Discuss instances federal government’s Cost Accounting Standards have influenced Callum’s divisional performance
The three operating divisions are the aerospace division, the ceramic products division, and the glass products division.
Much of the manufacturing activity of the aerospace division is related to work performed for the National Aeronautics and Space Administration (NASA) under negotiated contracts. The contracts provide that cost shall be allocated to the contracts in accordance with the federal government’s Cost Accounting Standards (as promulgated by the Cost Accounting Standards Board and administered by the General Accounting Office).
Callum Corporation headquarters provide general administrative support and computer services to each of the three operating divisions. The Cost Accounting Standards provide that the cost of gen- eral administration may be allocated to negotiated defense contracts. Further, the standards provide that in institutions where computer services are provided by corporate headquarters, the actual costs (fixed and variable) of operating the computer department may be allocated to the defense division based on a reasonable measure of computer usage.
Another provision of the Cost Accounting Standards deals with the situation in which a defense division acquires noncommercial components from a sister division. The standards provide that when there is no established market price for the component, the component must be transferred to the defense division at cost without a markup for profit. This provision of the standards applies to Callum Corporation because the aerospace division purchases custom designed ceramic components from the ceramic products division. There is no established market price for these custom components.
The general managers of the three divisions are evaluated as profit center managers based on the before-tax profit of the division. The November 2010 performance evaluation reports for each of the divisions (in millions of dollars) are shown in the following table:
Aerospace Division
Ceramic Products Division
Glass Products Division
Sales
$23.0
$15.0*
$55.0
Cost of goods sold
13.0
7.0
38.0
Gross profit
$10.0
$ 8.0
$17.0
Selling and administration: Division selling and administration
$ 5.0
$ 5.0
$ 8.0
Corporate-general administration
1.0
–
–
Corporate-computing
1.0
–
–
Total selling and administration
$ 7.0
$ 5.0
$ 8.0
Profit before taxes
$ 3.0
$ 3.0
$ 9.0
* Includes $3,000,000 of custom ceramic products sold to aerospace division at cost and the remainder ($12,000,000) sold to the glass products division and outside customers at established market prices.
Required
1. Review the November performance evaluation reports for the three operating divisions of Callum Corporation.
a. Identify specific instances where the federal government’s Cost Accounting Standards have influenced Callum’s divisional performance reporting.
b. For each specific instance identified, discuss whether the use of accounting practices based on Cost Accounting Standards is desirable for internal reporting and performance evaluation.
2. Considering the accounting practices and reporting methods currently employed by Callum Corporation, describe the improper decision making that could result for the company as a whole if the demand for commercial (nondefense related) ceramic products is equal to or greater than the productive capacity of the ceramic products division.
3. Without a charge for computing services, the operating divisions may not make the most cost effective use of the resources of the computer systems department of Callum Corporation. Outline and discuss methods for charging the operating divisions for the use of computer services that would promote cost consciousness by the operating divisions and operating efficiency by the computer systems department.
