Robert Buey became Chief Executive Officer of Phelps Manufacturing two years ago

BYP 9-6 Robert Buey became Chief Executive Officer of Phelps Manufacturing two years ago. At the time, the company was reporting lagging profits, and Robert was brought in to "stir thing up." The company has three divisions, electronics, fiber optics, and plumbing supplies. Robert has no interest in plumbing supplies, and one of the first fixed costs away from the other two divisions to the plumbing division. This had the effect of causing the plumbing division to report losses during the last two years; in the past it had always reported low, but acceptable, net income. Robert felt that this reallocation would shine a favorable light on him in front of the board of directors because it meant that the electronics and fiber optics divisions would look like they were improving.

Given that these are "business of the future," he believed that the stock market would react favorably to these increase, while not penalizing the poor results of the plumbing division. Without this shift in the allocation of fixed costs, the profits of the electronics and fiber optics divisions would not have improved. But now the board of directors has suggested that the plumbing division be closed because it is reporting losses. This would mean that nearly 500 employees, many of whom have worked for Phelps their whole lives, would lose their jobs.

Instructions
(a) If a division is reporting losses, does that necessarily mean that it should be closed?
(b) Was the reallocation of fixed costs across division unethical?
(c)What should Robert do?

Click here for the solution: Robert Buey became Chief Executive Officer of Phelps Manufacturing two years ago

Lincoln Chemicals became involved in investigations by the U.S. Environmental Protection Agency in regard to damages connected to waste disposal sites

P 13-9 Subsequent events

Lincoln Chemicals became involved in investigations by the U.S. Environmental Protection Agency in regard to damages connected to waste disposal sites. Below are four possibilities regarding the timing of (A) the alleged damage caused by Lincoln, (B) an investigation by the EPA, (C) the EPA assessment of penalties, and (D) ultimate settlement. In each case, assume that Lincoln is unaware of any problem until an investigation is begun. Also assume that once the EPA investigation begins, it is probable that a damage assessment will ensue and that once an assessment is made by the EPA, it is reasonably possible that a determinable amount will be paid by Lincoln.

Required:
For each case, decide whether (a) a loss should be accrued in the financial statements with an explanatory note, (b) a disclosure note only should be provided, or (c) no disclosure is necessary.


Click here for the solution: Lincoln Chemicals became involved in investigations by the U.S. Environmental Protection Agency in regard to damages connected to waste disposal sites

Stephen Gall and his family became ill after drinking contaminated water supplied to their home by the McKeesport Municipal Water Authority

Stephen Gall and his family became ill after drinking contaminated water supplied to their home by the McKeesport Municipal Water Authority. They filed suit against the utility, arguing, among other things, that the utility had breached the UCC implied warranty of merchantability when it sold them contaminated water. The utility moved to dismiss their complaint, arguing that since water was not “goods,” the UCC did not apply. Should the Galls’ complaint be dismissed?

Click here for the solution: Stephen Gall and his family became ill after drinking contaminated water supplied to their home by the McKeesport Municipal Water Authority

After reviewing the month-to-month variances, Panarude senior management became concerned about the increased spending occurring in the last three months of each fiscal year

Panarude Airfreight is an international air freight hauler with more than 45 jet aircraft operating in the United States and the Pacific Rim. The firm is headquartered in Melbourne, Australia, and is organized into five geographic areas: Australia, Japan, Taiwan, Korea, and the United States. Sup-porting these areas are several centralized corporate function services (cost centers): human resources, data processing, fleet acquisition and maintenance, and telecommunications. Each responsibility center has a budget, negotiated at the beginning of the year with the vice president of finance. Funds unspent at the end of the year do not carry over to the next fiscal year. The firm is on a January-to-December fiscal year.

After reviewing the month-to-month variances, Panarude senior management became concerned about the increased spending occurring in the last three months of each fiscal year. In particular, in the first nine months of the year, expenditure accounts typically show favorable variances (actual spending is less than budget), but in the last three months, unfavorable variances are the norm. In an attempt to smooth out these spending patterns, each responsibility center is reviewed at the end of each calendar quarter and any unspent funds can be deleted from the budget for the remainder of the year. The accompanying table shows the budget and actual spending in the telecommunications department for the first quarter of this year.

At the end of the first quarter, telecommunications’ total annual budget for this year can be reduced by $7,000, the total budget underrun in the first quarter. In addition, the remaining nine monthly budgets for telecommunications are reduced by $778 (or $7,000 / 9). If, at the end of the second quarter, telecommunications’ budget shows an unfavorable variance of, say, $8,000 (after the original budget is reduced for the first-quarter underrun), management of telecommunications is held responsible for the entire $8,000 unfavorable variance. The first-quarter underrun is not restored. If the second quarter budget variance is also favorable, the remaining six monthly budgets are each reduced further by one-sixth of the second-quarter favorable budget variance.

Required:
a. What behavior would this budgeting scheme engender in the responsibility center managers?
b. Compare the advantages and disadvantages of the previous budget regime, where any end-of-year budget surpluses do not carry over to the next fiscal year, with the system of quarterly budget adjustments just described.

Click here for the solution: After reviewing the month-to-month variances, Panarude senior management became concerned about the increased spending occurring in the last three months of each fiscal year