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business
cost management strategic

Cost Management Strategies For Business Decisions 4th Edition Ronald Hilton, Michael Maher, Frank Selto - Solutions

Great Lakes Metals, Inc., has two divisions. The fabrication division transfers partially completed components to the assembly division at a predetermined transfer price. The fabrication division, which has a standard variable production cost per unit of $300, has no excess capacity and could sell
Refer to the preceding exercise. The fabrication division’s full (absorption) cost of a component is $340, which includes $40 of applied fixed-overhead costs. The transfer price has been set at $374, which is the fabrication division’s full cost plus a 10 percent markup.The assembly division
Edgeworth Box Company has two decentralized divisions, X and Y. Division X always has purchased certain units from division Y at $145 per unit. Because division Y plans to raise the price to $195 per unit, division X desires to purchase these units from outside suppliers for $145 per unit. Division
Memphis Transit, Ltd., operates a local mass transit system. The transit authority is a governmental agency related to the state government. It has an agreement with the state government to provide rides to senior citizens for 25 cents per trip. The government reimburses Memphis Transit for the
Continental Electronics, Inc., permits its decentralized units to “lease” space to one another. Division X has leased some idle warehouse space to division Y for $1.65 per square foot per month. Recently, division X obtained a new five-year contract, which will increase its production
Outdoor Greenery, owned 60 percent by Kwasi Peterson and 40 percent by Maya Jefferies, grows specimen plants for landscape contractors. The wholesale price of each plant is $15. During the past year, Outdoor sold 5,000 specimen plants.Of the plants sold last year, 1,000 were sold to Lively
Western Lumber Corporation has two operating divisions. Its logging operation in Canada mills and ships logs to the United States where the company’s building supplies division uses them. Operating expenses amount to $2 million in Canada and $6 million in the United States exclusive of the costs
Down Under Corporation, based in Melbourne, Australia, has two operating divisions, an amusement park in Sydney and a hotel in Brisbane. The two divisions meet the Australian requirements for segment disclosures. Before transactions between the two divisions are considered, revenues and costs were
Universal Corporation’s division S has an investment base of $600,000. The division produces and sells 90,000 units of a product at a market price of $10 per unit. Its variable costs total $3 per unit. The division also charges each unit with a share of fixed costs. The fixed cost is computed as
The Tallahassee Division (TD) of Gulf South Corporation, operating at capacity, has been asked by Jaydee division to supply it with electrical fitting no. 1726. TD sells this part to its regular customers for$15.00 each. Jaydee, which is operating at 50 percent capacity, is willing to pay $10.00
Worldwide Merchants Co-op (WMC) operates a fleet of container ships in international trade between | tarnational Transfer Prices Great Britain and Thailand. All of the shipping income (that is, that related to WMC’s ships) is deemed (LO 1,4)as earned in Great Britain. WMC also owns a dock
Interglobal Company has two operating divisions in a semiautonomous organization structure. Division +, anster Picesanctter X, located in the United States, produces part XZ-1, which is an input to division Y, located in the south Regulations of France. Division X uses idle capacity to produce
a. Virtually all companies use financial performance measures to evaluate division and department managers.What are the advantages of focusing also on nonfinancial performance?
You are interviewing for a job. The interviewer says, “Historically, we have relied just on financial performance measures to evaluate division managers. We know the limitations of relying solely on financial performance measures, but we see a balanced scorecard as being too costly to implement.
Team Focus: You work for an internationally known consulting firm that has been asked by Singapore Airways to design and install a balanced scorecard system. You are starting to assemble a team of airline consultants and employees to work on the project. What characteristics should team members
Balanced scorecards present many opportunities for improved strategy formulation, communication, and evaluation. However, many unanswered questions surround using balanced scorecards. Questions related to using a balanced scorecard include these:Is strategy formulation more effective and
You are a consultant advising Valley Commercial Bank about its incentive systems for lower-level managers Maker and employees. Your interviews with branch and department managers inform you that they are satisfied with the new balanced scorecard performance measurement system (see Exhibit 20-6) but
How does a balanced scorecard differ from the measures of organizational cost and performance, which have been used for as long as organized companies have existed? What does it add that previous measures did not
Should Valley Commercial Bank design its incentive system to increase customer satisfaction? Is it possible to overstress customer satisfaction?
Howcan Valley Commercial Bank or any organization weigh the trade-offs of various incentives for improving financial performance?
20.27 A business executive says, The financial area of a balanced
Part5 Evaluating and Managing Performance scorecard indicates how the organization adds value to shareholders. I am involved with two organizations; a small business that is a partnership with no shareholders, and a church that has no shareholders. A balanced scorecard makes a lot of sense to me,
Respond to the following statement: Most measures of performance, such as profits and product costs, are useless for management decision making because they measure what has happened, not what will happen.
Until recently the CEO of Xerox Corporation prominently stated in his letter to the company’s annual reports that Xerox always strives to improve customer satisfaction.Xerox no longer makes this claim so prominently. Is it possible to create too much customer satisfaction?Explain.
Customers’ perceptions of value can differ across cultures. Many people believe that US-based companies are ignorant or arrogant when it comes to appreciating other cultures. Do you think this is true? What are the possible costs of lack of appreciation of other cultures?
How can you prepare yourself to contribute value to an organization by appreciating other cultures?
Westinghouse Corporation formerly advertised that its employees are its most important assets. If that is true for Westinghouse (and presumably for other organizations, too), why does its balance sheet (and presumably those of other organizations) not have a category of assets for employees?
20.32 “It is a bigger mistake to develop an unreliable balanced scorecard than never to build one at all.” Do you agree with this statement? Why or why not?
20.33 (Appendix) The manager of an organization is having trouble getting employees to perform adequate work for the organization’s benefit. “I pay them a good salary,” says the manager, “and I give them big pay increases when I feel generous. I just can’t figure out why they won’t work
20.34 (Appendix) Shauna Dormino is taking a job in a nonprofit organization, Freedom from Hunger. Anisa Morenez is taking a job at IBM. The women are equally qualified, each will do the same type of work, and each will put in the same number of hours each week, yet Dormino’s job pays $20,000 less
20.35 You are offered an executive position at a small hightechnology company. The salary is considerably lower than your current salary, but after one year, you will be eligible for many stock options. Your only performance measure will be the company’s stock price. What are the advantages and
20.36 You are offered the general manager position at a large, mostly autonomous division of a very large company. The company is market driven and has 20 similar divisions in different industries. The division you are offered has performed poorly in the past, but it is in an industry with high
20.37 You are the chair of the board of directors of a large regional charitable organization that has been recognized nationally for outstanding public service. It has just lost its CEO to a profit-seeking firm poised for its initial public offering of shares. You must convene the board to recruit
Wannabe University (WU) is a medium-size public university with 15,000 students and 1,000 faculty members. The university built its national reputation on the excellence of its teaching and interactions with undergraduate students. Because government support of the university has dropped
Magnum Manufacturing rewards its key executives exclusively on return on investment (ROI). The vice president of administration suggests to the CEO that Magnum can increase its ROI by outsourcing most of its manufacturing and logistics activities to business partners and suppliers, thereby greatly
eToys, Inc., had been one of the leading Internet-based retailers of children’s toys. However, in 2001 it generated a large loss, its stock price plummeted, and it declared bankruptcy. KB Toys purchased the company’s Web site, a warehouse, and its customer list for $15 million. The following
As prices for many items have stabilized because of competition, some Internet-based retailers now are competing on the basis of real-time customer service provided by live company representatives. These e-tailers report improved customer satisfaction, traffic, and sales growth that they attribute
Paragon Sports, a major sporting goods retailer, is considering upgrading its customer-support activities by improving online databases and training customer-service personnel. Consider the following data:Current data:ATINUAl "SIGS eerie careeearaa tar ce steeetrtte eo aere seeatene ne nathm eer
Bonanza Real Estate is considering enrolling in Rush Corp’s Customer Value Seminar, a $2,000 per person, week-long intensive seminar that teaches sales staff to build customer satisfaction and loyalty and to sell products more effectively by understanding customers’ needs. Rush Corp advertises
Quattro Drive is considering improvements to its warehousing and distribution operations including a$400,000 purchase of robotic machinery with a useful life of five years. Other improvements entail the installation of new computing equipment and software at a start-up cost of $250,000 and $75,000
Ruth Chambers, an executive in a large bank, recently attended a conference on management in the banking industry. At the conference, a Citibank manager presented a diagram similar to the one in Exhibit 20-2. Chambers is intrigued by the performance measurement problems posed by the diagram.She
Sheila Mack, an owner of 42 fast-food franchises, has come to you for advice. She wants to try a balanced scorecard in her stores. She is concerned because some attempts to implement improvements in the past have not been successful. “I’ve heard store managers say, ‘Somebody must have gone to
In a small group, select a real organization of any type for study. Review the organization’s Web site and/or annual report. For each of the four balanced scorecard areas of performance, identify no more than four performance measures. Write a report that states specifically how you plan to
Despite conflicting evidence and opinions about the causes of global warming, it is happening.Furthermore, institutional investors and insurers are getting nervous about the environmental disasters that might follow.Required Explain how large investors and insurance companies might use leading
Valley Commercial Bank wants to reward its branch bank managers for exceeding revenue growth targets and is considering alternative incentive formulas that award bonuses as a percentage of salary for each percentage point that actual revenue growth exceeds the target as follows.Alternative 2 10%8
PMI wants to reward its operations managers for reducing the number of defects below target rates. It is considering alternative incentive formulas that award bonuses as a percentage of salary for each percentage point that actual defect rates are under the target as follows.Formula Parameter
Valley Commercial Bank has a criterion to loan only to companies that have an economic value added greater than zero for the past year and for the past three years, on average. Answer the following questions.a. The bank is considering loaning money to a small company that has the following economic
Division managers of Atlantis, Ltd., have expressed dissatisfaction with the company’s division performance measurement system. Division operations are evaluated every quarter by comparing their EVA with the expected EVA identified in the prior year. Division managers claim that many factors are
Leslie Fay, the dressmaker, had a compensation plan that offered the chief operating officer and the chief financial officer bonuses if the company’s net income reached $16 million (approximately 2 percent of sales). The company reported a net income of $23 million, and the two executives
“All this talk about developing leading indicators of our process performance and customer needs is really missing the mark,” argued Ronald Melcher, the executive vice president of marketing for Industrial Foods, Inc. (IFI), which provides food items for airline kitchens. “What we need most
Although each of the 20 divisions performs at different levels, for simplicity, assume that three types of divisions exist: high performers, medium performers, and low performers with the following average frequency and performances:Performance Measure Low Performers Medium Performers High
Sudden Burrito Company plans to add a second cafeteria truck to service the growing numberjof construction and oil drilling sites in Colorado’s Roan Plateau. The company’s owner has made thd following estimates related to adding a second truck.New truck cost, including installation of kitchen
Unreal Networks, Inc., participated with several large music industry firms in a joint venture to distribute music electronically to third parties, such as Internet service providers and computer manufacturers, who would then sell the rights to download music to consumers. Unreal Networks is
Do you think it is a good idea for organizations to formally express principles of cost allocation? Would it WELC a be any more important in a public organization such as a municipality than in a private firm?
You are the manager of the Social Services Department (a production department with a budget of approximately $500,000 per month). How might you react if you found out that the Information Technology Department (a support-service department with a budget of approximately $36,000 per month) was
Take the position of the city manager who is responsible for both support-service and production departments.Which of the four principles of cost allocation identified do you think is most important? How would you resolve disputes over cost allocations?
Allocating costs on the basis of FTE is easy because the necessary data are readily available. The allocations that result, however, might not accurately reflect the use of resources. But is it cost effective to obtain more accurate information that would allow cost allocations to more closely
Cost allocations are arbitrary. Does this mean that the way you decide to allocate costs is of no consequenc to you or your organization?
Choosing a cost-allocation approach is always a judgment that is based on an evaluation of tradeoffs.How can you be best prepared to evaluate the trade-offs and provide leadership if dramatic changes are needed?
Some cost-allocation approaches appear to be quite complex. How should you educate other managers to understand the complexities of the cost allocation process?
What factors would you consider when deciding whether to outsource a particular support service?
What are four broad categories of common costs and a typical basis for the allocation of costs in each category?
What are some costs of the cost-allocation process itself?
What are the similarities and differences of allocating service costs for the direct method and the step method (and the reciprocal method, if studied)?
What are some benefits of cost allocation?
How should a manager decide whether to allocate costs?
What criterion should be used to determine the order of allocation from support-service departments when using the step method? Explain why.
Three students share a house. Having better things to do than clean house, they hire someone to come in and clean once each week. How should they share the costs of the housekeeper? One simple solution is to share the cost equally. Suppose, however, that one student’s bedroom is twice as large as
The second student has a small bedroom and uses the house only four days per week. The third student uses the house all week, has a small bedroom, and 1s generally acknowledged to be the cleanest of the three. Sharing the cost equally is simple, but is it fair? Form groups of three. Each should
Using the techniques of the chapter, develop a reasonable way to share housekeeping costs.
Respond to this comment: Outsourcing is based on a market economy and, therefore, is the most efficient way to obtain a service.Consider the following conversation between a selfstyled cost-allocation expert and Joe, the manager of a diner.
If support-service cost allocations are arbitrary and potentially misleading, should we assume that managers are foolish for using information about which services to provide based on allocated service costs?
One critic of cost allocation noted, You can avoid the problem of arbitrary cost allocations by simply not allocating any higher-level resource service costs to lowerlevel uses of resources. Prepare a memo outlining the costs and benefits of this approach.
Explain how cost allocation in an organization could be both a technical and a political exercise.(Appendix) What argument(s) could be given in support of the reciprocal method as the preferred method for allocating the costs of service departments?
Under what conditions are the results from using the direct method of allocation the same as those from the step method? Why?
Consider a company with two producing departments and one service department. The service department allocates its costs to the producing departments on the basis of the number of employees in each department. If the costs in the service department are fixed by policy forthe coming period, what
Prepare a short presentation to explain and comment capacity than our division requires. We seem to be alloon this argument: Cost allocation can never provide cated more costs in periods when other departments use an incentive to reduce service costs unless the amount less service capacity. We are
The Klingons and the Romulans own two adjacent tracts of land. Each tract has a surface area of 4,000 acres. During a recent shoot-out between the families, crude oil came bubbling to the surface where a phaser blast entered the ground. A petroleum geologist determined that an underground rock
Rice Company has a TV station and a radio station that share the common costs of the company’s news wire services, which are $200,000 a year. You have the following information about the wire services and the two stations:Wire Service Hours Used This Hours of Station Period News Broadcasts Hoi
Kroger, Inc., operates a 120,000-square-foot supermarket. Each department in the store is charged a Ae rate MitocetcnBaece share of the cost of the building. The following information concerning two of the departments in the i (LO 3)store is available.Department Meat Dry Goods SAlESIO VENUS SHE
Quality Credit Company produces two styles of credit reports, standard and executive. The difference between the two is in the amount of background checking and data collection. The executive report uses more skilled personnel because additional interviews and analyses are performed. The relevant
Refer to your calculations for Exercise 10.23. Your supervisor wants to know the costs to prepare a standard report and an executive report, including the cost of data, labor (which costs $40 per hour), and support services.Requireda. For each type of report, prepare four different answers to this
All-Town Corporation has two production departments, Pl and P2, and two support-service departments, S1 and $2. Direct costs for each department and the percentage of service costs used by the various departments for the month of May are as follows:Percentage of Services Used By Department Direct
Ming, Inc., has two service departments (maintenance and general factory administration) and two production departments (cutting and assembly). Management has decided to allocate maintenance costs on the basis of the size of the area in each department and general factory administration costs on
During the past month, the following costs were incurred in the three production departments and two service departments in the East Bay Company:Paleeee amase reader sted Mactan baste $120,000 ROTDEM ATE BEE, Sadtin esse 312,500 aS Tene ea ohamec was Crate coda diane 390,000 1S.) Ort rr a babe Rare
Form small groups and prepare a short visual presentation that Tukami could use to explain the advantages and disadvantages of using traditional cost-allocation bases and ABC cost-driver bases for allocating support-service costs at Rock Creek (in the chapter example).Polish Enterprises allocates
Selto & Company manufactures and sells T-shirts for advertising and promotional purposes. The company has two manufacturing operations, shirtmaking and printing. When the company receives an order for T-shirts, the shirtmaking department obtains the materials and colors requested and has the shirts
Brazil, Inc., has three service departments that support the production area. Outlined here is the budgeted support-service spending by department for the coming year.Support-Service Departments Budgeted Spending Number of Employees ve CCIVIING Cetera nce visa d corer ee eit yecex neointima ition
Syntel Corporation’s memory chip division manufactures two types of computer memory chips: The RAM.-A chip is a commonly used chip for personal computer systems, and the RAM-B chip is used for specialized scientific applications. Unit-level materials costs for the RAM-A chip are 25 cents per unit
Your Wreck, Inc., rebuilds old cars. It operates two production departments, mechanical repair and body work, and has three service departments for its plant: building occupancy, human resources, and equipment maintenance. Management is concerned that the costs of its service departments are
Apple Restaurants has a commissary that supplies food and other products to its restaurants. Its two support-service departments, purchasing (S1) and general administration (S2), support two directservice departments, food products (P1) and supplies (P2). As an internal auditor, you are checking
Auckland Products is reviewing its operations to determine what additional energy-saving projects it might implement. The company’s southern plant has three service departments and two production departments. This plant has its own electric-generating facilities powered by natural gas wells that
Biotech’s promotion department is responsible for designing and developing all marketing campaign materials and related literature, pamphlets, and brochures. Management is reviewing the effectiveness of the promotion department to determine whether its services could be acquired more economically
Donelan Company has three support-service departments (general factory administration, factory maintenance, and factory cafeteria), and two production departments (fabrication and assembly). A summary of costs and other data for each department prior to allocation of service-department costs for
SkyBlue Airlines operates a centralized computer center for the data-processing needs of its reservations, scheduling, maintenance, and accounting divisions. Costs associated with use of the computer are charged to the individual departments on the basis of time usage. Due to recent increased
Your company has a travel policy that reimburses employees for the “ordinary and necessary” costs of business travel. Employees often mix a business trip with pleasure either by extending the time at the destination or traveling from the business destination to a nearby resort or other personal
Allied Insurance Company asked the regulatory board for permission to increase the premiums of its insurance operations. Insurance premium rates in the jurisdiction in which Allied operates are designed to cover the operating costs and insurance claims. As a part of Allied’s expenses, its agents
Comparative Costs of Instruction, University of Minnesota Departmental Allocated Total FYE Cost per Cost per Cost per Campus College Student FYE Student FYE Student | FYE Student Twin Cities | Architecture 381 $6,914 $3,449 $10,363 Biology 1,252 7,006 3,219 10,225 Education 3,312 4,765 2,916 7,681
The US Department of Transportation completed an extensive study of costs and uses of the federal highway system, the Federal Highway Cost Allocation Study (HCAS). This study led to recommendations for significant changes in user fees paid by private citizens (e.g., in fuel taxes) and commercial
A hospital then can use either the reciprocal method or the step method to solve the cost-allocation problem. If it uses the step method, the order of departments for allocation is the same as that by which the departments are listed in Exhibit 10-11. Thus, depreciation and maintenance, buildings,

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