HIGH STREET CLOTHES

IPMI Executive MBA Class of March 2015

Group 2-Queen Ratih: Ratih Arie Utami, Arief
Sugito, Rachmat Makkasau, Prasetyo
Sumantri, Denny Situmorang
Lecturer: Mr. Widiyarto S. Sumitro

BACKGROUND
High Street Clothes is a retailer
that sells to professional women,
where the organization structure
consists of regions, districts, and
stores. It is located mostly in
upscale shopping districts.
The South Region consists of the
Coastal District and Inland District.

BACKGROUND
The Coastal District includes the
Excelsior, Windsor and Sovereign
stores.
The Coastal Districts
performance has not been up to
expectations in the past.

PROBLEM IDENTIFICATION
With High Street Clothes more of a responsibility rather
than blame and control type of company, its managers , in
consultation with its supervisors, annually establish
financial and non-financial goals integrated into their
budget. The Coastal District manager has set performance
goals with the managers of Excelsior and Windsor stores,
where the Sovereign store manager decided not to take
part in the bonus scheme.

PROBLEM IDENTIFICATION
The companys net income goal for each store is
12 percent of sales, where Excelsior managers
bonus is released on sales more than budgeted
sales of $570,000, and Windsor manager gets
bonus when net income is more than budgeted.

PROBLEM IDENTIFICATION
Mays data includes:

Coastal District (CD) sales revenue was $ 1.5 million, its

COGS was $ 633,000.

Advertising was $ 75,000.

G&A expenses were $180,000.

Excelsior and Windsor sales were 40% and 35% of CD

sales, respectively. Both stores COGS were 40% of sales.

Variable selling expenses (sales commissions) were set at

6% for all stores, districts, and regions.

Variable administrative expenses were at 2.5% of sales for

all.

Maintenance costs (incl. janitor and repairs) is a direct cost

under the control of the store manager, were: Excelsior, $
7,500; Windsor, $ 600; and Sovereign $4,500.

PROBLEM IDENTIFICATION
Mays data includes:

Advertising is considered a direct cost under the

control of the store manager. Excelsior spent 2/3 of
CD advertising budgeted expense, 10 times the
advertising amount spent by Windsor.

CD rental expense was $ 150,000, with Excelsior

spending 40% and Windsor 30% of it.

District expenses were allocated to the stores

based on sales.

South Region G&A expenses of $165,000 were

allocated to CD, and these expenses were
allocated further to each of its three stores equally.

PROBLEM IDENTIFICATION
1.

Prepare the May segmented income statement for the Coastal

District and for the Excelsior and Windsor stores.

2.

Compute the Sovereign stores net income for May.

3.

Discuss the impact of the responsibility-accounting system and

bonus structure on the manager's behavior and the effect of their
behavior on the financial results for the Excelsior store and the
Windsor store.

4.

The assistant controller for the South Region, Jack Williams, has
been a close friend of the Excelsior store manager for over 20
years. When Williams saw the segmented income statement [as
prepared in requirement (1)], he realized that the Excelsior store
manager had really gone overboard on advertising expenditures.
To make his friend look better to the regional management, he
reclassified $25,000 of the advertising expenditures as
miscellaneous expenses, and buried them in rent and other costs.
Comment on the ethical issues in the assistant controller's
actions.

PROBLEM ANALYSIS 1
1.

Segmented income statement for May:

PROBLEM ANALYSIS 2
2.

Sovereign store net income for May:

Coastal
District
$156,150

Excelsior
Store
$52,500

Windsor
Store
$91,275

Sovereign
Store
$ ??
12,375

PROBLEM ANALYSIS 3

The impact of
responsibilityaccounting system
and bonus structure
on the managers
behavior and their
behaviors effect on
Excelsiors and
Windsors financial
results are:

Excelsiors manager was

driven by the bonus setting
of an excess of $570,000
budgeted sales. In order to
so, he/she went overboard on
his/her budget of advertising
by two thirds of CDs
advertising expense, 1,000%
the amount spent by
Windsor, but only exceeded
Windsors sales by $75,000
or by 14%. Thus Excelsiors
net income was on 9% of its
sales, against Windsors net
income of 17% of its sales.

PROBLEM ANALYSIS 3

Windsors manager was

driven by the bonus setting of
an excess of budgeted net
income. In order to so, he/she
optimized his/her direct costs,
mostly in advertising expense
to only 7% of CDs advertising
expense, a tenth of the
amount spent by Excelsior.
Thus Windsors net income
was 17% of its sales
successfully exceeding the
budgeted net income.

PROBLEM ANALYSIS 4

Jack Williams violated several

standards of ethical conduct for in
managerial accounting namely as
follows:
Competance: to prepare complete and
clear reports and recommendations
after appropriate analyses of relevant
and reliable information.
Integrity: to avoid actual or apparent
conflicts of interest and advise all
appropriate parties of any potential
conflict.
Confidentiality: to refrain from using
or appearing to use confidential
information acquired in the course of
their work for unethical or illegal
advantage either personally or through
third parties

CONCLUSION AND
RECOMMENDATIONS
It is vital that a company
understands the
importance of setting
goals and accurately
aligning the performance
metrics to optimize the
bottom line of the
company which is its net
income and maximize the
companys value to its
shareholders. In doing so
one must be bound
ethically to avoid any
undue complications or
liabilities in the future.

High Street Clothes

company should be highly
careful in its bonus setting
of its store managers, if it
is to survive and thrive in a
competitive business such
as the fashion industry. It
should also further assess
its commitment and
compliance to the
managerial accounting
ethical standards, in order
for its responsibilityaccounting system to be
accurate, timely, and
reliable, for its decision
making.

By leaving Sovereigns
manager out of the bonus
system led to a dismal 2%
of net income to sales,
which should become
another lesson learnt, if
the responsibilityaccounting is to work as it
should have in supporting
good management
decision in its Sovereign
Store.

THANK YOU, , ,
DANKE, TERIMA KASIH.