Cathy\'s Classic Clothes is a retailer that sells to professional women in the n
ID: 2337695 • Letter: C
Question
Cathy's Classic Clothes is a retailer that sells to professional women in the northeast. The firm leases space for stores in upscale shopping centers, and the organizational 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 center. At all levels, the company uses a responsibility-accounting system focusing on information and knowledge rather than blame and control. Each year, managers, in consultation with their supervisors, establish financial and nonfinancial goals, and these goals are integrated into the budget. Actual performance is measured each month The New England Region consists of the Coastal District and the Inland District. The Coastal District includes the New Haven, Boston and Portland stores. The Coastal District's performance has not been up to expectations in the past. For the month of May, the district manager has set performance goals with the managers of the New Haven and Boston stores, who will receive bonuses if certain performance measures are exceeded. The manager in Portland decided not to participate in the bonus scheme. Since the district manager is unsure what type of bonus will encourage better performance, the New Haven manager will receive a bonus based on sales in excess of budgeted sales of $580,000, while the Boston manager will receive a bonus based on operating income in excess of budget. The company's operating income goa for each store is 13 percent of sales. The budgeted sales revenue for the Boston store is $540,000 Other pertinent data for May are as follows Coastal District sales revenue was $1,580,000, and its cost of goods sold amounted to $637,950 The Coastal District spent $82,500 on advertising General and administrative expenses for the Coastal District amounted to $186,000 At the New Haven store, sales were 40 percent of Coastal District sales, while sales at the Boston store were 35 percent of district sales. The cost of goods sold in both New Haven and Boston was 42 percent of sales. Variable selling expenses (sales commissions) were 7 percent of sales for all stores, districts, and regions Variable administrative expenses were 2.8 percent of sales for all stores, districts, and regions .Maintenance cost includes janitorial and repair services and is a direct cost for each store. The store manager has complete controlExplanation / Answer
1. Prepare the May segmented income statement for the Coastal District and for the New Haven and Boston stores.
CATHY'S CLASSIC CLOTHES: NORTHEAST REGION
Segmented Income Statement
For May
Coastal
District
New Haven
Store
Boston
Store
Sales
Less: Cost of goods sold
Gross margin
Operating expenses:
Variable selling
Variable administrative
Other direct expenses:
Store maintenance
Advertising
Rent and other costs
District general administrative
expenses (allocated)
Regional general and administrative
expenses (allocated)
Total expenses
Net Income
$1,580,000
637,950
$ 942,050
$ 110,600
44,240
12,700
82,500
190,000
186,000
162,000
$ 788,040
$ 154,010
$632,000
265,440
$ 366,560
$ 44,240
17,696
7,600
55,000
76,000
74,400
54,000
$328,936
$ 37,624
$553,000
232,260
$320,740
$ 38,710
15,484
900
2,750
57,000
65,100
54,000
$233,944
$ 86,796
Calculations:
Coastal District
New Haven Store
Boston Store
Sales
Cost of goods sold
Variable selling
Variable administrative
Maintenance
Advertising
Rent
District expenses
-
-
$1,580,000 x 7%
$1,580,000 x 2.8%
$7,600 + $900
+ $4,200
-
-
-
$1,580,000 x .40
$632,000 x .42
$632,000 x 7%
$632,000 x 2.8%
-
($82,500)(2/3)
$190,000 x .40
$186,000 x .40
$1,580,000 x .35
$553,000 x .42
$553,000 x 7%
$553,000 x 2.8%
-
$55,000 x .05
at New Haven
$190,000 x .30
for Coastal District
$186,000 x .35
2. Compute the Portland store’s operating income for May.
The Portland store's net operating income for May :
= $ 154,040 - $ 37,624 - $ 86,796
= $ 29,590
4. The assistant controller for the New England Region, Jack Isner, has been a close friend of the New Haven store manager for over 20 years. When Isner saw the segmented income statement [as prepared in requirement (1)], he realized that the New Haven store manager had really gone overboard on advertising expenditures. To make his friend look better to the regional management, he reclassified $28,000 of the advertising expenditures as miscellaneous expenses, and buried them in rent and other costs. The assistant controller's actions violate several standards of ethical conduct for management accountants, including the following:
Integrity:
Competence:
Objectivity:
Coastal
District
New Haven
Store
Boston
Store
Sales
Less: Cost of goods sold
Gross margin
Operating expenses:
Variable selling
Variable administrative
Other direct expenses:
Store maintenance
Advertising
Rent and other costs
District general administrative
expenses (allocated)
Regional general and administrative
expenses (allocated)
Total expenses
Net Income
$1,580,000
637,950
$ 942,050
$ 110,600
44,240
12,700
82,500
190,000
186,000
162,000
$ 788,040
$ 154,010
$632,000
265,440
$ 366,560
$ 44,240
17,696
7,600
55,000
76,000
74,400
54,000
$328,936
$ 37,624
$553,000
232,260
$320,740
$ 38,710
15,484
900
2,750
57,000
65,100
54,000
$233,944
$ 86,796
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