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University of the South Pacific

Faculty of Business and Economics

School of Accounting and Finance

AF201 - Managerial Accounting s1, 2021

Individual Assignment

Weighting: The total mark for this assignment is 65 and is worth 12% of your total assessment.

Due date: Monday 31st May 11:55pm. ALL ASSIGNMENTS HANDED IN AFTER THIS TIME WILL BE REGARDED AS LATE ASSIGNMENTS.

Introduction This assignment will assess your critical thinking, creativity and written communication. As a future management accountant it is essential to think critically, creatively and communicate effectively to avoid losing any valuable opportunities to create value for shareholders and customers.

Furthermore, this assignment addresses learning outcomes (5) and (6) of the course as depicted on the course outline.

Instructions:

1. Your assignment MUST be word processed. Hand written assignment will NOT be accepted.

2. This is an Individual assignment.

3. The assignment must be submitted online in the appropriate drop box.

4. Chapter Reference: Chapters 12, 13 & 14 of the textbook. Please read these chapters to familiarize yourself with the concept of performance measurement and reward systems.

5. Ensure that your name and ID number is stated clearly on the cover page (design your own cover page).

6. All references used must be properly referenced using the APA style.

7. A penalty of 10% will be deducted each day or part thereof that the assignment is late.

8. Plagiarized assignment will be awarded a Zero (0) mark.

9. The assignment will be marked according to the attached rubric – see Appendix 1 so make sure that you refer to the descriptors of the rubric. DO NOT attach the rubric to your assignment when uploading it for marking.

Case Study

Harwood Medical Instruments PLC

Harwood Medical Instruments PLC (HMI), based just outside of Birmingham, England, manufactured specialty medical instruments and sold them in market niches that were becoming increasingly competitive and price sensitive because of pressures to reduce health care costs. HMI was organized into nine decisions each run by a general manager. Over the years, HMI had grown both organically and by acquisition. Six of the divisions had been acquired by HMI within the past decade.

All of HMI’s divisions sold medical products to hospitals, laboratories, and/or doctors, so the need for product quality and reliability was high. The divisions varied significantly, however, in terms of the degree to which their success depended on, for example, development of new products, efficiency of production, and/or customer service.

Bonuses for division general managers were paid semi-annually. Up to the year 2009, these bonuses were calculated as 1% of division operating profits.

HMI’s managing director, Andy Guthrie, had concerns though that the operating profit measure was too narrowly focused. He had been reading articles about performance measurement and decided to a “more balanced” scorecard. In November 2009, just before introducing a new bonus plan, Mr. Guthrie explained to his chief financial officer that he was willing to pay out higher bonuses than had been paid historically if improved performance warranted doing so.

The new plan provided a base bonus for division general managers of 1% of division operating profits for the half-year period. This base bonus was adjusted as follows:

• Increased by £5,000 if over 99% of deliveries were on time; by £2,000 if 95-99% of deliveries were on time; or by zero is less than 95% of deliveries were on time.

• Increased by £5,000 if sales returns were less than or equal to1% of sales, or decreased by 50% of the excess of sales returns over 1% of sales.

• Increased by £1,000 for every patent application filed with the UK Intellectual Property Office.

• Reduced by the excess of scrap and rework costs over 1% of operating profit.

• Reduced by £5,000 if average customer satisfaction ratings were below 90%.

If the bonus calculation resulted in a negative amount for a particular period, the manager received no bonus. Negative amounts were not carried forward to the next period.

Exhibit 1 shows results for two representative HMI divisions for the year 2010, the first year under the new bonus plan. The Surgical Instruments Division (SID), one of HMI’s original businesses, sold a variety of surgical instruments, including scissors, scapels, retractors, and clamps. The markets for these products were mature, so growth was relatively slow. Not much innovation was needed, but controlling costs was critical. The Ultrasound Diagnostic Equipment Division (Ultrasound), which was acquired in 2007, sold and serviced ultrasound probes, transducers, and diagnostic imaging systems. The ultrasound market promised excellent growth and profits if the division could keep its sophisticated products on the cutting edge technologically and control both product development and product costs effectively.

In 2009, the total annual bonuses for the year earned by the managers of SID and Ultrasound were approximately £85,000 and £74,000, respectively.

Exhibit 1 Harwood Medical Instruments PLC

Operating results for the surgical Instruments and Ultrasound Diagnostic Equipment Divisions, 2010 (£ in 000s)

Assignment Questions

1. Critically analyze the current reward system that Harwood Medical Instruments PLC uses to award the bonus.

1. Calculate the bonus earned by each manager of the two Divisions for each 6-month period and for the year 2010 (i.e. total bonus) [Note: the figures are in thousands; (£’000s)].

1. (i) Design a performance measurement reward system that would encapsulate a rather “more balanced” approach in awarding of bonuses.

(ii) Briefly explain how the reward system you design in 3(i) can be used to award bonus.

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