ACCT 1511 TOPIC 12

Seminar Homework Questions:

Group discussion and presentation

Group 1: Additional Question: Car Dealer

Group 2: Additional Question: Car Sales Representative

Group 3: Additional Question: Car Brand (1 item only)

Group 4: Semester 1, 2012 Final Exam Question 10

Group 5: Semester 1, 2009 Final Exam Question 6

Group 6: Semester 2, 2007 Final Exam Question 6 (a)

Group 7: Semester 2, 2007 Final Exam Question 6 (b)

Group 8: Semester 2, 2010 Final Exam Question 5

1
ADDITIONAL QUESTION
By participants: (i) identify the shortcoming; (ii) classify the problem (goal congruence, slack
creation, myopic behaviour, etc); (iii) explain the incentives by participants for such
behaviour; (iv) explain the behavioural dysfunction (i.e. the negative result); and (v) suggest
a solution to each shortcoming.

[GROUP 1] CAR DEALERS

Identify: Buying more cars than they can sell.

Classify: Myopic behaviour

Incentive: Buying in bulk to get manufacturer bonuses (i.e. getting a rebate effectively a
discount on buying more cars).

Dysfunction: Unsold cars in car yards, necessitating discounting to clear and reducing dealer
profitability.

Solution: No solution? Car brands encourage this behaviour as it pushes overproduction

problems to car dealers.

[GROUP2] SALES REPRESENTATIVES

Identify: Selling cars at lower price

Classify: goal congruence

Incentive: To hit sales targets to earn performance bonus

Dysfunction: Car dealer sells more cars but at no/low profit.

Solution: Fix minimum margins per car.

2
[GROUP 3] CAR BRANDS
Identify: Channel stuffing

Classify: Goal congruence (divergence between firm management and shareholders); myopic
behaviour (recognise sales/ profit now, defer writedowns to later, pulling sales from future)

Incentive: Report more apparent sales (to dealers) than underlying sales

Dysfunction: Over-recognition of sales and profit, that may reverse in future financial
periods. Car brand may have to give more dealer incentives to enable dealers to sell cars at
lower prices. Leads shareholders/investors to believe car company is more successful than it
really is. May impact future sales as car dealers will not buy any more cars until inventory
backlog is cleared.

Solution: Appropriate revenue recognition? When final sales occurs?

CAR BRANDS
Identify: Over-reporting of sales figures

Classify: Myopic behaviour?

Incentive: Appear to have greater market share of Australian car sales than reality. May
impact buyer perception of most popular cars leading to more sales.

Dysfunction: Improperly influences buyer perception of car popularity that may influence
buyer purchase decision.

Solution: External audit of reported car sales; compile car sales from motor vehicle
registration.

3
SEMESTER 1, 2012 FINAL EXAM, QUESTION 10 (4 MARKS)
[GROUP 4]

(a) As CEO of the company, which line item(s) from the above budget would you require that
the Sales Department meet? (2 marks – 1 mark for line item selection, 1 mark for reasoning).
Both Sales dollars and sales units, because they need to be able to meet the overall
revenue target as well by controlling the price of each unit sold.

If say sales units, and has supporting reason that makes sense: 1 mark.

(b) As CEO of the company, would you require that the Production Department meet the
production budget in terms of production units and/or production costs? (2 marks – 1 mark
for item selection, 1 mark for reasoning)
Both production units and cost, because they need incentives to meet target output
plus be able to control costs.

If say production units, and has supporting reason that makes sense: 1 mark.

4
[GROUP 5]

SEMESTER 1, 2009 FINAL EXAM, QUESTION 6 (4 MARKS)

Prepare a production budget for the first quarter of the year. Show the number of units (i.e.
cans of cat food) that should be produced each month as well as for the quarter in total.

Prepquestion Ltd.
Production Budget
For the First Quarter 19XX
January February March Total
Sales 100,000 120,000 110,000 330,000 (1 mark)
Desired ending inventory 24,000 22,000 20,000 20,000 (1 mark ending)
Total needs 124,000 142,000 130,000 350,000
Less: Beginning inventory (20,000) (24,000) (22,000) (20,000) (1 mark begin)
Units to be produced 104,000 118,000 108,000 330,000 (1 mark)

[This was a preparation question for that semester. We no longer have preparation questions
as we now prepare PASS questions to be worked on in PASS sessions. At that time we did
not provide exam questions for practice in PASS sessions.]

[GROUP 6]

SEMESTER 2, 2010 FINAL EXAM QUESTION 5 (5 MARKS)

Prepare a direct material budget for the quarter ended December 31, 2010. The budget
needs to include the dollar value of direct materials to be purchased for each month of the
quarter (5 marks).

DoNotGiveUp Ltd.
Direct Materials Budget
For the Quarter ended 31 December 2010
October November December Total
Units to Produce 110 120 130 360 2 marks
Cost of Direct Materials $100 $100 $100 $100
Cost of Production needs $11000 $12000 $13000 $36000
Desired ending inventory $1000 $1000 $1000 $1000 1 mark
Total cost of direct materials needed $12000 $13000 $14000 $37000
Less: beginning inventory 0 $1000 $1000 0 1 mark
Direct materials purchased $12000 $12000 $13000 $37000 1 mark

5
SEMESTER 2, 2007 FINAL EXAM QUESTION 6 (ADAPTED)
This question is about the possible dysfunctional effects of a poorly designed budget.

[GROUP 7]
(a) What is a problem with using the sales budget as described to motivate employees to
perform better? (2 marks)

• The question is not clear on whether the sales budget is to only motivate sales
employees, using the sales budget to motivate all employees including non-sales
employees may is not good budget design
• Need to have accountability where there is controllability, i.e. separate budget for
different departments or line/function staff.
• Sales budget only has number of units and revenue targets – while employees may be
able to achieve these “physical and financial” targets, they may ignore other important
issues such as customer service, etc.

[GROUP 8]
(b) At the end of the quarter, it has been found that while the sales department was able to
sell 10,000 units of espresso coffee machine, the company fell short of its profit target of
$1,500,000 by $100,000. Prudence has decided that since only one target was met, there
will not be any bonus for sales personnel. Discuss the flaws in this budget design. (3
marks)

• It would seem that there is some unfairness to sales staff that they are denied a bonus
because of not meeting profit targets that are not entirely within their control, even
though they met their sales targets.
• However, this ignores the possibility that the sales personnel may have contributed to
the profit miss from having their expense account blow out as the sales budget only
targets sales units and revenue but not the expense incurred to generate the sales
which is fully within their control.
• It is not unreasonable to have a profit pool from which all employees will be paid a
bonus based on the company meeting an overall profit target as all employees from all
departments have to work together for the company to meet its objectives.

• Plus any other answer that makes sense.