Divisional Performance Evaluation Darmen Corporation is one of the major producers of prefabricated homes 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, and (2) 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 home 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 large portion of the units sold because the final home buyer is faced with prices that are increasing more rapidly than personal income. The kits are manufactured and assembled in a new plant just 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 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 no product standards have been developed. 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 over-applied overhead is allocated to the cost of goods sold account and work in process inventories.
Bell Division’s performance report follows. This report forms the basis of the evaluation of the division and its management by the corporate CFO. Additional information regarding corporate and division practices is as follows:
• The corporate 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 corporate 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 (ROI) calculation includes division inventory and plant and equipment at gross book value.
BELL DIVISION Performance Report For the Year Ended December 31, 2010 | ||||
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| Increase or (Decrease) from 2009 to 2010 | |
| 2010 | 2009 | Amount | Percent Change |
Summary Data |
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Division income ($000 omitted) | $ 34,222 | $ 31,573 | $ 2,649 | 8.4% |
Return on investment (ROI) | 37% | 43% |
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Production Data (in units) |
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Kits started | 2400 | 1,600 | 800 | 50.0 |
Kits shipped | 2000 | 2,100 | (100) | (4.8) |
Kits in process at year-end | 700 | 300 | 400 | 133.3 |
Financial Data ($000 omitted) |
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Sales | $138,000 | $162,800 | ($24,800) | (15.2) |
Production costs of units sold |
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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 |
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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) |
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| Increase or (Decrease) from 2009 to 2010 | |
| 2010 | 2009 | Amount | Percent Change |
Adjustments to income Unreimbursed fire loss |
| $52 | $(52) | (100.00) |
Raw material losses due to improper storage | $125 |
| $125 |
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Total adjustments | $ 125 | $ 52 | $ 73 | 140.4 |
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 |
Return on Investment | 37% | 43% |
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Required
1. What performance-evaluation system does Darmen Corporation use? Discuss the value of the system in evaluating the Bell Division and its management.
2. Present specific recommendations to the management of Darmen Corporation to improve its performance-evaluation system.
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