Question
Business unit profit statement; decentralisation; responsibility accounting; behavioural issues; financial performance reporting; theories of motivation. Surge Surfing is a retailer that sells surfing equipment and
Business unit profit statement; decentralisation; responsibility accounting; behavioural issues; financial performance reporting; theories of motivation.
Surge Surfing is a retailer that sells surfing equipment and gear. The firm leases space for stores in shopping centres, and the organisational structure consists of regions, districts and stores. Each region consists of two or more districts; each district consists of three or more stores. Each store, district and region has been established as a profit centre. At all levels, the company uses a responsibility accounting system focusing on information and knowledge rather than on blame and control. Each year, managers, in consultation with their supervisors, establish financial and non- financial goals, and these goals are integrated into the budget. Actual performance is measured each month.
The Queensland region consists of the southern district and northern district. The Southern district includes the Caloundra, Noose and Coolangatta stores. The southern district's performance has not been up to expectations. For the month of October, the district manager has set performance goals with the managers of the Caloundra and Noosa stores, who will receive bonuses if certain performance measures are exceeded. Since the manager of the Coolangatta store has decided not to participate in the bonus scheme, the performance of this store will not be displayed in the performance report under consideration. Since the district manager is unsure what type of bonus will encourage better performance, the Caloundra manager will receive a bonus based on sales in excess of budgeted sales of $1 200 000, while the Noosa manager will receive a bonus based on profit in excess of budgeted net profit. The company's profit goal for each store is 16 per cent of sales. The budgeted sales revenue for the Noose store is $1 100 000.
Other pertinent data for October are as follows:
- Southerndistrictsalesrevenuewas$3300000.SalesattheCaloundrastorewere40percent
- of Southern district sales, while sales at the Noosa store were 35 per cent of district sales.
- Southern district cost of goods sold amounted to $1 386 000. The cost of goods sold in both Caloundra and Noosa was 42 per cent of their store sales.
- Variable selling expenses (sales commissions) were 6 per cent of sales for all stores, districts and regions.
- Variableadministrativeexpenseswere2.5percentofsalesforallstores,districtsandregions.
- Maintenance costs include cleaning and repair services and are a direct cost for each store. The store manager has complete control over this outlay. Southern district's maintenance costs
- of $23 300 were incurred as follows: Caloundra, $14 000; Noosa, $1 300; and Coolangatta,
- $8 000.
- TheSoutherndistrictspent$180000onadvertising.Advertisingisconsideredadirectcostfor
- each store and is completely under the control of the store manager. The Caloundra store spent two-thirds of the Southern district's total outlay for advertising, which was 10 times the amount spent in the Noosa on advertising
- Southerndistrictrentalexpensesamountedto$350000.TherentalexpensesattheCaloundra store were 40 per cent of the Southern district's total, while the Noosa store incurred 30 per cent of the district total.
- General and administrative expenses for the Southern district amounted to $380 000. District expenses were allocated to the stores based on sales.
- Queensland Region general and administrative expenses of $300 000 were allocated to the Southern district. These expenses were, in turn, allocated equally to the district's three stores.
1. PrepareforthemonthofOctober,theBusinessunitprofitstatementfortheSoutherndistrictand for the Caloundra and Noosa stores in the table provided.
Southern district
Caloundra store
Noosa store
Sales
Less: cost of goods sold
Gross margin
Less: Variable selling expenses
Less: Variable admin expenses
Less: Store maintenance costs
Less: Store advertising costs
Less: Rent expenses
Less: District general administrative expenses (allocated)
Less: Regional general and administrative (allocated)
Total Expenses
Net Profit
2.Discusstheeffectofthemanagers'behaviouronthefinancialresultsfortheCaloundrastoreand the Noosa store that has occurred from the impact of the responsibility accounting system and bonus structure.
3.Explain why it is important to distinguish between the performance of a business unit manager and the performance of a business unit.
4.Discuss how Herzberg's theory of motivation and expectancy theory can help managers to design and implement incentive schemes.
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