1.Assume the following comments were recently overheard at an international mana

Question

1.Assume the following comments were recently overheard at an international management accounting conference. For each group of comments below, state whether or not you agree with each set of comments, and provide a 1 to 2 paragraph rationale for your position.


a.. My advice is to always pick up any special offer of irregular materials from your supplier. The only place you’ll take a hit is on the direct materials usage variance; because you’ll have more scrap. But you’ll always make it up on the materials price variance

b. In our company, every department is treated as a profit center. You can’t really effectively evaluate a responsibility center unless you actually assign some revenues to it

c. We use cost-based transfer prices for all our transfers between responsibility centers. We use full cost, which includes production and nonproduction costs. It makes for the best situation, because we never have to waste time negotiating some artificial selling price

d. Our bonus system is easy, and I’m sure it maximizes performance. Whenever a division exceeds its budgeted output for the year, everyone in the division gets a 15 percent bonus based on his or her annual salary

Explanation / Answer

a) I disagree with the statement. Taking irregular materials from the supplier reduces the quality of final output. Though the material price variance is high, but the quality of output will come down significantly. Taking the best quality materials would make the direct materials usage favourable with little price variance.A favourable material price variance may be arisen from purhasing goods of inadequate quality for production. Therefore, purchasing inadequate quality materials or accepting irregular materials special offers would reduce the quality of the produced good. b) I disagree with the statement. A business unit or department which is treated as a distinct entity enabling revenues and expenses can be determined so that profitability can be measured is called Profit center. Responsibility center is a unit or organization that has control over costs, revenues or investment funds. For accounting purposes, responsibility centers are classified as Cost centers, Profit centers, Revenue centers and Investment centers. This center is controlled by a responsibility manager to establish procedures and accounting practices to ensure that necessary revenue and expense information is reported accurately. The main function of responsibility center is to collect and report revenue and cost information by areas of responsibility. No one will assign revenue to responsibility centre.  Some times this is treated as Cost centers and Profit centers also. This unit evaluates the performance of other centers by gathering and reporting the cost and revenue information. c) I Disagree with the statement: Full cost plus pricing is a method of determining the sales price by calculating the full cost of the product and adding a percentage mark-up for profit. Though Full cost takes both production and Non-production costs into account that is Fixed costs and variable costs. It is not just the time constraint in setting the price. It becomes a problem if the price is not set according to the market conditions. Though every Business may have an idea of how much percent to earn as profit. But profit is a combination of price and demand. Since the Full costing is lacking these, it is not the best method for price setting. d) The company has fixed a certain percentage to be announced as bonus if the division exceeds the budgeted output. Suppose a person's salary is $10,000 per month. Annual salary = $120,000 Bonus amount = 15% ($120,000)                        = $18,000 This is easy way of calculating bonus becasue here they are not considering the total number of days, years of experience, total leaves etc., This really improves the performance of the employees. The statement is true. It is not just the time constraint in setting the price. It becomes a problem if the price is not set according to the market conditions. Though every Business may have an idea of how much percent to earn as profit. But profit is a combination of price and demand. Since the Full costing is lacking these, it is not the best method for price setting. d) The company has fixed a certain percentage to be announced as bonus if the division exceeds the budgeted output. Suppose a person's salary is $10,000 per month. Annual salary = $120,000 Bonus amount = 15% ($120,000)                        = $18,000 This is easy way of calculating bonus becasue here they are not considering the total number of days, years of experience, total leaves etc., This really improves the performance of the employees. The statement is true.

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