The top management of General Electronics, Inc., is well known for “managing by the numbers.” With an eye on the company’s desired growth in overall net profit, the company’s CEO (chief executive officer) sets target profits at the beginning of the year for each of the company’s divisions. The CEO has stated her policy as follows: “I won’t interfere with operations in the divisions. I am available for advice, but the division vice presidents are free to do anything they want so long as they hit the target profits for the year.”
In November, Stan Richart, the vice president in charge of the Cellular Telephone Technologies Division, saw that making the current year’s target profit for his division was going to be very difficult. Among other actions, he directed that discretionary expenditures be delayed until the beginning of the new year. On December 30, he was angered to discover that a warehouse clerk had ordered $350,000 of cellular telephone parts earlier in December even though the parts weren’t really needed by the assembly department until January or February. Contrary to common accounting practice, the General Electronics, Inc., Accounting Policy Manual states that such parts are to be recorded as an expense when delivered. To avoid recording the expense, Mr. Richart asked that the order be canceled, but the purchasing department reported that the parts had already been delivered and the supplier would not accept returns. Since the bill had not yet been paid, Mr. Richart asked the accounting department to correct the clerk’s mistake by delaying recognition of the delivery until the bill is paid in January.
Required:
Are Mr. Richart’s actions ethical? Explain why they are or are not ethical.
Do the general management philosophy and accounting policies at General Electronics encourage or discourage ethical behavior? Explain.
Understanding the natures of fixed and variable costs is extremely important to managers. This knowledge is used in planning, making strategic and tactical decisions, evaluating performance, and controlling operations.
Required:
Form a team consisting of four persons. Each team member will be responsible for one of the following businesses:
Retail store that sells music CDs
Dental clinic
Fast-food restaurant
Auto repair shop
In each business decide what single measure best reflects the overall level of activity in the business and give examples of costs that are fixed and variable with respect to small changes in the measure of activity you have chosen.
Explain the relationship between the level of activity in each business and each of the following: total fixed costs, fixed cost per unit of activity, total variable costs, variable cost per unit of activity, total costs, and average total cost per unit of activity.
Discuss and refine your answers to each of the above questions with your group. Which of the above businesses seems to have the highest ratio of variable to fixed costs? The lowest? Which of the businesses’ profits would be most sensitive to changes in demand for its services? The least sensitive? Why?
While snoozing at the controls of his Pepper Six airplane, Dunse P. Sluggard leaned heavily against the door; suddenly, the door flew open and a startled Dunse tumbled out. As he parachuted to the ground, Dunse watched helplessly as the empty plane smashed into Operex Products’ plant and administrative offices.
“The insurance company will never believe this,” cried Mercedes Juliet, the company’s controller, as she watched the ensuing fire burn the building to the ground. “The entire company is wiped out!”
“There’s no reason to even contact the insurance agent,” replied Ford Romero, the company’s operations manager. “We can’t file a claim without records, and all we have left is this copy of last year’s annual report. It shows that raw materials at the beginning of this year (January 1) totaled $30,000, work in process totaled $50,000, and finished goods totaled $90,000. But what we need is a record of these inventories as of today, and our records are up in smoke.”
“All except this summary page I was working on when the plane hit the building,” said Mercedes. “It shows that our sales to date this year have totaled $1,350,000 and that manufacturing overhead cost has totaled $520,000.”
“Hey! This annual report is more helpful than I thought,” exclaimed Ford. “I can see that our gross margin was 40% of sales. I can also see that direct labor cost is one-quarter of the manufacturing overhead cost.”
“We may have a chance after all,” cried Mercedes. “My summary sheet lists the sum of direct labor and direct materials at $510,000 for the year, and it says that our goods available for sale to customers this year has totaled $960,000 at cost. Now if we just knew the amount of raw materials purchased so far this year.”
“I know that figure,” yelled Ford. “It’s $420,000! The purchasing agent gave it to me in our planning meeting yesterday.”
“Fantastic,” shouted Mercedes. “We’ll have our claim ready before the day is over!”
To file a claim with the insurance company, Operex Products must determine the amount of cost in its inventories as of the date of the accident. You may assume that all of the materials used in production during the year were direct materials.
Required:
Determine the amount of cost in the Raw Materials, Work in Process, and Finished Goods inventory accounts as of the date of the accident. (Hint: One way to proceed would be to reconstruct the various schedules and statements that would have been affected by the company’s inventory accounts during the year.)
Hickey Corporation a manufacturing company, produces a single product. The following information has been taken from the company’s production, sales, and cost records for the just completed year:
The questions in this exercise are based on Dell, Inc. To answer the questions, you will need to download Dell´s Form 10-K for the fiscal year ended January 28, 2005 by going to www.sec.gov/edgar/searchedgar/companysearch.html. Input CIK code 826083 and hit enter. In the gray box on the right-hand side of your computer screen defi ne the scope of your search by inputting 10-K and then pressing enter. Select the 10-K with a fi ling date of March 8, 2005. You do not need to print this document in order to answer the questions.
Required:
What is Dell’s strategy for success in the marketplace? Does the company rely primarily on a customer intimacy, operational excellence, or product leadership customer value proposition?
What evidence supports your conclusion?
What business risks does Dell face that may threaten its ability to satisfy stockholder expectations? What are some examples of control activities that the company could use to reduce these risks? (Hint: Focus on pages 7–10 of the 10-K.)
How has the Sarbanes-Oxley Act of 2002 explicitly affected the disclosures contained in Dell’s 10-K report? (Hint: Focus on pages 34–35, 59, and 76–78.)
Is Dell a merchandiser or a manufacturer? What information contained in the 10-K supports your answer?
What are some examples of direct and indirect inventoriable costs for Dell? Why has Dell’s gross margin (in dollars) steadily increased from 2003 to 2005, yet the gross margin as a percent of net revenue has only increased slightly?
What is the inventory balance on Dell’s January 28, 2005, balance sheet? Why is the inventory balance so small compared to the other current asset balances? What competitive advantage does Dell derive from its low inventory levels? Page 27 of Dell’s 10-K reports a figure called the cash conversion cycle. The cash conversion cycle for Dell has consistently been negative. Is this a good sign for Dell or a bad sign? Why?
Describe some of the various types of operating expenses incurred by Dell. Why are these expenses treated as period costs?
List four different cost objects for Dell. For each cost object, mention one example of a direct cost and an indirect cost.
