602 Accounting: Business Reporting for Decision Making
Required
a. Outline the pros and cons of government taxation of toxic environmental emissions.
b. State your opinion on the concept of environmental taxes and justify your position.
14.49 Environmental information management systems LO 4
Information management is an essential component of an environmental and social performance
measurement system. Discuss whether you agree with this statement.
14.50 EVA and balanced scorecard LO1, 3
Water Solutions Pty Ltd operates three divisions that supply products and services relating to
water. The two older divisions produce and supply water hardware such as pumps, pipes and
tanks. The new division is a service division. It supplies consultancy services to government and
large corporations on the preservation and best use of water resources.
Water Solutions Pty Ltd uses the EVA to measure divisional performance. Its results over the
last year are as follows.Consultancy services Tanks Pumps and pipesSales
Divisional margin
EVA$ 1 430 000
1 200 000
370 000$ 25 700 000
5 200 000
1 230 000$ 5 680 000
980 000
560 000In the management performance meeting, some concern was expressed about the use of the EVA
as the sole measure for consultancy services performance. It was agreed that this was a growth
area, but that sales growth had slowed dramatically over the last year. Investigation revealed that
some competitor companies had managed to sustain their initial growth through the current year,
in contrast to the slowing sales of Water Solutions Pty Ltd. It was concluded that the performance
of the consultancy services division was poor in the current growth market.
Required
a. Consider whether the use of the EVA as the sole performance measure is suitable in the cur-
rent circumstances.
b. Consider whether the introduction of a balanced scorecard could facilitate a focus on the
growth strategy.
14.51 Divisional performance measurement — short-term behaviour LO 3
Loog International is a provider of personal exercise equipment. One division of Loog Inter-
national produces a product called Belly Fantastic, which is a specialised piece of equipment
that focuses on exercising the abdominal region. Most of the components for the Belly Fantastic
are sourced from various entities, warehoused and retrieved during production runs. Some com-
ponents are made by the division.
The divisional report shows that the division made sales of 12 000 units at a price of $80 each.
The variable costs were $50 per unit, with fixed costs of $190 000.
The entity calculates managers’ bonuses on the profit. The manager of the Belly Fantastic
division wants to receive as big a bonus as possible. To ensure that the divisional margin is
reported at its highest possible level, the manager has been producing more units of the Belly
Fantastic than would be required according to sales forecasts. Producing more units has the effect
of increasing the ending inventory, which in the statement of profit or loss reduces the cost of
sales amount. This in turn increases the divisional margin. The extra production of Belly Fan-
tastic then has to be stored, thus increasing the need for warehouse space.
Required
a. Comment on the strategy of the manager to produce more units of product than are needed in
order to adjust the closing inventory and raise the profit. Is this practice in the best interests of
the entity’s long-term survival?
b. Discuss the use of divisional margin as a performance measure.