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Question 5 (20 marks)

You are a management accountant with the divisional accounting office of a large grocery retailer Bidco Foods. Your supervisor has asked you to go to the Uchumi store to resolve an issue the store managers has with the bakery manager about the fairness of the accounting information used with the bonus system.

In order to remain viable and grow, Bidco introduced sales and profit targets for retail stores. For an “A” type store like Uchumi the weekly sales target is $12 per square foot, or for this 20,000 square foot store, $12.5 million a year. Operating profits are to be 5 percent of target sales or $625,000 a year.

Typically store managers delegate responsibility for sales and operating profit to department mangers, ie. produce, dry food, bakery and delicatessen. Within this system, the store managers and their department managers receive bonuses equal to about one-third of their salaries if the two targets are achieved.

Upon Arriving at the Uchumi store, you meet Terry, the store manger, and then Mark, the baker. Mark reiterates his complaint that the bonus system is based on unfair accounting.

I am told that my sales target is 1.75 million a year or about $33,655 a week. I have no problem with sales. I can provide customers with what they want at competitive prices. However, I have a problem with the annual profit target of $150,000 which is 8.5 percent of sales. My complaint has nothing to do with the 8.5 percent profit target being more than the 5 percent for the overall store. A baker has a better chance of high profits than the other departments.

Let me explain. First, I have little control over my labour costs. The store manager schedules employees who may or may not be necessary for the bakery. Second, the bakery operating statement includes charges that have nothing to do with the bakery. For example, the store manager’s total salary is charged to the bakery because it is always profitable. Third, I do not get a...
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