Concept explainers
Responsibility, controllability, and stretch targets. Consider each of the following independent situations for Sunrise Tours, a company owned by David Bartlett that sells motor coach tours to schools and other groups. Sunshine Tours owns a fleet of 10 motor coaches and employs 12 drivers, 1 maintenance technician, 3 sales representatives, and an office manager. Sunshine Tours pays for all fuel and maintenance on the coaches. Drivers are paid $0.50 per mile while in transit, plus $15 per hour while idle (time spent waiting while tour groups are visiting their destinations). The maintenance technician and office manager are both full-time salaried employees. The sales representatives work on straight commission.
- 1. When the office manager receives calls from potential customers, she is instructed to handle the contracts herself. Recently, however, the number of contracts written up by the office manager has declined. At the same time, one of the sales representatives has experienced a significant increase in contracts. The other two representatives believe that the office manager has been colluding with the third representative to send him the prospective customers.
- 2. One of the motor coach drivers seems to be reaching his destinations more quickly than any of the other drivers and is reporting longer idle time.
- 3. Regular preventive maintenance of the motor coaches has been proven to improve fuel efficiency and reduce overall operating costs by averting costly repairs. During busy months, however, it is difficult for the maintenance technician to complete all of the maintenance tasks within his 40-hour workweek.
- 4. David Bartlett has read about stretch targets, and he believes that a change in the compensation structure of the sales representatives may improve sales. Rather than a straight commission of 10% of sales, he is considering a system where each representative is given a monthly goal of 50 contracts. If the goal is met, the representative is paid a 12% commission. If the goal is not met, the commission falls to 8%. Currently, each sales representative averages 45 contracts per month.
- 5. Fuel consumption has increased significantly in recent months. David Bartlett is considering ways to promote improved fuel efficiency and reduce harmful emissions using stretch environmental targets, where drivers and the maintenance mechanic would receive a bonus if fuel consumption falls below 90% of budgeted fuel usage per mile driven.
For situations 1–3, discuss which employee has responsibility for the related costs and the extent to which costs are controllable and by whom. What are the risks or costs to the company? What can be done to solve the problem or improve the situation? For situations 4 and 5, describe the potential benefits and costs of establishing stretch targets.
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HORGREN'S COST ACCOUNTING
- Sunrise Tours, a company owned by David Bartlett that sells motor coach tours to schools and other groups. Sunshine Tours owns a fleet of 10 motor coaches and employs 12 drivers, 1 maintenance technician, 3 sales representatives, and an office manager. Sunshine Tours pays for all fuel and maintenance on the coaches. Drivers are paid $0.50 per mile while in transit, plus $15 per hour while idle (time spent waiting while tour groups are visiting their destinations). The maintenance technician and office manager are both full-time salaried employees. The sales representatives work on straight commission. Q. One of the motor coach drivers seems to be reaching his destinations more quickly than any of the other drivers and is reporting longer idle time.arrow_forwardSunrise Tours, a company owned by David Bartlett that sells motor coach tours to schools and other groups. Sunshine Tours owns a fleet of 10 motor coaches and employs 12 drivers, 1 maintenance technician, 3 sales representatives, and an office manager. Sunshine Tours pays for all fuel and maintenance on the coaches. Drivers are paid $0.50 per mile while in transit, plus $15 per hour while idle (time spent waiting while tour groups are visiting their destinations). The maintenance technician and office manager are both full-time salaried employees. The sales representatives work on straight commission. Q.David Bartlett has read about stretch targets, and he believes that a change in the compensation structure of the sales representatives may improve sales. Rather than a straight commission of 10% of sales, he is considering a system where each representative is given a monthly goal of 50 contracts. If the goal is met, the representative is paid a 12% commission. If the goal is not met,…arrow_forwardSunrise Tours, a company owned by David Bartlett that sells motor coach tours to schools and other groups. Sunshine Tours owns a fleet of 10 motor coaches and employs 12 drivers, 1 maintenance technician, 3 sales representatives, and an office manager. Sunshine Tours pays for all fuel and maintenance on the coaches. Drivers are paid $0.50 per mile while in transit, plus $15 per hour while idle (time spent waiting while tour groups are visiting their destinations). The maintenance technician and office manager are both full-time salaried employees. The sales representatives work on straight commission. Q.Fuel consumption has increased significantly in recent months. David Bartlett is considering ways to promote improved fuel efficiency and reduce harmful emissions using stretch environmental targets, where drivers and the maintenance mechanic would receive a bonus if fuel consumption falls below 90% of budgeted fuel usage per mile driven. describe the potential benefits and costs of…arrow_forward
- Cost Information and Ethical Behavior, Service Organization Jean Erickson, manager and owner of an advertising company in Charlotte, North Carolina, arranged a meeting with Leroy Gee, the chief accountant of a large, local competitor. The two are lifelong friends. They grew up together in a small town and attended the same university. Leroy is a competent, successful accountant but is having some personal financial difficulties after some of his investments turned sour, leaving him with a 15,000 personal loan to pay offjust when his oldest son is starting college. Jean, on the other hand, is struggling to establish a successful advertising business. She had recently acquired the rights to open a branch office of a large regional advertising firm headquartered in Atlanta, Georgia. During her first 2 years, she was able to build a small, profitable practice. However, the chance to gain a significant foothold in Charlotte hinged on the success of winning a bid to represent the state of North Carolina in a major campaign to attract new industry and tourism. The meeting she had scheduled with Leroy concerned the bid she planned to submit. Jean: Leroy, Im at a critical point in my business venture. If I can win the bid for the states advertising dollars, Ill be set. Winning the bid will bring 600,000 to 700,000 of revenues into the firm. On top of that, I estimate that the publicity will bring another 200,000 to 300,000 of new business. Leroy: I understand. My boss is anxious to win that business as well. It would mean a huge increase in profits for my firm. Its a competitive business, though. As new as you are, I doubt that youll have much chance of winning. Jean: Youre forgetting two very important considerations. First, I have the backing of all the resources and talent of a regional firm. Second, I have some political connections. Last year, I was hired to run the publicity side of the governors campaign. He was impressed with my work and would like me to have this business. I am confident that the proposals I submit will be very competitive. My only concern is to submit a bid that beats your firm. If I come in with a lower bid and good proposals, the governor can see to it that I get the work. Leroy: Sounds promising. If you do win, however, there will be a lot of upset people. After all, they are going to claim that the business should have been given to local advertisers, not to some out-of-state firm. Given the size of your office, youll have to get support from Atlanta. You could take a lot of heat. Jean: True. But I am the owner of the branch office. That fact alone should blunt most of the criticism. Who can argue that Im not a local? Listen, with your help, I think I can win this bid. Furthermore, if I do win it, you can reap some direct benefits. With that kind of business, I can afford to hire an accountant, and Ill make it worthwhile for you to transfer jobs. I can offer you an up-front bonus of 15,000. On top of that, Ill increase your annual salary by 20%. That should solve most of your financial difficulties. After all, we have been friends since day oneand what are friends for? Leroy: Jean, my wife would be ecstatic if I were able to improve our financial position as quickly as this opportunity affords. I certainly hope that you win the bid. What kind of help can I provide? Jean: Simple. To win, all I have to do is beat the bid of your firm. Before I submit my bid, I would like you to review it. With the financial skills you have, it should be easy for you to spot any excessive costs that I may have included. Or perhaps I included the wrong kind of costs. By cutting excessive costs and eliminating costs that may not be directly related to the project, my bid should be competitive enough to meet or beat your firms bid. Required: 1. What would you do if you were Leroy? Fully explain the reasons for your choice. What do you suppose the code of conduct for Leroys company would say about this situation? 2. What is the likely outcome if Leroy agrees to review the bid? Is there much risk to him personally if he reviews the bid? Should the degree of risk have any bearing on his decision?arrow_forwardThe Bramble Dental Clinic provides both preventive and orthodontic dental services. The two owners, Reese Dinkle and Anita Frizell, operate the clinic as two separate investment centers: Preventive Services and Orthodontic Services. Each of them is in charge of one of the centers: Reese for Preventive Services and Anita for Orthodontic Services. Each month, they prepare an income statement for the two centers to evaluate performance and make decisions about how to improve the operational efficiency and profitability of the clinic. 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