Fundamentals of Cost Accounting 2nd Edition by William Lanen, Carolyn Wells, Michael Maher

Exercise 30

Analyze Performance Report for Decentralized Organization
Hall O' Fame Products is a nationwide sporting goods manufacturer. The company operates with a widely based manufacturing and distribution system that has led to a highly decentralized management structure. Each division manager is responsible for producing and distributing corporate products in one of eight geographical areas of the country.
Division managers are evaluated using a performance measure that is calculated as the division's contribution to corporate profits before taxes less a 20 percent investment charge on the division's investment base. The investment base of each division is the sum of its year-end balances of accounts receivable, inventories, and net plant fixed assets (cost less accumulated depreciation). Corporate policies dictate that divisions minimize their investments in receivables and inventories. Investments in fixed plant assets are decisions jointly made by the division and corporate based on proposals made by division plant managers, available corporate funds, and general corporate policy.
James Davenport, division manager for the California sector, prepared the year 2 and preliminary year 3 budgets for his division late in year 1. Final approval of the year 3 budget took place in late year 2 after adjustments for trends and other information developed during year 2. Preliminary work on the year 4 budget also took place at that time. In early October of year 3, Davenport asked the division controller to prepare a report that presents performance for the first nine months of year 3. The report follows:

a Hall O' Fame's sales occur uniformly throughout the year.
Required
a. Evaluate the performance of James Davenport for the nine months ending September 30, Year 3. Support your evaluation with pertinent facts from the problem.
b. Identify the features of Hall O' Fame's division performance measurement reporting and evaluation system that need to be revised if it is to effectively reflect the responsibilities of the divisional managers.