Discussing a performance evaluation system. Darmen Corporation is one of the major producers of prefabricated houses in the home building industry. The corporation consists of two divisions: (1) Bell...

Discussing a performance evaluation system. Darmen Corporation is one of the major producers of prefabricated houses in the home building industry. The corporation consists of two divisions: (1) Bell Division, which acquires the raw materials to manufacture the basic house components and assembles them into kits, and (2) the Cornish Division, which takes the kits and constructs the homes for final home buyers. The corporation is decentralized, and the management of each division is measured by its income and return on investment.

Bell Division assembles seven separate house kits using raw materials purchased at the prevailing market prices. The seven kits are sold to Cornish for prices ranging from $45,000 to $98,000. The prices are set by Darmen's corporate management using prices paid by Cornish when it buys comparable units from outside sources. The smaller kits with the lower prices have become a larger portion of the units sold because the final house buyer is facing prices that are increasing more rapidly than personal income. The kits are manufactured and assembled in a new plant just purchased by Bell this year. The division had been located in a leased plant for the past four years.

All kits are assembled upon receipt of an order from the Cornish Division. When the kit is completely assembled, it is loaded immediately on a Cornish truck. Thus, Bell Division has no finished goods inventory.

The Bell Division's accounts and reports are prepared on an actual cost basis. There is no budget, and standards have not been developed for any product. A factory overhead rate is calculated at the beginning of each year. The rate is designed to charge all overhead to the product each year. Any under- or over-applied overhead is allocated to the cost of goods sold account and work-in-process inventories.

Bell Division's annual report is presented next. This report forms the basis of the evaluation of the division and its management by corporate management.

Additional information regarding corporate and division practices is as follows:

• The corporate office does all the personnel and accounting work for each division.
• The corporate personnel costs are allocated on the basis of the number of employees in the division.
• The accounting costs are allocated to the division on the basis of total costs excluding corporate charges
• The division administration costs are included in factory overhead.
• The financing charges include a corporate imputed interest charge on division assets and any divisional lease payments.
• The division investment for the return on investment calculation includes division inventory and plant and equipment at gross book value.

Required:

a. Discuss the value of the annual report presented for the Bell Division in evaluating the division and its management in terms of:

• 1. The accounting techniques employed in the measurement of division activities.
• 2. The manner of presentation.
• 3. The effectiveness with which it discloses differences and similarities between years.

b. Present specific recommendations you would make to the management of Darmen Corporation to improve its accounting and financial reporting system