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Loose-Leaf for Managerial Accounting: Creating Value in a Dynamic Business Environment (11th Edition)

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Cathy’s Classic Clothes is a retailer that sells to professional women in the northeast. The firm leases space for stores in upscale shopping centers, and the organizational structure consists of regions, districts, and stores. Each region consists of two or more districts; each district consists of three or more stores. Each store, district, and region has been established as a profit center. At all levels, the company uses a responsibility-accounting system focusing on information and knowledge rather than blame and control. Each year, managers, in consultation with their supervisors, establish financial and nonfinancial goals, and these goals are integrated into the budget. Actual performance is measured each month. The New England Region consists of the Coastal District and the Inland District. The Coastal District includes the New Haven, Boston, and Portland stores. The Coastal District’s performance has not been up to expectations in the past. For the month of May, the district manager has set

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performance goals with the managers of the New Haven and Boston stores, who will receive bonuses if certain performance measures are exceeded. The manager in Portland decided not t participate in the bonus scheme. Since the district manager is unsure what type of bonus will encourage better performance, the New Haven manager will receive a bonus based on sales in excess of budgeted sales of $570,000, while the Boston manager will receive a bonus based on operating income in excess of budget. The company’s operating income goal for each store is 12 percent of sales. The budgeted sales revenue for the Boston store is $530,000. Other pertinent data for May are as follows: • Coastal District sales revenue was $1,500,000, and its cost of goods sold amounted to $633,750. • The Coastal District spent $75,000 on advertising. • General and administrative expenses for the Coastal District amounted to $180,000. • At the New Haven store, sales were 40 percent of Coastal District sales, while sales at the Boston store were 35 percent of district sales. The cost of goods sold in both New Haven and Boston was 42 percent of sales. • Variable selling expenses (sales commissions) were 6 percent of sales for all stores, districts, and regions. • Variable administrative expenses were 2.5 percent of sales for all stores, districts, and regions. • Maintenance cost includes janitorial and repair services and is a direct cost for each store. The store manager has complete control over this outlay. Maintenance costs were incurred as follows: New Haven, $7,500; Boston, $600; and Portland, $4,500. • Advertising is considered a direct cost for each store and is completely under the control of the store manager. The New Haven store spent two-thirds of the Coastal District total outlay for advertising, which was 10 times the amount spent in Boston on advertising. • Coastal District rental expense amounted to $150,000. • The rental expenses at the New Haven store were 40 percent of the Coastal District’s total, while the Boston store incurred 30 percent of the district total. • District expenses were allocated to the stores based on sales. • New England Region general and administrative expenses of $165,000 were allocated to the Coastal District. These expenses were, in turn, allocated equally to the district’s three stores. Required: 1. Prepare the May segmented income statement for the Coastal District and for the New Haven and Boston stores. 2. Compute the Portland store’s operating income for May.

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Chapter 12, Problem 52C

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New Haven [as prepared in requirement (1)], he realized that the New Haven store manager had really gone overboard on advertising expenditures. To make his friend look better to the regional management, h reclassified $25,000 of the advertising expenditures as miscellaneous expenses, and buried them in rent and other costs. Comment on the ethical issues in the assistant controller’s actions. (Refer to specific ethical standards that were given in Chapter 1.) (CMA, adapted)

Step-by-step solution

Step 1 of 7

Segment income statement: Segment may be geographical segment or business segment. The Separate Income statement prepared by the organization for each segment is called the Segment Income Statement.

Comment

Step 2 of 7

Key features of the segment income statement: 1. Contribution Format: The income statements are prepared using the concept of variable costing. Variable expenses are deducted from sales revenue to arrive at contribution margin. 2. Classification of Cost: Costs are classified into controllable and uncontrollable costs. Influence of segment manager over controllable cost is also measured. 3. Segmented Income Statement: Segment reporting presents data for the company as a whole and major segment of the company.

Comment

Step 3 of 7 1. Prepare the Statement Showing the May Segment Income for the C District and for the NH and B stores. Particulars

C District

Sales Revenue

$1,500,000

Less: Cost of Goods Sold

Gross profit

$633,750

$866,250

NH Store

B Store

$600,000

$525,000

($1,500,000

($1,500,000

40%)

35%)

$252,000

$220,500

($600,000

($525,000

42%)

42%)

$348,000

$304,500

Less: Expenses

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Chapter 12, Problem 52C

Variable Administrative Expenses

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$37,500

$15,000

$13,125

($1,500,000

($600,000

($525,000

2.5%)

2.5%)

2.5%)

$7,500

$600

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$12,600 Store Maintenance Cost

($7,500 + $600 + $4,500)

$5,000

$50,000 Advertising Cost

$75,000 ($75,000

Rent Expenses

$150,000

District Expenses

$180,000

Region General and Administrative Expenses

2/3)

($50,000 10%)

$60,000

$45,000

($150,000

($150,000

40%)

30%)

$72,000

$63,000

(180,000

(180,000

40%)

35%)

$55,000

$55,000

$165,000

Total Expenses

$710,100

$295,500

$213,225

Net Income

$156,150

$52,500

$91,275

Comment

Step 4 of 7 2. Computation of P Stores Net Income for the Month of May: Particulars

Amount

C District total income

$156,150

Less: NH Store income

$52,500

Less: B store income

$91,275

Net income of P stores $12,375

Comment

Step 5 of 7

Therefore, the net income of P stores is $12,375.

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3. The impact of t e responsibility-accounting system and the bonus structure on the manager’s behavior is as follows: NH store Manager: Bonus in NH Store will be attracted if sales exceed the budgeted sales, i.e., $570,000. Here the problem is that manager will only keep his eyes on increasing the sales and neglect the cost factors. Department management expended heavy cost on the advertising compared to the othe stores to increase the sales. The ultimate effect of bonus plan is reduction in overall profit. B store: Bonus in B store will be attracted if income exceeds the budgeted income. To increase the income, manager has to deal with both the cost and revenue factors. To increase the net income manager will use the effective cost structure. The ultimate effect of bonus plan is increase in the overall profit.

Comment

Step 7 of 7 4. Employee of the organization should behave ethically and follow the standard of ethics pertainin to competence, integrity, creditability, and confidentiality. They should disclose all relevant information that is used for decision making by higher authority. They should not give importance to personal interest rather organizational interest should be followed. By reclassifying the cost, employee distorted the actual result of the store which can lead to wrong decisions.

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Recommended solutions for you in Chapter 12 Chapter 12, Problem 27E For each of the following organizational subunits, indicate the type of responsibility center that is most appropriate. 1.... See solution

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