1. Segmented Reporting and Variances

   Pittsburgh-Walsh Company (PWC) is a manufacturing company whoseproduct line consists of lighting fixtures and electronic timingdevices. The Lighting Fixtures Division assembles units for theupscale and mid-range markets. The Electronic Timing DevicesDivision manufactures instrument panels that allow electronicsystems to be activated and deactivated at scheduled times for bothefficiency and safety purposes. Both divisions operate out of thesame manufacturing facilities and share production equipment.

      PWC’s budget for the year ending December 31,20x1, follows and was prepared on a business segment basis underthe following guidelines:

   1. Variable expenses are directly assigned to the incurringdivision.
   2. Fixed overhead expenses are directly assigned to the incurringdivision.
   3. The production plan is for 8,000 upscale fixtures, 22,000mid-range fixtures, and 20,000 electronic timing devices.Production equals sales.

      PWC established a bonus plan for divisionmanagement that required meeting the budget’s planned operatingincome by product line, with a bonus increment if the divisionexceeds the planned product line operating income by 10 percent ormore.

   PWC Budget
   For the Year Ending December 31,20x1
   (In Thousands of Dollars)
   Lighting Fixtures
   		Upscale		Mid-Range		Electronic Timing Devices		Total
   Sales		$1,440		$ 770		$ 800		$ 3,010
   Variable expenses:
   Cost of goods sold		(720)		(439)		(320)		(1,479)
   Selling and administrative		(170)		(60)		(60)		(290)
   Contribution margin		$ 550		$ 271		$ 420		$ 1,241
   Fixed overhead expenses		140		80		80		300
   Segment margin		$ 410		$ 191		$ 340		$ 941

      Shortly before the year began, the CEO, JackParkow, suffered a heart attack and retired. After reviewing the20x1 budget, the new CEO, Joe Kelly, decided to close the lightingfixtures mid-range product line by the end of the first quarter anduse the available production capacity to grow the remaining twoproduct lines. The marketing staff advised that electronic timingdevices could grow by 40 percent with increased direct salessupport. Increases above that level and increasing sales of upscalelighting fixtures would require expanded advertising expendituresto increase consumer awareness of PWC as an electronics and upscalelighting fixtures company. Kelly approved the increased salessupport and advertising expenditures to achieve the revised plan.Kelly advised the divisions that for bonus purposes the originalproduct-line operating income objectives must be met, but he didallow the Lighting Fixtures Division to combine the operatingincome objectives for both product lines for bonus purposes.

      Prior to the close of the fiscal year, thedivision controllers were furnished with preliminary actual datafor review and adjustment, as appropriate. These preliminaryyear-end data reflect the revised units of production amounting to12,000 upscale fixtures, 4,000 mid-range fixtures, and 30,000electronic timing devices and are presented as follows:

   PWC Preliminary Actuals
   For the Year Ending December 31,20x1
   (In Thousands of Dollars)
   Lighting Fixtures
   		Upscale		Mid-Range		Electronic Timing Devices		Total
   Sales		$ 2,160		$140		$1,200		$ 3,500
   Variable expenses:
   Cost of goods sold		(1,080)		(80)		(480)		(1,640)
   Selling and administrative		(260)		(11)		(96)		(367)
   Contribution margin		$ 820		$ 49		$ 624		$ 1,493
   Fixed overhead expenses		140		14		80		234
   Segment margin		$ 680		$ 35		$ 544		$ 1,259

      The controller of the Lighting FixturesDivision, anticipating a similar bonus plan for 20x2, iscontemplating deferring some revenues to the next year on thepretext that the sales are not yet final and accruing in thecurrent year expenditures that will be applicable to the firstquarter of 20x2. The corporation would meet its annual plan, andthe division would exceed the 10 percent incremental bonus plateauin 20x1 despite the deferred revenues and accrued expensescontemplated.

   Required:

   1. Select one benefits that an organizationrealizes from segment reporting. Evaluate segment reporting on avariable-costing basis versus an absorption-costingbasis.
   

   • It highlights the profitability of each segment
   • The contribution each segment makes toward profit is not easilyseen
   • It enables managers to increase profits by manipulatinginventory production levels

   2. Calculate the contribution margin,contribution margin volume, and sales mix variances. Enter youranswers in dollars, rather than in thousands of dollars Forexample, enter "750,000" rather than "750". If required, roundcalculations to the nearest cent.

   Contribution margin variance	$	Favorable Unfavorable
   Contribution margin volume variance	$	Favorable Unfavorable
   Sales mix variance	$	Favorable Unfavorable

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