Instruction: Below are two essay questions. Write down all the detailed explanations with good business format and use the terminology that you learn from the course. It is required to do some minor research in each question.
Part 1. Diversified Products Inc.. Has recently acquired a small publishing company that offer three books for sale -a cookbook, a travel guide, and a handy speller. Each book sells for $10. The publishing company's most recent monthly income statement is given:
|
|
Total Company
|
Cookbook
|
Travel Guide
|
Handy Speller
|
|
Sales
|
300,000
|
90,000
|
|
150,000
|
|
60,000
|
|
Expenses:
|
|
|
|
|
|
|
|
Printing Costs
|
102,000
|
27,000
|
|
63,000
|
|
12,000
|
|
Advertising
|
36,000
|
13,500
|
|
19,500
|
|
3,000
|
|
General Sales
|
18,000
|
5,400
|
|
9,000
|
|
3,600
|
|
Salaries
|
33,000
|
18,000
|
|
9,000
|
|
6,000
|
|
Equipment depreciation
|
9,000
|
3,000
|
|
3,000
|
|
3,000
|
|
Sales commissions
|
30,000
|
9,000
|
|
15,000
|
|
6,000
|
|
General administration
|
42,000
|
14,000
|
|
14,000
|
|
14,000
|
|
Warehouse rent
|
12,000
|
3,600
|
|
6,000
|
|
2,400
|
|
Depreciation- office facilities
|
3,000
|
1,000
|
|
1,000
|
|
1,000
|
|
Total expenses
|
285,000
|
94,500
|
|
139,500
|
|
51,000
|
|
NOI (loss)
|
$ 15,000
|
$ (4,500)
|
$
|
10,500
|
$
|
9,000
|
The following additional information is available about the company:
A. The same equipment is used to produce all three books, so the equipment depreciation cost has been allocated equally among the three product lines. An analysis of the company's activities indicates that the equipment is used 30% of the time to produce cookbooks, 50% of the time to produce travel guides, and 20% of the time to produce handy spellers.
B. The general sales cost above includes the salary of the sales manager and other sales costs not traceable to any specific product line. This cost has been allocated to the product lines on the basis of sales dollars.
Issues
1. Write a detailed memo to persuade the CEO to use absorption costing Income statement approach for internal control purpose.
2. What are the pros and cons for absorption costing income statement and variable costing income statement approaches ?
3.Comment any ethical and control issues on both absorption costing income statement and variable costing income statement .
4. AS a CFO in this company, would you suggest that the company should eliminate the cookbook and promote travel guide. Please provide the detailed explanation.
Part 2. Madden International is a large 7 billion sales, successful international pharmaceuticals firm operation in 23 countries with 15 autonomous subsidiaries. The corporate office consists of five Vice presidents who oversee the operations of the subsidiaries. These five vice presidents report to two executive vice presidents, who in turn report to the president of the firm.
The 15 subsidiaries specialize by pharmaceutical type and in some cases by country. The pace of innovation in this industry is very fast. In addition, each country has its own elaborate regulatory environment that controls new drug introduction, pricing, and distribution. Each market has its own peculiarities concerning hospital drug purchases. It is an understatement to say that Madden International operates in a very complex world that changes daily.
The corporate office requires each subsidiary to maintain an elaborate, detailed budget and control system. The following points summarize the budget and control system in each subsidiary:
A. One through five year budgets are prepared each year.
B. The vice president overseeing the subsidiary looks for three and five year budgets that stretch the subsidiary's capabilities. That is, subsidiaries are pushed to devise programs that increase value.
C. These budgets are developed and approved first at the subsidiary level, then by corporate headquarters.
D. Every three months the subsidiaries must reconcile actual performance to budget and write detailed reports to the corporate office explaining variances and corrective actions to be taken.
E. The corporate vice president assigned to the subsidiary makes quarterly visits for three days of meetings that involve extensive reviews of the budgets and operating results. These meetings involve all the senior managers in the subsidiary.
F. Subsidiary senior managers are not compensation or rewarded for meeting budget targets. Rather, they are evaluated on their ability to develop new markets, solve short-run problems, add value to their organization and to Madden International, and manage and motivate their subordinates. These performance evaluation criteria are quite subjective. But the corporate vice presidents have a great deal of in depth personal contact with each of the senior people in their subsidiaries and are able to arrive at suitable performance evaluations.
G. Preparing for these meetings with the corporate vice president and developing the budgets requires the involvement of their senior managers in the subsidiary.
It turns out that Madden International is not special in the amount of senior management time spent on budgeting and financial reviews. A survey of large, publicly traded US firms supports the Madden System. Researchers found that innovative firms in complex environments characterized by high uncertainty and change used much more elaborate formal financial control budgeting system and did firms in more stable, mature industries. Innovative firms seems to employ more financial controls than less-innovative firms.
Issues
1. List the strengths and weakness of the budgeting (focus on the discussion on static budget, flexible budget and standard job costing ) and control system at Madden International.
2. Why might you expect firms like Madden International to rely so heavily on formal financial control systems ? The discussion should be focused on the ethics, fraud aspects.