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Comment on the advantages and disadvantages of the incentive compensation plans it applies to department heads. The new incentive compensation plan was adopted. Under this

Comment on the advantages and disadvantages of the incentive compensation plans it applies to department heads.

The new incentive compensation plan was adopted. Under this plan, each three department heads are rewarded based on the performance of his or her responsibility center. Performance is measured against the companys master budget and standard cost system. The plan was the result of several meetings with Janet McKinley who is employed by the Quality Products Corporation and Vice President in charge of BTCs division of quality products and her managers. The managers argued and bargained for a plan that rewarded the managers fairly for individual contribution and achievements. McKinleys plan was intended to promote participation and teamwork and the manages accepted the new preprogram enthusiastically. The plan provides for the followings:

David Hall, the purchasing manager, will receive a bonus equal to 20% of the net materials price if the variance is favorable

Rita Smith, the production manager, will receive a bonus equal to 10% of the excess if any of the actual net revenues (revenues minus both variable and fixed selling expenses) over master budget net revenues.

Bill Wilford, the production manager, will receive a bonus equal to 3% of the net of several variances: the efficiency (usage or quality) variances for materials, labor, and variable overhead; the labor rate variance; and the variance and fixed overhead spending variances. He will receive no bonus if his net variance is unfavorable.

Statement of Operating Income for the Year Ended June 30, 1998

Actual Master Budget Master Budget Variance F/ U Flexible Budget Flexible Budget Variance F/ U
Units sold 325,556 280,000 45,556 F 325,556
Retail and catalog in units 174,965 8,573,285 11,662,000 3,088,715 U 8,573,285
Internet 105,429 4,428,018 - (4,428,018) F 4,428,018
Wholesale 45,162 1,445,184 1,344,000 (101,184) F 1,445,184
Total units 325,556
Total Revenue 14,446,487 13,006,000 (1,440,487) F 14,446,487
Variable Production Costs
Direct Materials
Acrylic pile fabric 256,422 233,324 (23,098) U $271,302 (14,880) F
10-mm acrylic eye 125,637 106,400 (19,237) U $123,711 1,926 U
45-mm plastic joints 246,002 196,000 (50,002) U $227,889 18,113 U
polyester fiber filling 450,856 365,400 (85,456) U $424,851 26,005 U
woven label 16,422 14,000 (2,422) U $16,278 144 U
designer box 69,488 67,200 (2,288) U $78,133 (8,645) F
accessories 66,013 33,600 (32,413) U $39,067 26,946 U
Total Direct Labor Materials 1,230,840 1,015,924 (214,916) U $ 1,181,231 49,609 U
Direct labor 3,668,305 2,688,000 (980,305) U 3,125,338 542,967 U
variable overhead 1,725,665 1,046,304 (679,361) U 1,216,538 509,127 U
Total variable production costs 6,624,810 4,750,228 (1,874,582) U 5,523,091 1,101,719 U
Variable Selling expenses 1,859,594 1,218,280 (641,314) 1,416,494 443,100 U
Total variable expenses 8,484,404 5,968,508 (7,266,124) U 6,939,585 1,544,819 U
Contribution Margin 5,962,083 7,037,492 7,037,492 U 7,506,902 (1,544,819) U
Fixed costs
manufacturing overhead 658,897 661,920 3,023 F 769,614 (110,717) F
selling expenses 5,023,192 4,463,000 (560,192) U 4,463,000 560,192 U
administrative expenses 1,123,739 1,124,000 261 F 1,124,000 (261) F
total fixed costs 6,805,828 6,248,920 (556,908) U 6,356,614 449,214 U
Operating Income (843,745) 788,572 7,594,400 U 1,150,272 (1,994,017) F
Price and Efficiency Variance
Actual Costs Price Variance Actual input, standard Prices Efficiency Variance Flexible Budget
Direct Materials
Acrylic pile fabric 256,422 20,428 F $276,850 ($5,548) U $271,302
10-mm acrylic eye 125,637 - $125,637 ($1,926) U $123,711
45-mm plastic joints $246,002 25,181 F $271,183 ($43,294) U $227,889
polyester fiber filling 450,856 48,183 F $499,039 ($74,188) U $424,851
woven label 16,422 - 16,422 ($145) U $16,278
designer box 69,488 6,317 F $75,805 $2,328 F $78,133
accessories 66,013 (26,946) U $41,346 $0 $39,067
Total Direct materials 1,230,840 73,164 F $1,306,283 ($122,772) U $1,181,232
Direct Labor 3,668,305 ($76,329) U $3,591,976 ($466,638) U $3,125,338
Variable Overhead 1,725,665 ($327,488) U $1,398,177 ($181,639) U $1,216,538
Total Variable Cost 6,624,811 (330,654) U 6,296,435 (771,049) U 5,523,107
Sales
Units Actual Master Budget Master Budget Variance Flexible Budget (Actual Sales Mix) Flexible Budget Variance (Budget Sales Mix) Sales Mix Variance Sales Volume Variance
Unit Sold 325,556 280,000 45,556 325,556 325,556 0 45,556
Retail and Catalog 174,965 8,573,285 11,662,000 3,088,715 8,573,285 13,559,574 -4,986,289 1,897,407
Internet 105,429 4,428,018 - (4,428,018) 4,428,018 0 4,428,018 0
Wholesale 45,162 1,445,184 1,344,000 (101,184) 1,445,184 1,562,656 -117,472 218,669
Total revenue 14,446,487 13,006,000 -1,440,487 14,446,487 15,122,230 -675,743 2,116,076

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