90.2K

Verified Solution

Link Copied!

Responsibility accounting, interdependent units (LO2, LO3). AlarmTek makes and sells home security systems. It has two divisionsa production division and a marketing division. The company treats the production division as a cost center and the marketing division as a revenue center. It evaluates the production division by comparing the actual cost performance to a flexible budget. Similarly, it evaluates the marketing division by comparing actual revenues less marketing and customer care costs to the corresponding budget. The following presents budgeted and actual performance for a recent year.

BudgetActual

Production volume (units) $40,000$45,000

Revenues$8,000,000$8,550,000

Variable production costs $4,000,000$4,050,000

Total fixed production costs $800,000$780,000

Variable marketing and customer care costs $400,000$640,000

Fixed marketing and customer care costs $250,000$450,000

Profit before taxes $2,550,000$2,630,000

Required:

a.The production manager was very happy with his performance, but the marketing manager was not at all pleased. Explain why by evaluating their respective performances.

b. The marketing manager made the following complaint to the head office:"I helped sell more units, but the quality was poor. Just look at my marketing costs. I did not spend any more in sales calls and promotions compared to last year. The only reason my costs are so high is because my department had to offer more after-sales service to handle a lot of customer complaints. I even lost out on revenues. I think my esteemed colleague on the production side is cutting corners to come un-der the cost budget. I think you have to change the way you evaluate performance."Do you believe the marketing manager might have a legitimate case?

c.How could you improve the performance measurement and evaluation system to avoid such conflicts in the future?

Answer & Explanation Solved by verified expert

See Answer