Solution manual managerial accounting concept and applications by cabrera chapter 26 answer

MANAGEMENT ACCOUNTING - Solutions Manual

CHAPTER 26
EXECUTIVE PERFORMANCE MEASURES
AND COMPENSATION
I.

Questions
1. Incentive compensation is a monetary reward that is based on
measured performance. Organizations where employees have been
given the responsibility to make decisions are best suited for incentive
compensation systems.
2. The four guidelines are: fairness, participation, basic wage level, and
independent wage policy.
Fairness deals with the ratio of salaries of the highest paid to lowest
paid employees.
Participation states that all employees should be included in a
compensation plan. Although, they do not need to be included in the
same one.
Basic wage level states that a market wage should be paid, and
incentive compensation should not be used to adjust the market wage
downward.
Independent wage policy states that the incentive compensation system
for the most senior levels of the organization should be set by a group
that is independent of senior management.
3. a. based on salary – easy to administer, likely to be considered fair,
and, to the extent that salary reflects the relative ability to
contribute to results, is based on contribution;
based on equal share – easy to administer, likely to be considered
fair, and reflects how people often divide up rewards when left to
their own devices;

based on position – same as based on salary;
based on individual performance – ties reward most closely to
performance and likely to have the highest motivational impact.
b. based on salary – may convince lower level employees that they
have little to contribute, does not necessarily reflect contributions;
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Chapter 26 Executive Performance Measures and Compensation

based on equal share – may have little motivational effect, may
lead to feeling of inequity if some people contribute nothing;
based on position – same as based on salary;
based on individual performance – may be difficult and costly to
administer, may lead to arguments about interpreting the
performance measure.
4. A cash bonus is a cash reward tied to measured performance. A cash
bonus is a bonus that is best related to activities oriented to short-run
performance that should be rewarded immediately to provide a
reinforcement effect. Cash bonuses are best tied to measures of
achieved operating performance such as quality improvement, sales
increases, and success at short-run cost control.
Profit-sharing is a cash bonus incentive compensation plan where the
total of all cash bonuses paid to all employees is determined by a
formula involving the organization’s, or an organization unit’s, reported
profit. Profit-sharing is used to focus organization members on team
activities to improve the organization’s short-term performance.
Gain-sharing is a cash bonus incentive compensation plan where the
total of all cash bonuses paid to all employees is determined by a
formula involving cost performance (on materials or labor that the

group is deemed able to control) relative to some standard. Gain
sharing is best used when there is a visible and agreed performance
standard and the employees can work as a group to improve
performance relative to that standard.
A stock option plan is a process where employees, deemed to be able to
affect the value of an organization’s shares, are given the option to
purchase those shares at a specified price which is usually higher than
the share price at the time the option is issued. Stock options are best
used to focus attention of senior people, who can affect the
organization’s long-run performance by their decisions, on long-run
performance.

II. Problems
Problem 1

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Executive Performance Measures and Compensation Chapter 26

Requirement (a)
P20,000,000 – (0.18 x P60,000,000) = P9,200,000
P9,200,000 x 0.20 = P1,840,000
Therefore, P2,000,000 would be larger.
Requirement (b)
P50,000 / P12,000,000 x P2,000,000 = P8,333.33
Problem 2
Requirement (a)
P30,000,000 – (0.18 x P72,000,000) = P17,040,000
P17,040,000 x 0.25 = P4,260,000

Therefore, P4,260,000 would be larger.
Requirement (b)
P40,000 / P10,000,000 x P4,260,000 = P17,040
III. Multiple Choice Questions
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

C
A
D
C
B
D
D
A
D
B

11.
12.
13.
14.

15.
16.
17.
18.
19.
20.

C
B
D
B
A
D
C
B
B
B

21.
22.
23.
24.

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C
D
B
D