Question 01:

SleepEase Ltd. produces a specialised bed called the Max-ease which is designed to ease back pains for orthopaedic patients. It started trading on the 1st January 2020. SleepEase sold 900 Max-ease beds and achieved a net profit margin close to 11% by the end of its first year of trading. Whilst the board of directors were pleased with the overall financial performance, they were disappointed by the sales figures.

SleepEases accounting records show the following results at the end of December 2020:

Direct materials per Max-ease bed	300.00
Direct labour per Max-ease bed	200.00
Variable manufacturing overhead per Max-ease bed	100.00
Variable distribution cost per Max-ease bed	50.00
Total fixed manufacturing overhead costs	200,000
Total fixed selling and administrative costs	67,000
Production	1,200 Max-ease beds
Sales	900 Max-ease beds
Sales price per Max-ease bed: Note: There were no beginning inventories in 2020.	1,000.00

On the 1st January 2021, SleepEase hired a new sales manager, Mr. Jack Spenser. The board of directors agreed to pay Mr. Spenser a bonus of 10,000 if he achieved a 10% increase in sales on 2020 providing the business also increased net profit by 10%.

SleepEases accounting records show the following results at the end of December 2021:

Direct materials per Max-ease bed		300.00
Direct labour per Max-ease bed		200.00
Variable manufacturing overhead per Max-ease bed		100.00
Variable distribution cost per Max-ease bed		50.00
Total fixed manufacturing overhead costs		200,000
Total fixed selling and administrative costs		67,000
Production		800 Max-ease beds
Sales		1,000 Max-ease beds
Sales price per Max-ease bed:		1,000.00

SleepEase uses an absorption costing system and all actual overheads were as budgeted. At the end of December 2021, Mr. Spenser was delighted to have increased sales by more than 10% and was sure that the net profit would have equally improved since costs appeared to have remained the same. Yet he was left dismayed and disillusioned after the board of directors decided that he would not receive any bonus because according to the financial statements, SleepEase had not attained the profit objective. The board of directors described his performance as satisfactory, but would not pay him a bonus because the overall firm performance target had not been achieved.

Required:

1. Produce profit statements based on absorption and marginal costing for SleepEase for the year ending 2020 and for the year ending 2021.
2. Produce an extract that clearly shows the reconciliation between net profits under both costing methods
3. Using the data provided in the SleepEase case and your profit statements produced in task 2, discuss why performance measurement systems and rewards should focus on performance that employees can control. Your answer must include a critical evaluation of financial and nonfinancial performance measures. Use relevant academic and professional literature to support your answer.