125. The Daniels Tool & Die Corporation has been in existence for a little over three years; its
sales have been increasing each year as it has built a reputation. The company manufactures
dies to its customers’ specifications; as a consequence, a job order cost system is employed.
Factory overhead is applied to the jobs based on direct labor hours. Actual variable overhead is
the same as applied variable overhead. Overapplied or underapplied overhead is treated as an
adjustment to cost of goods sold. The company’s income statements for the last two years are
presented below.
Daniels Tool & Die Corporation
2015 – 2016 Comparative Income Statement
2015 2016
Sales $840,000 $1,015,000
Cost of goods sold
Finished goods, 1/1 25,000 18,000
Cost of goods manufactured 548,000 657,600
Total available 573,000 675,600
Finished goods 12/31 18,000 14,000
Cost of goods sold before overhead adjustment 555,000 661,600
Underapplied factory overhead 36,000 14,400
Cost of goods sold 591,000 676,000
Gross profit 249,000 339,000
Selling expenses 82,000 95,000
Administrative expenses 70,000 75,000
Total operating expenses 152,000 170,000
Operating income $97,000 $169,000
Daniels used the same predetermined overhead rate in applying overhead to production orders
in both 2015 and 2016. The rate was based on the following estimates:
Fixed factory overhead $25,000
Variable factory overhead $155,000
Direct labor hours 25,000
Direct labor costs $150,000
In 2015 and 2016, actual direct labor hours expended were 20,000 and 23,000, respectively. Raw
materials put into production were $292,000 in 2015 and $370,000 in 2016. Actual fixed overhead
was $37,400 for 2016 and $42,300 for 2015, and the planned direct labor rate was the direct labor
rate achieved.
For both years, all of the reported administrative costs were fixed, while the variable portion of
the reported selling expenses result from a commission of five percent of sales revenue.
Daniels Tool & Die Corporation
Inventory Information
1/1/2015 1/1/2016 12/31/2016
Raw material $22,000 $30,000 $10,000
Work-in-process $40,000 $48,000 $64,000
Direct labor hours assigned 1,335 1,600 2,100
Finished goods $25,000 $18,000 $14,000
Direct labor hours assigned 1,450 1,050 820
(CMA adapted)
Required:
(1) For the year December 31, 2016, prepare a revised income statement for Daniels Tool & Die
Corporation utilizing the variable costing method. Be sure to include the contribution margin on
your statement.
(2) Prepare a numerical reconciliation of the difference in operating income between Daniels
Tool & Die Corporation’s costing and the revised 2016 income statement prepared on the basis of
variable costing.
(3) Describe both the advantages and disadvantages of using variable costing.
126. Red Apple Industries manufactures institutional-use furniture. Dept. A is responsible for
welding the base of the desk to the chair assembly. The desks are then placed on an automatic
conveyer to Dept. B, where the desktop is riveted to the chair. The desks continue on the
conveyer to Dept. C for further assembly. Wanda, the manager of Dept. A, is responsible for
moving 800 welded desks per hour to Dept. B. A faulty circuit in Dept. B causes a delay in
processing in the department and prompts Rosie, the Dept. B manager, to ask Wanda to stop the
conveyer. Wanda refuses, necessitating the removal of the welded desks from the conveyer until
the riveting can resume. Rosie bills Wanda’s department for the costs of this extra work. Wanda
disputes the charge, citing her responsibility to convey 800 desks/hour to Dept. B.
Required:
How should the managers’ dispute be resolved? How could it have been avoided?
127. Divisional managers of SIU Incorporated have been expressing growing dissatisfaction
with the current methods used to measure divisional performance. Divisional operations are
evaluated every quarter by comparison with the static budget prepared during the prior year.
Divisional managers claim that many factors are completely out of their control but are included
in this comparison. This results in an unfair and misleading performance evaluation.
The managers have been particularly critical of the process used to establish standards and
budgets. The annual budget, stated by quarters, is prepared six months prior to the beginning of
the operating year. Pressure by top management to reflect increased earnings has often caused
divisional managers to overstate revenues and/or understate expenses. In addition, once the
budget had been established, divisions were required to “live with the budget.” Frequently,
external factors such as the state of the economy, changes in consumer preferences, and actions
of competitors have not been adequately recognized in the budget parameters that top
management supplied to the divisions. The credibility of the performance review is curtailed
when the budget cannot be adjusted to incorporate these changes.
Top management, recognizing the current problems, has agreed to establish a committee to
review the situation and to make recommendations for a new performance evaluation system.
The committee consists of each division manager, the Corporate Controller, and the Executive
Vice President who serves as the chairman. At the first meeting one division manager outlined an
Achievement of Objectives System (AOS). In this performance evaluation system, divisional
managers would be evaluated according to three criteria:
• Doing better than last year – Various measures would be compared to the same measures of
the prior year.
• Planning realistically – Actual performance for the current year would be compared to realistic
plans and/or goals.
• Managing current assets – Various measures would be used to evaluate the divisional
management’s achievements and reactions to changing business and economic conditions.
A division manager believed this system would overcome many of the inconsistencies of the
current system because divisions could be evaluated from three different viewpoints. In addition,
managers would have the opportunity to show how they would react and account for changes in
uncontrollable external factors.
A second division manager was also in favor of the proposed AOS. However, he cautioned that
the success of a new performance evaluation system would be limited unless it had the complete
support of top management. Further, this support should be visible within all divisions. He
believed that the committee should recommend some procedures which would enhance the
motivational and competitive spirit of the divisions.
Required:
(1) Explain whether or not the proposed AOS would be an improvement over the measure of
divisional performance now used by SIU Incorporated.
(2) Develop specific performance measures for each of the three criteria in the proposed AOS
which could be used to evaluate divisional managers.
(3) Discuss the motivational and behavioral aspects of the proposed performance system. Also,
recommend specific programs which could be instituted to promote morale and give incentives to
divisional management.
128. Chadd Fisher was recently appointed vice president of operations for Cary Corporation.
He has a manufacturing background and previously served as operations manager of Cary’s
building products division. The business units of Cary Corporation include divisions that
manufacture building products, process food, and provide financial services.
In a recent conversation with Drew Williams, Cary’s chief financial officer, Chadd suggested
evaluating unit managers on the basis of the business unit data in Cary’s annual financial report.
This report presents revenues, earnings, identifiable assets, and depreciation for each business
unit for a five-year period. He believes that evaluating business unit managers by criteria similar
to that used to evaluate the company’s top management is appropriate. Drew has reservations
about using information from the annual financial report for this purpose and suggested that
Chadd consider other criteria to use in the evaluation.
Required:
1. Explain why the business unit information prepared for public reporting purposes might not be
appropriate for the evaluation of unit managers’ performance.
2. Describe the possible motivational impact on Cary Corporation’s unit managers if Chadd’s
proposal for their evaluation is accepted.
3. Identify and describe several types of financial information that would be more appropriate for
Chadd Fisher to use when evaluating the performance of unit managers.