Evaluating Divisional Performance (CMA, Adapted)
Darmen Corporation is one of the major producers of prefabricated houses in the home building industry. The corporation consists of two divisions:
1. Bell Division, which acquires the raw materials to manufacture the basic house components and assembles them into kits
2. The Cornish Division, which takes the kits and constructs the homes for final home buyers. The corporation is decentralized, and the management of each division is measured by its income and return on investment.
Bell Division assembles seven separate house kits using raw materials purchased at the prevailing market prices. The seven kits are sold to Cornish for prices ranging from $45,000 to $98,000. The prices are set by corporate management of Darmen using prices paid by Cornish when it buys comparable units from outside sources. The smaller kits with the lower prices have become a larger portion of the units sold because the final house buyer is faced with prices that are increasing more, rapidly than personal income. The kits are manufactured and assembled in a new plant purchased by Bell this year. The division had been located in a leased plant for the past four years.
All kits are assembled upon receipt of an order from the Cornish Division. When the kit is completely assembled, it is loaded immediately on a Cornish truck. Thus, Bell Division has no finished goods inventory.
The Bell Division's accounts and reports are prepared on an actual-cost basis. There is no budget, and standards have not been developed for any product. A factory overhead rate is calculated at the beginning of each year. The rate is designed to charge all overhead to the product each year. Any under- or overapplied overhead is allocated to the cost of goods sold account and work-in-process inventories.
Bell Division's annual report is presented below. This report forms the basis of the evaluation of the division and its management by the corporation management.
Additional information regarding corporate and division practices is as follows:
• The corporation office does all the personnel and accounting work for each division.
• The corporate personnel costs are allocated on the basis of number of employees in the division.
• The accounting costs are allocated to the division on the basis of total costs excluding corporate charges.
• The division administration costs are included in factory overhead.
• The financing charges include a corporate-imputed interest charge on division assets and any divisional lease payments.
• The division investment for the return-on-investment calculation includes division inventory and plant and equipment at gross book value.
Bell Division Performance Report for the Year Ended December 31, 1997
INCREASE (OR DECREASE) FROM 1996 | ||||
| 1997 | 1996 | AMOUNT | PERCENT CHANGE |
Summary Data | ||||
Net income ($000 omitted) | $ 34,222 | $ 31,573% | $ 2,649 | 8.4 |
Return on investmenl | 37% | 43% | (6)% | (14.0) |
Kits shipped (units) | 2,000 | 2,100 | (100) | (4.8) |
Production Data (in units) | ||||
Kits started | 2,400 | 1,600 | 800 | (50.0) |
Kits shipped | 2,000 | 2,100 | (100) | (4.8) |
Kits in process at year-end | 700 | 300 | 400 | 133.3 |
Increase (decrease) in kits in process at year end | 400 | (500) | — | — |
Financial Data ($000) Sales | $138,000 | $162,800 | $(24,800) | (15.2) |
Production costs of units sold | ||||
Raw material | $ 32,000 | $ 40,000 | $ (8,000) | (20.0) |
Labor | 41,700 | 53,000 | (11.300) | (21.3) |
Factory overhead | 29,000 | 37,000 | (8,000) | (21.6) |
Cost of units sold | $102,700 | $130,000 | $(27,300) | (21.0) |
Other Costs: Corporate Charges for | ||||
Personnel services | $228 | $ 210 | $ 18 | 8.6 |
Accounting services | 425 | 440 | (15) | (3.4) |
Financing costs | 300 | 525 | (225) | 42.9 |
Total other costs | $953 | $1,175 | $(222) | (18.9) |
Adjustments to income | ||||
Unreimbursed fire loss | — | $52 | $(52) | (100.0) |
Raw material losses due to improper slorage | $125 | — | 125 | — |
Total adjustments | $125 | $52 | $73 | (140.0) |
Total deductions | $103,778 | $131,227 | (27,449) | (20.9) |
Division income | $ 34,222 | $ 31,573 | $ 2,649 | 8.4 |
Division investment | $ 92,000 | $ 73,000 | $ 19,000 | 26.0 |
Relum on investment | 37% | 43% | (6)% | (14.0)% |
Required
(1) Discuss the value of the annual report presented for the Bell Division in evaluating the division and its management in terms of
(a) The accounting techniques employed in the measurement of division activities
(b) The manner of presentation
(c) The effectiveness with which it discloses differences and similarities between years
Use the information in the problem to illustrate your discussion.
(2) Make specific recommendations to the management of Darmen Corporation that would improve its accounting and financial reporting system.
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