Destination Resort International

Applied Pharmaceuticals

Problem 10-23(continued)

Destination Resorts International

Problem 10-23(continued)

3. The hypotheses underlying the balanced scorecards are indicated by the arrows in each diagram. Reading from the bottom of each balanced scorecard, the hypotheses are:

Applied Pharmaceuticals

o If the dollars invested in engineering technology increase, then the R&D yield will increase.

o If the percentage of job offers accepted increases, then the R&D yield will increase.

o If the dollars invested in engineering training per engineer increase, then the R&D yield will increase.

o If the R&D yield increases, then customer perception of first-to-market capability will increase.

o If the defects per million opportunities decrease, then the customer perception of product quality will increase.

o If the customer perception of first-to-market capability increases, then the return on stockholders’ equity will increase.

o If the customer perception of product quality increases, then the return on stockholders’ equity will increase.

Destination Resort International

o If the employee turnover decreases, then the percentage of error-free repeat customer check-ins and room cleanliness will increase and the average time to resolve customer complaints will decrease.

o If the number of employees receiving database training increases, then the percentage of error-free repeat customer check-ins will increase.

o If employee morale increases, then the percentage of error-free repeat customer check-ins and room cleanliness will increase and the average time to resolve customer complaints will decrease.

o If the percentage of error-free repeat customer check-ins increases, then the number of repeat customers will increase.

o If the room cleanliness increases, then the number of repeat customers will increase.

o If the average time to resolve customer complaints decreases, then the number of repeat customers will increase.

o If the number of repeat customers increases, then sales will increase.

Problem 10-23(continued)

Each of these hypotheses is questionable to some degree. For example, in the case of Applied Pharmaceuticals, R&D yield is not the sole driver of the customers’ perception of first-to-market capability. More specifically, if Applied Pharmaceuticals experimented with nine possible drug compounds in year one and three of those compounds proved to be successful in the marketplace it would result in an R&D yield of 33%. If in year two, it experimented with four possible drug compounds and two of those compounds proved to be successful in the marketplace it would result in an R&D yield of 50%. While the R&D yield has increased from year one to year two, it is quite possible that the customer’s perception of first-to-market capability would decrease. The fact that each of the hypotheses mentioned above can be questioned does not invalidate the balanced scorecard. If the scorecard is used correctly, management will be able to identify which, if any, of the hypotheses are invalid and the balanced scorecard can then be appropriately modified.

Problem 10-24(30 minutes)

1. a., b., and c.

2. a. The company seems to be improving mainly in the areas of quality control, material control, on-time delivery, and total delivery cycle time. Customer complaints, warranty claims, defects, and scrap are all down somewhat, which suggests that the company has been paying attention to quality in its improvement campaign. The fact that on-time delivery and delivery cycle time have both improved also suggests that the company is seeking to please the customer with improved service.

b. Inspection time has increased dramatically. Use as percentage of availability has deteriorated, and throughput time as well as MCE show negative trends.

Problem 10-24(continued)

c. While it is difficult to draw any definitive conclusions, it appears that the company has concentrated first on those areas of performance that are of most immediate concern to the customer—quality and delivery performance. The lower scrap and defect statistics suggest that the company has been able to improve its processes to reduce the rate of defects; although, some of the improvement in quality apparently was due simply to increased inspections of the products before they were shipped to customers.

3. a. and b.

As non-value-added activities are eliminated, the manufacturing cycle efficiency improves. The goal, of course, is to have an efficiency of 100%. This is achieved when all non-value-added activities have been eliminated and process time equals throughput time.

Problem 10-25(45 minutes)

1. Students’ answers may differ in some details from this solution.

Problem 10-25(continued)

2. The hypotheses underlying the balanced scorecard are indicated by the arrows in the diagram. Reading from the bottom of the balanced scorecard, the hypotheses are:

o If the percentage of dining room staff who complete the hospitality course increases, the average time to take an order will decrease.

o If the percentage of dining room staff who complete the hospitality course increases, then dining room cleanliness will improve.

o If the percentage of kitchen staff who complete the cooking course increases, then the average time to prepare an order will decrease.

o If the percentage of kitchen staff who complete the cooking course increases, then the number of menu items will increase.

o If the dining room cleanliness improves, then customer satisfaction with service will increase.

o If the average time to take an order decreases, then customer satisfaction with service will increase.

o If the average time to prepare an order decreases, then customer satisfaction with service will increase.

o If the number of menu items increases, then customer satisfaction with menu choices will increase.

o If customer satisfaction with service increases, sales will increase.

o If customer satisfaction with menu choices increases, sales will increase.

o If sales increase, total profits for the Lodge will increase.

Each of these hypotheses can be questioned. For example, even if the number of menu items increases, customer satisfaction with the menu choices may not increase. The items added to the menu may not appeal to customers. The fact that each of the hypotheses can be questioned does not, however, invalidate the balanced scorecard. If the scorecard is used correctly, management will be able to identify which, if any, of the hypotheses is incorrect. [See below.]

3. Management will be able to tell if a hypothesis is false if an improvement in a performance measure at the bottom of an arrow does not, in fact, lead to improvement in the performance measure at the tip of the arrow. For example, if the number of menu items is increased, but customer satisfaction with the menu choices does not increase, management will immediately know that something was wrong with their assumptions.

Problem 10-26(45 minutes)

1. Each kilogram of fresh mushrooms yields 150 grams of dried mushrooms suitable for packing:

Since 1,000 grams of fresh mushrooms yield 150 grams of dried mushrooms, 100 grams (or, 0.1 kilogram) of fresh mushrooms should yield the 15 grams of acceptable dried mushrooms that are packed in each jar.

The direct labor standards are determined as follows:

Problem 10-26(continued)

Standard cost per jar of dried chanterelle mushrooms:

Problem 10-26(continued)

2. a. Ordinarily, the purchasing manager has more influence over the prices of purchased materials than anyone else in the organization. Therefore, the purchasing manager is usually held responsible for material price variances.

b. The production manager is usually held responsible for materials quantity variances. However, this situation is a bit unusual. The quantity variance will be heavily influenced by the quality of the mushrooms acquired from gatherers by the purchasing manager. If the mushrooms have an unusually large proportion of unacceptable mushrooms, the quantity variance will be unfavorable. The production process itself is likely to have less effect on the amount of wastage and spoilage. On the other hand, if the production manager is not held responsible for the quantity variance, the production workers may not take sufficient care in their handling of the mushrooms. A partial solution to this problem would be to make the sorting and inspection process part of the purchasing manager’s responsibility. The purchasing manager would then be held responsible for any wastage in excess of the 100 grams expected for each 300 grams of acceptable fresh mushrooms. The production manager would be held responsible for any wastage after that point. This is only a partial solution, however, because the purchasing manager may pass on at least 300 grams of every 400 grams of fresh mushrooms, whether they are acceptable or not.

Problem 10-27(45 minutes)

1. a. Materials Price Variance = AQ (AP – SP)

6,000 pounds ($2.75 per pound* – SP) = $1,500 F**

$16,500 – 6,000 pounds × SP = $1,500***

6,000 pounds × SP = $18,000

SP = $3 per pound

b. Materials Quantity Variance = SP (AQ – SQ)

$3 per pound (6,000 pounds – SQ) = $1,200 U

$18,000 – $3 per pound × SQ = $1,200*

$3 per pound × SQ = $16,800

SQ = 5,600 pounds

Alternative approach to parts (a) and (b):

*Given.

c. 5,600 pounds ÷ 1,400 units = 4 pounds per unit.

Problem 10-27 (continued)

2. a. Labor Efficiency Variance = SR (AH – SH)

$9 per hour (AH – 3,500 hours*) = $4,500 F

$9 per hour × AH – $31,500 = –$4,500**

$9 per hour × AH = $27,000

AH = 3,000 hours

b. Labor Rate Variance = AH (AR – SR)

3,000 hours ($9.50 per hour* – $9.00 per hour) = $1,500 U

Alternative approach to parts (a) and (b):

Problem 10-28(75 minutes)

1. a.

*6,000 units × 6.0 feet per unit = 36,000 feet

Alternative approach:

Materials Price Variance = AQ (AP – SP)

60,000 feet ($0.95 per foot – $1.00 per foot) = $3,000 F

Materials Quantity Variance = SP (AQ – SQ)

$1.00 per foot (38,000 feet – 36,000 feet) = $2,000 U

Problem 10-28 (continued)

2. a.

Alternative approach:

Labor Rate Variance = AH × (AR – SR)

6,500 hours ($4.30 per hour* – $4.50 per hour) = $1,300 F

*$27,950 ÷ 6,500 hours = $4.30 per hour

Labor Efficiency Variance = SR (AH – SH)

$4.50 per hour (6,500 hours – 6,000 hours) = $2,250 U

Problem 10-28(continued)

3. a.

Alternative approach:

Variable Overhead Spending Variance = AH × (AR – SR)

6,500 hours ($3.15 per hour* – $3.00 per hour) = $975 U

*$20,475 ÷ 6,500 hours = $3.15 per hour

Variable Overhead Efficiency Variance = SR (AH – SH)

$3.00 per hour (6,500 hours – 6,000 hours) = $1,500 U

Problem 10-28(continued)

b. No. When variable manufacturing overhead is applied on the basis of direct labor-hours, it is impossible to have an unfavorable variable manufacturing overhead efficiency variance when the direct labor efficiency variance is favorable. The variable manufacturing overhead efficiency variance is the same as the direct labor efficiency variance except that the difference between actual hours and the standard hours allowed for the output is multiplied by a different rate. If the direct labor efficiency variance is favorable, the variable manufacturing overhead efficiency variance must also be favorable.

4. For materials:

Favorable price variance: Decrease in outside purchase prices, fortunate buy, inferior quality materials, unusual discounts due to quantity purchased, inaccurate standards.

Unfavorable quantity variance: Inferior quality materials, carelessness, poorly adjusted machines, unskilled workers, inaccurate standards.

For labor:

Favorable rate variance: Unskilled workers (paid lower rates), piecework, inaccurate standards.

Unfavorable efficiency variance: Poorly trained workers, poor quality materials, faulty equipment, work interruptions, fixed labor with insufficient demand to keep them all busy, inaccurate standards.

For variable overhead:

Unfavorable spending variance: Increase in supplier prices, inaccurate standards, waste, theft of supplies.

Unfavorable efficiency variance: See comments under direct labor efficiency variance.

Problem 10-29(45 minutes)

This is a very difficult problem that is harder than it looks. Be sure your students have been thoroughly “checked out” in the variance formulas before assigning it.

Alternative Solution:

Materials Price Variance = AQ (AP – SP)

6,000 yards ($6.00 per yard* – $6.50 per yard) = $3,000 F

*$36,000 ÷ 6,000 yards = $6.00 per yard

Materials Quantity Variance = SP (AQ – SQ)

$6.50 per yard (6,000 yards – 5,600 yards) = $2,600 U

Problem 10-29(continued)

2. Many students will miss parts 2 and 3 because they will try to use product costs as if they were hourly costs. Pay particular attention to the computation of the standard direct labor time per unit and the standard direct labor rate per hour.

Alternative Solution:

Labor Rate Variance = AH (AR – SR)

760 hours ($10 per hour* – $9 per hour) = $760 U

*$7,600 ÷ 760 hours = $10 per hour

Labor Efficiency Variance = SR (AH – SH)

$9 per hour (760 hours – 800 hours) = $360 F

Problem 10-29(continued)

Alternative Solution:

Variable Overhead Spending Variance = AH (AR – SR)

760 hours ($5 per hour* – $3 per hour) = $1,520 U

*$3,800 ÷ 760 hours = $5 per hour

Variable Overhead Efficiency Variance = SR (AH – SH)

$3 per hour (760 hours – 800 hours) = $120 F

Problem 10-30(60 minutes)

The price and quantity variances together equal the total variance. If the quantity variance is $600 U, then the price variance must be $2,000 F:

Problem 10-30(continued)

Alternative Solution:

4. The first step in computing the standard direct labor rate is to determine the standard direct labor-hours allowed for the month’s production. The standard direct labor-hours can be computed by working with the variable manufacturing overhead cost figures, since they are based on direct labor-hours worked:

Problem 10-30(continued)

5. Before the labor variances can be computed, it is necessary to compute the actual direct labor cost for the month:

With this information, the variances can be computed:

*Given.

Problem 10-30 (continued)

*Given.

¹From part 2.

²800 hours (from part 4) ÷ 500 kits = 1.6 hours per kit.

³From part 4.

Case 10-31(30 minutes)

This case may be difficult for some students to grasp since it requires looking at standard costs from an entirely different perspective. In this case, standard costs have been inappropriately used as a means to manipulate reported earnings rather than as a way to control costs.

1. Lansing has evidently set very loose standards in which the standard prices and standard quantities are far too high. This guarantees that favorable variances will ordinarily result from operations. If the standard costs are set artificially high, the standard cost of goods sold will be artificially high and thus the division’s net operating income will be depressed until the favorable variances are recognized. If Lansing saves the favorable variances, he can release just enough in the second and third quarters to show some improvement and then he can release all of the rest in the last quarter, creating the annual “Christmas present.”

2. Lansing should not be permitted to continue this practice for several reasons. First, it distorts the quarterly earnings for both the division and the company. The distortions of the division’s quarterly earnings are troubling because the manipulations may mask real signs of trouble. The distortions of the company’s quarterly earnings are troubling because they may mislead external users of the financial statements. Second, Lansing should not be rewarded for manipulating earnings. This sets a moral tone in the company that is likely to lead to even deeper trouble. Indeed, the permissive attitude of top management toward the manipulation of earnings may indicate the existence of other, even more serious, ethical problems in the company. Third, a clear message should be sent to division managers like Lansing that their job is to manage their operations, not their earnings. If they keep on top of operations and manage well, the earnings should take care of themselves.

Case 10-31(continued)

3. Stacy Cummins does not have any easy alternatives available. She has already taken the problem to the President, who was not interested. If she goes around the President to the Board of Directors, she will be putting herself in a politically difficult position with little likelihood that it will do much good if, in fact, the Board of Directors already knows what is going on.

On the other hand, if she simply goes along, she will be violating the “Objectivity” standard of ethical conduct for management accountants. The Home Security Division’s manipulation of quarterly earnings does distort the entire company’s quarterly reports. And the Objectivity standard clearly stipulates that “management accountants have a responsibility to disclose fully all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, comments, and recommendations presented.” Apart from the ethical issue, there is also a very practical consideration. If Merced Home Products becomes embroiled in controversy concerning questionable accounting practices, Stacy Cummins will be viewed as a responsible party by outsiders and her career is likely to suffer dramatically and she may even face legal problems.

We would suggest that Ms. Cummins quietly bring the manipulation of earnings to the attention of the audit committee of the Board of Directors, carefully laying out in a non-confrontational manner the problems created by Lansing’s practice of manipulating earnings. If the President and the Board of Directors are still not interested in dealing with the problem, she may reasonably conclude that the best alternative is to start looking for another job.

Case 10-32 (60 minutes)

1. Answers may differ concerning which category—learning and growth, internal business processes, customers, or financial—a particular performance measure belongs to.

Case 10-32 (continued)

A number of the performance measures suggested by managers have not been included in the above balanced scorecard. The excluded performance measures may have an impact on total profit, but they are not linked in any obvious way with the two key problems that have been identified by management—accounts receivables and unsold inventory. If every performance measure that potentially impacts profit is included in a company’s balanced scorecard, it would become unwieldy and focus would be lost.

2. The results of operations can be exploited for information about the company’s strategy. Each link in the balanced scorecard should be regarded as a hypothesis of the form “If ..., then ...”. For example, the balanced scorecard on the previous page contains the hypothesis “If customers express greater satisfaction with the accuracy of their charge account bills, then the average age of accounts receivable will improve.” If customers in fact do express greater satisfaction with the accuracy of their charge account bills, but the average age of accounts receivable does not improve, this would have to be considered evidence that is inconsistent with the hypothesis. Management should try to figure out why the average age of receivables has not improved. (See the answer below for possible explanations.) The answer may suggest a shift in strategy.

In general, the most important results are those that provide evidence inconsistent with the hypotheses embedded in the balanced scorecard. Such evidence suggests that the company’s strategy needs to be reexamined.

Case 10-32 (continued)

3. a. This evidence is inconsistent with two of the hypotheses underlying the balanced scorecard. The first of these hypotheses is “If customers express greater satisfaction with the accuracy of their charge account bills, then there will be improvement in the average age of accounts receivable.” The second of these hypotheses is “If customers express greater satisfaction with the accuracy of their charge account bills, then there will be improvement in bad debts.” There are a number of possible explanations. Two possibilities are that the company’s collection efforts are ineffective and that the company’s credit reviews are not working properly. In other words, the problem may not be incorrect charge account bills at all. The problem may be that the procedures for collecting overdue accounts are not working properly. Or, the problem may be that the procedures for reviewing credit card applications let through too many poor credit risks. If so, this would suggest that efforts should be shifted from reducing charge account billing errors to improving the internal business processes dealing with collections and credit screening. And in that case, the balanced scorecard should be modified.

b. This evidence is inconsistent with three hypotheses. The first of these is “If the average age of receivables declines, then profits will increase.” The second hypothesis is “If the written-off accounts receivable decrease as a percentage of sales, then profits will increase.” The third hypothesis is “If unsold inventory at the end of the season as a percentage of cost of sales declines, then profits will increase.”

Again, there are a number of possible explanations for the lack of results consistent with the hypotheses. Managers may have decreased the average age of receivables by simply writing off old accounts earlier than was done previously. This would actually decrease reported profits in the short term. Bad debts as a percentage of sales could be decreased by drastically cutting back on extensions of credit to customers—perhaps even canceling some charge accounts. (There would be no bad debts at all if there were no credit sales.) This would have the effect of reducing bad debts, but might irritate otherwise loyal credit customers and reduce sales and profits.

Case 10-32 (continued)

The reduction in unsold inventories at the end of the season as a percentage of cost of sales could have occurred for a number of reasons that are not necessarily good for profits. For example, managers may have been too cautious about ordering goods to restock low inventories—creating stockouts and lost sales. Or, managers may have cut prices drastically on excess inventories in order to eliminate them before the end of the season. This may have reduced the willingness of customers to pay the store’s normal prices. Or, managers may have gotten rid of excess inventories by selling them to discounters before the end of the season.

Research and Application 10-33 (240 minutes)

1. Nordstrom succeeds first and foremost because of its customer intimacy customer value proposition. The company’s Personal Book system is the clearest indication of its customer intimacy value proposition. Page 17 of the annual report says “With Personal Book, our salespeople are able to set and manage their customer follow-ups, organize and track customer preferences and easily reference customer purchases and contact information. The result is that our salespeople are able to tailor our service to the needs of each customer. We are able to stay connected with our customers and invite them back in for the new trends, merchandise, sales and events that interest them.” The Personal Book system is the latest innovation from a company that has prospered because of its attentiveness to individual customer needs.

Offering fashionable, high-quality merchandise is also important to Nordstrom. However, the company has historically differentiated itself from competitors such as Dillard’s, Federated, and Neiman Marcus by hiring top-notch salespeople and motivating them to provide superior individualized customer service. Page 14 of the annual report says “On the selling floor, our goal has been to create an environment that’s fair and positive, while at the same time, providing our people with the tools they need to run their own businesses within our four walls. By giving each individual the ability and freedom to excel, we enhance our company’s ability to do the same.” Providing this extraordinary level of employee autonomy is another major driving force behind Nordstrom’s customer intimacy value proposition.

2. These measures do not comprise a balanced scorecard because all of the measures, except one (inventory turns) are financial measures. The measures shown in the annual report may be satisfactory for external investors who are primarily interested in financial results; however, they would not constitute a balanced scorecard for internal management purposes. First, the scorecard does not include enough measures related to the non-financial leading indicators that drive financial results. In other words, the customer, internal business process, and learning and growth perspectives are largely non-existent in the scorecard included in the annual report. Second, there are no linkages between the measures shown in the scorecard. This is understandable because all of the measures except one are financial measures. Nonetheless, to quality as a genuine balanced scorecard, the scorecard shown in the annual

Research and Application 10-33 (continued)

report would need to include measures from various non-financial perspectives (such as the customer, internal business process, and learning and growth perspectives) and those measures would need to be related to one another on a cause-and-effect basis.

3. Students will probably choose their measures from among those shown in the scorecard included in Nordstrom’s annual report: (1) sales per square foot; (2) same-store sales percentage change; (3) gross profit as a percentage of sales; (4) SG&A

Date: 2015-12-18; view: 698