2 Ollie Mace is the controller of SDC,an automotive parts manufacturing firm. Its four major operatingdivisions are heat treating, extruding, small parts stamping, andmachining. Last year’s sales from each division ranged from$150,000 to $3 million. Each division is physically andmanagerially independent, except for the constant surveillance ofSam Dilley, the firm’s founder.
The AIS for each division evolved according to the needs andabilities of its accounting staff. Mace is the first controller tohave responsibility for overall financial management. Dilley wantsMace to improve the AIS before he retires in a few years so that itwill be easier to monitor division performance. Mace decides toredesign the financial reporting system to include the followingfeatures:
It should give managers uniform, timely, and accurate reports ofbusiness activity. Monthly reports should be uniform acrossdivisions and be completed by the fifth day of the following monthto provide enough time to take corrective actions to affect thenext month’s performance. Company-wide financial reports should beavailable at the same time.
Reports should provide a basis for measuring the return oninvestment for each division. Thus, in addition to revenue andexpense accounts, reports should show assets assigned to eachdivision.
The system should generate meaningful budget data for planning anddecision-making purposes. Budgets should reflect managerialresponsibility and show costs for major product groups.
Mace believes that a new chart of accounts is required toaccomplish these goals. He wants to divide financial statementaccounts into major categories, such as assets, liabilities, andequity. He does not foresee a need for more than 10 controlaccounts within each of these categories. From his observations todate, 100 subsidiary accounts are more than adequate for eachcontrol account.
No division has more than five major product groups. Mace foreseesa maximum of six cost centers within any product group, includingboth the operating and nonoperating groups. He views generaldivisional costs as a non-revenue-producing product group. Maceestimates that 44 expense accounts plus 12 specific varianceaccounts would be adequate.
Design a chart of accounts for SDC. Explain how you structured thechart of accounts to meet the company’s needs and operatingcharacteristics. Keep total account code length to a minimum, whilestill satisfying all of Mace’s desires. (CMA Examination, adapted)
