Question

34. Comprehensive Responsibility Accounting, Segment Margin, and ManagementCompensation LO2, 4, 8 Gantry Manufacturing is a medium-sized organization with manufacturing facilities in seven locations around the southwestern United States. Of these facilities, Galveston and Amarillo are treated as profit centers, with local management exercising authority over manufacturing costs, certain nonmanufacturing costs (e.g., advertising at local minor league baseball stadiums, sponsoring local charity events), and sales revenue. The segment income statements that follow were prepared by facility-level accountants and were provided to the corporate office in Denver, Colorado, shortly after the end of this year's second quarter. Note that the statements are shown in parallel for convenience and are not intended to be combined for analysis purposes. The managers of these two facilities are former classmates at the University of Texas at Austin and routinely stay in touch with each other. Shortly after receiving the quarterly results from his accountant, the Amarillo manager, Jim Lowell, called his friend in Galveston to talk about the surprising loss shown on his facility's income statement. After a short conversation with the Galveston manager, Jim met with his accountant. He learned the following: - A recent memo sent from the corporate controller to all facility controllers indicated that new manufacturing overhead rates should be used beginning May 1, 2012. The old rate was $2.80 per direct labor hour and the new rate is $3.25 per direct labor hour. The memo had a new policy statement attached to it asserting that individual manufacturing facilities could no longer establish individual overhead rates. - An average of 210 employees worked 40 hours per week during the quarter. There were 13 weeks in the second quarter. - Each division was required to record a onetime expense associated 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 manufacturing employees, and the remainder is related to administrative employees. • • - The corporate office also implemented a new policy related to certain divisional employees' retirement, insurance, and other benefits. In past years, all benefits were paid by the corporate office and were not allocated to local facilities. However, the company's new president believes that those costs are more properly reflected in the expenses of the individual facilities because they are incurred by local employees. In total, additional retirement and insurance expenses of $46,500 were incurred for each month during the quarter ended June 30, 2012. 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 appeared as follows: • • Jim is not particularly pleased with the financial performance of his facility, preferring 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 administrative services and does not manufacture goods; however, sales activities for five of the company's facilities are handled in the corporate office. Required A. Assist Jim by identifying reasons that support his desire that the Amarillo facility not be required 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? After addressing letters A through C, address the following questions: You are presented with additional information regarding the overall operations of Gentry Manufacturing that currently operates as a privately held firm. You learn that the overall financial results of the company indicate that they have an annual operating income of $15 million, with $125 million allocated towards research and development costs for an upcoming project. However, recent accounting updates suggest that the annual operating income generated would be $7.5 million due to changing economic conditions and consumer preferences. • What is the return on investment (ROI) based upon original estimates? What is the ROI if the new operating income projections are used? • During the next upcoming internal meeting for managers and executives, what advice would you provide to the CEO when she must present a report regarding the proposed project and anticipated results? Assume that the organization has plans to "go public" with an initial public stock offering next year. Would your advice change? • What responsibility does the CEO have to other Gentry employees (including Jim), other managers, the board of directors, and potential venture capitalists? • Include a discussion of Biblical principles and how they are applicable to various areas of the Assignment (e.g. Jim's decision regarding the revised income statement, new corporate policies regarding expenses, benefits, an bonus structure, fixed expense allocation, accurate ROI reporting, and performance reporting responsibilities). What is the return on investment (ROI) based upon original estimates? What is the ROI if the new operating income projections are used?

Answer 1

Answer:-

Each Organization will have working structure from the season of associations development and its activity which we for the most part comprehend as corporate structure. The associations tasks comprising of different exercises and situated at better places dependent on the size and nature of business will be ordered in to corporate and divisional focuses which are additionally separated in to offices to carryout its activities in a productive way comprehended as practical authoritative structure.

The organizations frame various policies, procedures, guidelines based on which they operate and they are given various decision making authority depending up on the responsibilites they need to meet. The division managers should implement these policies after considering the authority given and considering its affects on the division and organization performance and revise the policies after discussion with higher management in the interest of the organization.

For this situation Galveston and Amarillo are treated as benefit focuses, henceforth neighborhood the executives can practicing expert over assembling costs certain nonmanufacturing costs (e.g., publicizing at nearby small time baseball arenas, supporting neighborhood philanthropy occasions), and deals income.

However in this case the corporate office some changes to the existing policies and the corporate office also implemented a new policy related to certain divisional employees' retirement, insurance, and other benefits.

the organization's new president choice that those expenses are all the more legitimately reflected in the costs of the individual offices since they are caused by nearby representatives is a valied see point and it serves to accurately mirror the portion income and cost. This understudy sets up the responsibilites of division chiefs to concentrate on Direct work cost which is one of the real expense of assembling associations

However the decision that individual manufacturing facilities could no longer establish individual overhead rates is not prudent since these are affected by number of factors.  

Henceforth for this situation JIM should display the report according to new and old arrangements and clarify how it will impact his advantage since he is paid compencation according to old strategies and continue further.

For a public company, any business unit that has at least 10% of the revenues, net profits, or assets of the parent company

Henceforth for this situation JIM should display the report according to new and old arrangements and clarify how it will impact his advantage since he is paid compencation according to old strategies and continue further.

You should also consider creating a separate statement of cash flows for each business segment, which gives an accurate view of the sources and uses of cash by segment.

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