Advanced: Accounting, motivational and ethical issues arising from divisional actions Within a large group, divisional managers are paid a bonus which can represent a large proportion of their annual earnings. The bonus is paid when the budgeted divisional profit for the financial year is achieved or exceeded.

Meetings of divisional boards are held monthly and attended by the senior management of the division, and senior members of group manage¬ ment.

With the aid of the financial year approaching, there had been discussion in all divisional board meetings of forecast profit for the year, and whether budgeted profit would be achieved. In three board meetings, for divisions which were having difficulty in achieving budgeted profits, the following divisional actions had been discussed. In each case, the amounts involved would have been material in determining whether the division would achieve its budget:

• Division A had severely cut spending on training, and postponed routine re-painting of premises.

• Division B had re-negotiated a contract for consultancy services. It was in the process of installing Total Quality Management (TQM) systems, and had originally agreed to pay progress payments to the consultants, and had budgeted to make these payments. It had re¬ negotiated that the consultancy would invoice the division with the total cost only when the work was completed in the next financial year.

• Division C had persuaded some major customers to take early delivery, in the current financial year, of products originally ordered for delivery early in the next financial year. This would ensure virtually nil stock at year end.

Requirement:

Discuss the financial accounting, budgeting, ethical and motivational issues which arise from these divisional actions.

Comment on whether any group management action is necessary. (20 marks)

CIMA Stage 4 Management Accounting Control Systems