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Decentralization and Performance Evaluation for Gantry Manu

Decentralization and Performance Evaluation

$46,500 were incurred for each month during the quarter ended June 30, 2007. Thirty percent of the monthly expenses are related to manufacturing employees and the remainder is related to administrative employees.

Jim was immediately frustrated by all that he learned from the accountant. Because his and other managers' bonuses depend on quarterly financial performance, he feels that the corporate memos unfairly reduce his division's profits. He asked his controller to prepare a revised income statement without the changes implemented by the corporate office during the quarter. Amarillo's revised income statement ap- peared as follows:

Segmented Income Statement Amarillo Facility For the quarter ending June 30, 2007 (Revised)
Sales $18,450,000

Variable expenses Contribution margin Divisional fixed expenses Segment margin
17,511,310
$ 938,690 912,050
$ 26,640

Jim is not particularly pleased with the financial performance of his facility, but prefers to report a small profit as opposed to a more significant loss. He now must decide how to communicate with the corporate office about this revised income statement. You should bear in mind that the corporate office only provides adminis- trative services and does not manufacture goods; however, sales activities for five of the company's facilities are handled in the corporate office.

A. Assist Jim by identifying reasons that support his desire to not require the Amarillo facility to implement the changes made by the corporate office.
B. What are the implications of having the corporate office issue memos requiring the facilities to record certain expenses given the company's bonus structure? How will the corporate office's new policy affect the facility management's motivation?
C. What are some of the possible bases that Gantry Manufacturing could use to allocate fixed expenses?

Solution Preview

A. Assist Jim by identifying reasons that support his desire to not require the Amarillo facility to implement the changes made by the corporate office.

While it is known that the divisions must price to cover all business expenses, not just their own division, but also a share of the common expenses, such as corporate and selling, allocating these cost to the division will not help the organization. Why not? Amarillo cannot control or influence the corporate or selling function and so the performance of the Amarillo manager should be enhanced or decreased because of these common activities. The performance of the division manager should be based on division activities and ...

Solution Summary

Your tutorial is 322 words and explains how arbitrary allocations impact division managers, some other approaches that might work and some ideas for Jim to use to explain why allocating these costs in the bonus computation is not a good idea.

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