Question

1. 2 Ollie Mace is the controller of SDC, an automotive parts manufacturing firm. Its four major operating divisions are heat treating, extruding, small parts stamping, and machining. Last year’s sales from each division ranged from $150,000 to $3 million. Each division is physically and managerially independent, except for the constant surveillance of Sam Dilley, the firm’s founder.

   The AIS for each division evolved according to the needs and abilities of its accounting staff. Mace is the first controller to have responsibility for overall financial management. Dilley wants Mace to improve the AIS before he retires in a few years so that it will be easier to monitor division performance. Mace decides to redesign the financial reporting system to include the following features:

   • It should give managers uniform, timely, and accurate reports of business activity. Monthly reports should be uniform across divisions and be completed by the fifth day of the following month to provide enough time to take corrective actions to affect the next month’s performance. Company-wide financial reports should be available at the same time.

   • Reports should provide a basis for measuring the return on investment for each division. Thus, in addition to revenue and expense accounts, reports should show assets assigned to each division.

   • The system should generate meaningful budget data for planning and decision-making purposes. Budgets should reflect managerial responsibility and show costs for major product groups.

   Mace believes that a new chart of accounts is required to accomplish these goals. He wants to divide financial statement accounts into major categories, such as assets, liabilities, and equity. He does not foresee a need for more than 10 control accounts within each of these categories. From his observations to date, 100 subsidiary accounts are more than adequate for each control account.

   No division has more than five major product groups. Mace foresees a maximum of six cost centers within any product group, including both the operating and nonoperating groups. He views general divisional costs as a non-revenue-producing product group. Mace estimates that 44 expense accounts plus 12 specific variance accounts would be adequate.

   Required

   Design a chart of accounts for SDC. Explain how you structured the chart of accounts to meet the company’s needs and operating characteristics. Keep total account code length to a minimum, while still satisfying all of Mace’s desires. (CMA Examination, adapted)

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Answer 1

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