2024 – Exercise 2 LO 1 Higgly Industries wants to formalize its management structure

Exercise 2 (LO 1)

 

Higgly Industries wants to formalize its management structure by designing an organization chart.  The company has a president, a board of directors, and two vice presidents.  Four discretionary cost centers-Business Office, Personnel, Technology Services, and Physical Plant-report to one of the vice presidents.  The other vice president has one production facility with three cost centers reporting to her.  Draw the company’s organization chart.

 

 

 

Exercise 8 (Economic Value Added LO 3) Accounting Connection

 

Game, LLP, is evaluating the performance of three divisions: Rock, Scissors, and Paper.  Using the data that follow, compute the economic value added by each division, and comment on each division’s performance.

 

 

 

	Rock	Scissors	Paper
Sales	$50,000	$50,000	$50,000
After-tax operating income	$5,000	$5,000	$20,000
Total Assets	$25,000	$12,500	$25,000
Current liabilities	$5,000	$5,000	$5,000
Cost of capital	15%	15%	15%

 

 

 

Exercise 12 (The balanced scorecard LO 4) Business Application

 

Unique Exclusive sells antiques to discerning clients.  The business has developed the following business objectives:

 

1.  To buy on the antiques that sell

2. To have repeat customers

3. To be profitable and grow

4. To keep employee turnover low

 

The business also developed the following performance measures:

 

1.  Growth in revenues and net income per quarter

2. Average unsold antiques at the end of the month as a percentage of the total antiques purchased that month

3. Number of unemployment claims

4. Percentage of repeat customers

 

Match each of these objectives and performance measures with the four perspectives of the balanced scorecard: financial perspective, learning and growth perspective, internal business processes perspective, and customer perspective. 

 

Problem 3 Evaluating Profit and Investment Center Performance (LO 1, 2, 3)

 

The managing partner of the law firm Sewell, Bagan, and Clark, LLP, makes asset acquisition and disposal decisions for the firm.  As managing partner, she supervises the partners in charge of the firm’s three branch offices.  Those partners have the authority to make employee compensation decisions.  The partners’ compensation depends on the profitability of their branch office.  Vanessa Smith manages the City Branch, which as the following master budget and actual results for the year ended December 31.

 

	Master Budget	Actual Results
Billed Hours	5,000	4,900
Revenue	$250,000	$254,800
Controlled variable costs:
Direct Labor	-120,000	-137,000
Vairable overhead	-90,000	-34,300
Contribution margin	$90,000	$83,300
Controllable fixed costs:
Rent	-30,000	-30,000
Other administrative expenses	-45,000	-42,000
Branch operating income	$15,000	$11,300

 

 

 

REQUIRED

 

1.  Assume that the City Branch is a profit center.  Prepare a performance report that includes a flexible budget.  Determine the variances between actual results, the flexible budget, and the master budget.

2. ACCOUNTING CONNECTION: Evaluate Vanessa Smith’s performance as manager of the City Branch.

3. Assume that the branch managers are assigned responsibility for capital expenditures and that the branches are thus investment centers.  City Branch is expected to generate a desired ROI of at least 30 percent on average invested assets of $40,000.

   1. Compute the branch’s return of investment and residual income (Round percentages to two decimals places).

   2. ACCOUNTING CONNECTION: Using the ROI and residual income, evaluate Vanessa Smith’s performance as branch manager.

 

NOTE:

 

Total variance between actual and flexible income: $1,900U

 

Total variance between flexible and master budget operating income: $1,800U

 

Problem 5 (The balanced scorecard and benchmarking LO 4) BUSINESS APPLICATION

 

Howski Associates is an independent insurance agency that sells business, automobile, home, and life insurance.  Maya Doyle, senior partner of the agency, recently attended a workshop at the local university in which the balanced scorecard was presented as a way of focusing all of a company’s functions on its mission.  After the workshop, she met with her managers in a weekend brainstorming session.  The group determined that Howski’s mission was to provide high-quality, innovative, risk-protection services to individuals and businesses.  To ensure that the agency would fulfill this mission, the group established the following objectives:

 

• To provide a sufficient return on investment by increasing sales and maintaining the liquidity needed to support operations

• To add value to the agency’s services by training employees to be knowledgeable and competent

• To retain customers and attract new customers

• To operate and efficient and cost-effective office support system for customer agents

 

To determine the agency’s progress in meeting these objectives, the group established the following performance measures:

 

• Number of new ideas for customer insurance

• Percentage of customers who rate services as excellent

• Average time for processing insurance applications

• Number of dollars spent on training

• Growth in revenues for each type of insurance

• Average time for processing claims

• Percentage of employees who compelte 40 hours of training during the year

• Percentage of new customer leads that result in sales

• Cash Flow

• Number of customer complaints

• Return on assets

• Percentage of customers who renew policies

• Percentage of revenue devoted to office support system (information systems, accounting, orders, and claims processing)

 

REQUIRED:

 

1.  Prepare a balanced scorecard for Howski by stating the agency’s mission and matching its four objectives to the four stakeholder perspectives: the financial, learning and growth, internal business processes, and customer.  Indicate which of the agency’s performance measure would be appropriate for each objective.

2. Howski is a member of an association of independent insurance agents that provides industry statistics about many aspects of operating an insurance agency.  What is benchmarking, and in what ways would the industry statistics assist Howski in further developing its balanced scorecard?