Case study – case 4

Question 1

Profit Statement Based on Traceable Costs Details New York

$’000 Chicago

$’000 Paris

$’000 Little Rock

$’000 Total

$’000 Sales Revenue 22,000 10,000 16,000 2,000 50,000 Less: Direct Traceable Costs: Consulting Costs 14,000 6,000 12,500 1,000 33,500 Gross Profit 8,000 4,000 3,500 1,000 16,500 Less: Operating Traceable Costs: Other Costs 300 200 500 0 1,000 Net Income 7,700 3,800 3,000 1,000 15,500 Question 2

The former system, under which non-traceable costs are allotted to different departments, the New York Division is regarded as the most profitable.  Chicago, Little Rock and Paris are categorized below in terms of profitability.   The Paris Section is highlighted under such method as unprofitable due to the loss performed.

The other method, where only traceable costs are used in the evaluation, the financial performance of the sections is different.  In such a stance the Paris Department will attain profits, which are actually higher than the Little Rock Division.  This portrays the fact that the different evaluation methods may lead to different decisions in such performance evaluation.

Question 3

The method that enhances goal congruence for the company examined is the revised profit statement, were non-traceable costs are not allocated to the sections during the performance rating.  This is due to the fact that under the first method used the Paris section would have been labeled as inefficient on expenses that were uncontrollable by such department.   Goal congruence is reached whenever departmental managers are properly evaluated.  If they are penalized for costs outside their control, they will be demotivated and will no longer pose importance on matters that fall under such evaluation.

References:

Drury C. (1996). Management and Cost Accounting. Fourth Edition. New York: International Thomson Business Press.

Randall H. (1999). Accounting. Third Edition. London: Letts Educational.