cite your references. If you used an electronic source, include the URL. If you used a printed source please include the data to your paper. See written presentation rubric in this syllabus

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Dear student,

The company is engaged in the making and selling of the athletic clothing. The company has manufacturing division which is engaged in the manufacture of athletic clothes and merchandising division which is engaged in the selling of manufactured clothes. The compensation package should be different to the managers of the manufacturing division and the merchandising division. Manufacturing divisional manager should be compensated on the basis of the measures to control the cost and how he is efficient in controlling the cost and reduce the wastage and defectives. On the other hand, the manager of the merchandising division has to be compensated on the basis of the sales made or gross profit earned in the merchandising division.
Job description of the merchandising divisional manager:
The merchandising manager should have the sound knowledge of the quality, the various grades and the rates of different types of the clothes and should have the prior adequate experience in the sale of athletic clothes. He should have high level of judgmental capacity to judge the ...

Solution Summary

The answer contains job description and duties of merchandising divisional manager & factors to be taken into account in deciding compensation package for merchandising divisional manager to motivate him.

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Management accounting practice problems

Study guide questions...attached.

Question 1
Knapple Company has a variable cost percentage of 35% on a product that sells for $25 per unit. Fixed costs are $40,000. Knapple wants to know how many units must be sold (a) to break even and (b) to earn a profit of $12,000. Ignore income taxes.

Question 2
Baldwin Division earns a contribution margin of $200,000 and has a division margin of $70,000. If Baldwin Division is closed, the firm can eliminate all of the direct division expenses and $110,000 of common expenses. How will closing the division affect the firm's operating income?

Question 3
Hankemeier Manufacturing Company has the following budgeted costs for 10,000 units:
Variable Costs Fixed Costs
Manufacturing $100,000 $75,000
Selling & Administrative 50,000 25,000
Total $150,000 $100,000

What is the initial selling price needed to obtain a target profit of $50,000 using the manufacturing cost markup method?

Question 4
Hankemeier Manufacturing Company has the following budgeted costs for 10,000 units:
Variable Costs Fixed Costs
Manufacturing $100,000 $75,000
Selling & Administrative 50,000 25,000
Total $150,000 $100,000

Calculate the markup on variable costs needed to break even.

Question 5
Cook River Company management is analyzing the company's standard cost variances for direct materials for the most recent period. The following information was available from company records.
Actual quantity of materials used 24,000 units
Budgeted quantity of materials used 22,000 units
Actual price paid for materials $4 per unit
Budgeted price paid for materials $6 per unit

There were no increases or decreases in inventories during the period.
Calculate the materials quantity variance for the period.

Question 6
Budget preparation requires the development of a variety of forecasts. List some of the forecasts that must be made in developing a comprehensive budget.

Question 7
Assume the local cable company has the following information available about fleet miles and operating costs for its service department:
Fleet Miles Operating Costs
2008 534,000 $266,000
2009 726,000 $342,800

Using the high-low method, develop a cost-estimating equation for total annual operating costs.

Question 8
If a company has sales of $1,000,000, net income of $120,000, and an asset base of $500,000, what is its return on investment?

Question 9
Jordan Company has two service departments, Maintenance Department and Personnel Department, and two producing departments, X and Y. The Maintenance Department costs of $60,000 are allocated on the basis of standard service hours used. The Personnel Department costs of $9,000 are allocated on the basis of number of employees. The direct costs of Departments X and Y are $18,000 and $30,000, respectively. Data on standard service-hours and number of employees are as follows:
Maint. Dept. Person. Dept. Dept. X Dept. Y
Standard service hours used 200 100 600 300
Number of employees 5 15 25 20
Using the step method, if Personnel Department costs are allocated first, calculate the cost of Maintenance Department allocation to Department X.

Question 10
Identify and describe the three strategic positions that lead to business success.

Question 11
Cost-Volume-Profit analysis is subject to a number of assumptions. List five assumptions that are necessary to make cost-volume-profit analysis tractable (feasible).

Question 12
Briefly describe a contribution income statement and indicate how it differs from a functional income statement.

Question 13
The Widrick manufactures 10,000 rolls of cable each period. The cable is used as an input for producing several other products that Widrick manufactures. The full manufacturing costs for a batch of 100 rolls of cable are:
Direct materials $270
Direct labor 200
Variable manufacturing overhead 200
Average fixed manufacturing overhead 250
Total $920
The fixed manufacturing overhead is comprised of depreciation expenses related to prior investments in facilities and equipment that are used in the manufacturing of the cable. These assets have no other use than for the manufacturing of the cable. An outside supplier has offered to sell Widrick the 10,000 rolls of cable necessary to meet production needs this period for a lump-sum of $75,000. If Widrick accepts this outside supplier's offer, how much better or worse off will the company be?

Question 14
Kyle Company has the following sales forecast for the next quarter: April, 2,000 units; May, 2,400 units; June, 2,800 units. Sales totaled 1,600 units in March. The March ending finished goods inventory was 500 units. End-of-month finished goods inventory levels are planned to be equal to 30 percent of the next month's planned sales. Calculate the number of units of inventory Kyle needs to purchase for April?

Classify the total costs of each of the following as variable, fixed, mixed, or step. Sales volume is the cost driver.

Question 15
a. Salary of machine operator who is paid based on number of units produced on the machine
b. Keyboards purchased from a subcontract supplier in a computer assembly plant
c. Property taxes
d. Salaries of quality inspectors when each inspector can evaluate a maximum of 500 units per day
e. Annual salary for the vice president of manufacturing
f. Electric power in a factory
g. Raw materials used in production
h. Water consumed by the plant, which is based on a flat fee plus actual consumption
i. Overhead costs in the factory for incidental components such as small screws and rivets.
j. Fire insurance on factory building

Question 16
Jackson Company has two service departments (S1 and S2) and two producing departments (P1 and P2). Department S1 costs are allocated on the basis of number of employees, and Department S2 costs are allocated on the basis of space occupied expressed in square feet. Data on direct department costs, number of employees, and space occupied are as follows:
S1 S2 P1 P2
Direct dept. costs $15,000 $22,000 $55,000 $60,000
Number of employees 20 10 40 50
Space occupied 2,000 1,000 3,000 5,000
If Jackson uses the direct method, What is the ratio representing the portion of Department S2 allocated to P2?

Question 17
Describe zero-based budgeting.

Question 18
Jiork, Inc. had a contribution margin of $23,000 on sales of $40,000 and had fixed costs of $14,000. Calculate its break-even point in sales dollars.

Question 19
Briefly explain the nature of the ethical dilemmas that managers and accountants confront, giving examples.

Question 20
Jacksonville Products Co. has predicted the following costs for this year for 150,000 units:

Manufacturing Selling and
Variable $400,000 $100,000
Fixed 600,000 300,000
Total $1,000,000 $400,000
Calculate the markup on variable costs needed to achieve a target profit of $200,000.

Question 21
Match the following principles of financial accounting to their definitions:
a. Financial statements are linked within and across time
(1) Revenue recognition principle
b. Revenue and expenses are recognized when a cash transaction is completed (2) Articulation of financial statements
c. Revenue is recognized when earned
(3) Cash basis accounting
d. Recognizes revenue when earned and expenses when incurred, even if no cash is received or paid (4) Accrual accounting

Question 22
The total monthly operating costs of Smoothie Universe are:

$2,000 + $0.30X, where X = 12 ounce servings

Calculate the average cost per serving at each of the following monthly volumes: 1,500; 2,000; 3,000; and 5,000, and determine the monthly volume at which the average cost per serving is $0.50.

Question 23
Eastern Corp. obtained the following information from its accounting records:

Sales = $35,000
Beginning Finished Goods Inventory = $21,000
Ending Finished Goods Inventory = $23,000
Cost of Goods Sold = $20,000
Ending Work-in-Process Inventory = $15,000

Calculate the Cost of Goods Manufactured for the period.

Question 24
Kearns Company had the following functional income statement for the month of November 2006:
Kearns Company
Functional Income Statement
For the Month Ending November 30, 2006
Sales ($20 x 10,000) $200,000
Cost of goods sold:
Direct materials ($4 x 10,000) $40,000
Direct labor ($3 x 10,000) 30,000
Variable factory overhead ($2.50 x 10,000) 25,000
Fixed factory overhead 40,000 - 135,000
Gross profit $ 65,000
Selling and administrative expenses:
Variable ($0.50 x 10,000) $ 5,000
Fixed 30,000 - 35,000
Net income $ 30,000
Calculate Kearns Company's break-even sales in units.

Question 25
Nike Inc. has a fiscal year end of May 31. On May 31, 2007, Nike Inc. reported $10,688.3 million in assets and $7,025.4 million in equity. During fiscal 2008, Nike's assets increased by $1,754.4 million while its equity increased by $799.9 million.
What were Nike's total liabilities at May 31, 2007 and May 31, 2008?

Question 26
Packard Company's budgeted sales were 1,000 units at $50 per unit. During 2008 it had actual sales of 900 units at $55 per unit. Budgeted variable costs were $30 per unit. Calculate What is Packard's net sales volume variance.

Question 27
The following forecasted sales pertain to Louis Corporation:
Month Sales
September $80,000
October 100,000
November 60,000
December 40,000

Collection pattern:
65 percent in month of sale
35 percent in month following sale
Accounts Receivable (August 31) $14,000
Finished Goods Inventory (August 31) 15,000
Louis Corporation has a selling price of $5 per unit and expects to maintain ending inventories equal to 25 percent of the next month's sales. Calculate the budgeted beginning balance in units for finished goods inventory on November 1?

Question 28
Explain how budgets provide a basis for performance evaluation.

Question 29
Identify Cooper and Kaplan's four categories of activities and provide a brief description of each category.

Question 30
Identify the three different cost estimation methods discussed in this course and provide a description of the strengths and weaknesses of each.

Question 31
Summertime Clothing Company is in the process of preparing its budget for next year. Cost of goods sold has been estimated at 60 percent of sales. Fabric purchases and payments are to be made during the month preceding the month of sale. Wages (production-related) are estimated at 20 percent of sales and are paid during the month of sale. Other operating costs amounting to 25 percent of sales are to be paid in the month following the month of sales. Additionally, a monthly lease payment of $5,000 is paid to Net World for computer services. Sales revenue is forecasted as follows:
Month Sales
March $150,000
April $170,000
May $230,000
June $200,000
July $250,000
Calculate the amount of budgeted cash disbursements for the month of May?

Question 32
Briefly explain the terms (1) contribution margin and (2) contribution margin ratio and why they are useful (two to three sentences each).

Question 33
If net income is $25,000 and operating leverage is 3.00 at the end of the most recent period, a 15% increase in sale will increase net income by what percent and what dollar amount?

Question 34
Differentiate among structural, organizational, and activity cost drivers.

Question 35
Beginning inventory in February consisted of 5,000 units (60 percent converted) and ending inventory consisted of 10,000 units (30 percent converted). In addition, 25,000 units were started during the period. How many equivalent units for conversion costs were in process February using the weighted average method?

Question 36
Compute the missing amounts for Nike Inc. for 2007 and 2008, in the table below:
($ millions) 2008 2007
Total assets $10,688.3
Contributed capital $ 2,500.9 $ 1,963.1
Earned capital $ 5,324.7
Total Liabilities $ 4,617.1 $ 3,662.6
Liabilities and equity $10,688.3

Question 37
During the most recent fiscal period, Kajing LTD had a contribution margin of $50,000 and operating profit of $20,000 on sales of $80,000.
Calculate Kajing's (a) operating leverage and (b) the amount of its profit for next year assuming sales increase to $96,000.

Question 38
Define strategic cost management and briefly discuss the three themes that make up strategic cost management

Question 39
Briefly explain the limitation of basic cost-volume-profit analysis as it relates to an organization's sales mix.

Question 40
Identify and briefly discuss the three dimensions on which competition takes place.

Question 41
The management of Rose Enterprises is analyzing variable overhead variances for the fiscal period just ended. During the period, Rose's management used 2,500 hours of direct labor. It had budgeted to use 4,000 hours of direct labor. Hours of direct labor is the single overhead driver of variable overhead. Variable overhead consists of two items. Indirect labor was budgeted as $3.00 per hour of direct labor. Indirect materials was budgeted as $2.00 per hour of direct labor. Actual variable overhead was $15,000.

Calculate Rose's variable overhead spending variance.

Question 42
What is a sunk cost? Under what circumstances are sunk costs relevant to a decision? Construct an example of a sunk cost. Briefly discuss why you think financial reports for investors and managerial reports for managers may or may not differ in their treatment of sunk costs.

Question 43
The management of Rose Enterprises is analyzing variable overhead variances for the fiscal period just ended. During the period, Rose's management used 2,500 hours of direct labor. It had budgeted to use 4,000 hours of direct labor. Hours of direct labor is the single overhead driver of variable overhead. Variable overhead consists of two items. Indirect labor was budgeted as $3.00 per hour of direct labor. Indirect materials was budgeted as $2.00 per hour of direct labor. Actual variable overhead was $15,000. Calculate Rose's variable overhead efficiency variance.

Question 44
Briefly explain why changes in technology and prices make cost estimation difficult.

Question 45
Orlando Company manufactures a product through a process where all manufacturing costs are added uniformly. Information for October beginning work-in-process follows.

The following costs were incurred during October:

During October, 25,000 units were completed. Also, 2,500 units that were 50 percent complete remained in process at the end of the day on October 31.

Calculate the cost of goods completed and the cost assigned to ending inventory. (Round to the nearest dollar, if necessary.)

Question 46
Rutledge Corp. obtained the following information from the Raw Materials Inventory account and purchasing records for the first quarter of the current year:

Beginning Raw Materials = $5,000
Ending Raw Materials = $6,000
Jan. Purchases = $6,000
Feb. Purchases = $4,000
Mar. Purchases = $5,000

Calculate the amount of Raw Materials used for this quarter.

Question 47
Fuino Company manufactures and sells specialty items. The following representative direct labor-hours and production costs are provided for a four-month period:
Month Hrs. Direct Labor Production Costs
January 1,500 $15,000
February 2,000 17,500
March 2,500 20,000
April 2,000 15,000
Total 8,000 $67,500

a = fixed production costs per month
b = variable production costs per direct labor hour
n = number of months
X = direct labor-hours per month
Y = total monthly production costs
Σ = Summation
Using the symbols above, indicate the cost estimation equation based on number of direct labor hours per month, and calculate total monthly production costs for May using the high-low method, during which hours of direct labor are expected to be 2,300 hours.
Question 48
Louisiana Mower Manufacturing Company has three divisions. Engine components are transferred from Components to Assembly. Assembled engines are transferred from Assembly to the Mower Division. Costs for each division are given below. Mowers are sold on in a competitive outside market for $250.
Division Name Components Assembly Mower
Total variable costs $50 per package of components $10 per engine plus transfer price paid to Components $100 per mower plus transfer price paid to Assembly
Total division fixed costs $55,000 $55,000 $110,000

All transfers are made at 100% of absorption cost. This period, Components sends Assembly 10,000 package of engine components. Determine the transfer price Assembly pays Components for engine components.

Question 49
Casey Productions needs to know its anticipated cash inflows for the next quarter by month. Cash sales are 10 percent of total sales each month. Historically, credit sales on account have been collected as follows: 60 percent in the month of sale, 30 percent in the month after the sale, and the remaining 10 percent two months after the sale. Sales for the quarter are projected as follows: April, $60,000; May, $50,000; and June, $70,000. Accounts receivable on March 31 were $30,000.

Calculate the amount of Casey's expected cash collections for June.

Question 50
Odoom Merchandising Firm is developing its budgets for Year 2. The Year 1 income statement is as follows:
Sales (100,000 units) $500,000
Less Cost of goods sold 300,000
Gross profit $200,000
Operating expenses (includes $20,000 of depreciation) 120,000
Net income $80,000

Selling prices will increase by 10 percent, and sales volume in units will decrease by 5 percent. The cost of good sold as a percent of sales will increase to 62 percent. Other than depreciation, all operating costs are variable.

Required: Prepare a budgeted functional income statement for Year 2.

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