Question
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 |
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