Performance evaluation in most firms is applied

112. Tough-Built Corporation produces specialized truck body components, specializing in hydraulic lifts for dump trucks. Founded 35 years ago by George Halloway, the firm now employs 150 workers and has annual sales of over $10 million. George operates the firm in a highly centralized way, and retains control over all changes in operations. He is a regular visitor to the production area, which helps him "keep his finger on the pulse of the firm." Although George Halloway is now 67 years old, he has no apparent management successor, and has always hand-picked his department heads and staff personnel. He has been generous to those who worked for him, paying substantial bonuses each year to the employees based on his personal evaluation of each worker. Just six weeks ago, a heart attack convinced George to consider retirement, and he decided to sell the firm to his employees. You are assigned the task of recommending a set of strategic performance measures for the firm, assuming that the new worker management wants to operate as a decentralized firm. Required: What major management problems do you foresee in the transition from sole owner to employee ownership?

113. Harrison Hartwell and Zenith is a successful law firm employing 26 professionals. There is an internal controversy over allocation of the $104,000 purchase cost of a highly sophisticated electronic law library. Each professional employee of the firm has been assessed $4,000 as a charge against the profit distribution account of each of the 26 members affected. In addition, it is expected to cost about $2,600 per month to update information for the library system, resulting in a monthly $100 assessment against each professional in the firm.

Required: (a) As a new junior member of the professional legal group of 26, why might you not like the proposed electronic library costallocation? (b) Propose an alternate allocation method for both the initial purchase cost and the updating charge that is more equitable (fair).(c) Could one argue for no allocation at all in this case? On what basis?

114.

McShane Inc. manufactures hair brushes that sell at wholesale for $6.00 per unit. Budgeted production in both 2009 and 2010 was 2,000 units and fixed overhead budgeted was $25,000 in each year. There was no beginning inventory in 2009. The following data summarized the 2009 and 2010 operations:

Required:Determine income under both full costing and variable costing and explain the difference.

115. 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 used the same predetermined overhead rate in applying overhead to production orders in both 2010 and 2011. The rate was based on the following estimates:

In 2009 and 2010, actual direct labor hours expended were 20,000 and 23,000, respectively. Raw materials put into production were $292,000 in 2009 and $370,000 in 2010. Actual fixed overhead was $37,400 for 2010 and $42,300 for 2009, 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. Required: (1) For the year December 31, 2010, 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 2010 income statement prepared on the basis of variable costing. (3) Describe both the advantages and disadvantages of using variable costing.

116. 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?

^117.Betty Jones and Penny White are associates at the same law firm in Atlanta. They traveled to New York City together recently to visit

their respective clients. From the airport, they shared a cab ride to their hotel. The cab ride for Betty alone would have cost $18.00, but for two passengers the cost was $22.00. Had Betty not offered to share the cab ride, Penny (in deference to her client's frugality) would have taken the bus to Grand Central Station, which is six blocks from the hotel, at a cost of $10.00.

Required: How should the $22.00 cost of the cab ride be allocated to the two clients?

118. 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 can not 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 beevaluated 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 factorA 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 nowused 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.

119. 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 theevaluation 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.

120. Tyler Company had the following manufacturing information for the current year.

Required:Determine operating income under both full costing and variable costing and explain the difference.

121. Greg Peterson was recently appointed vice president of operations for Webster Corporation. He has a manufacturing background and previously served as operations manager of Webster's tractor division. The business units of Webster Corporation include divisions that manufacture heavy equipment, process food, and provide financial services. In a recent conversation with Carol Andrews, Webster's chief financial officer, Greg suggested evaluating unit managers on the basis of the business unit data in Webster'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. Carol has reservations about using information from the annual financial report for this purpose and suggested that Greg 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 Webster Corporation's unit managers if Greg's proposal for their evaluation is accepted. 3. Identify and describe several types of information that would be appropriate for Greg Peterson to use when evaluating the performance of unit managers.

(CMA Adapted)