Question 1

Langsam,Inc.has used a decentralized form of organizational structure for the past five years.The controller,Ms.Terrance,has noticed that some of the divisions are still using fixed assets that are fully depreciated and that there has been little acquisition activity in these divisions.Coupled with this are very high ROIs,especially when compared to the other divisions that seem to have a regular program of disposition and replacement of fixed assets.She takes her concerns and observations to the Financial Vice President who says he will review her findings and look into the problem.Required:
1)What are the potential negative effects of decentralization?
2)Specifically discuss the issues involved in suboptimization.

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Question 2

Affordable Credit Checks produces two styles of credit reports: personal and corporate.The difference between the two is the amount of background information and data collection required.The corporate report uses more skilled personnel because additional checking and data are required.The relevant figures for the year just completed follow: Total support service costs to be allocated are $3,200,000.$$\begin{array} { | l | r | r | } 
\hline \text { Allocation base } & \text { Indlvidual } & \text { Corporate } \
\hline \text { Data purchased } & \$ 40,000 & \$ 80,000 \
\hline \text { Research hours } & 24,000 & 30,000 \
\hline \text { Interview hours } & 1,000 & 10,000 \
\hline \text { Number of reports } & 16,000 & 3,000 \
\hline
\end{array}$$ Required:
(a)Which method would be preferred by each manager? Which method would be least preferred?
(b)Provide arguments that each manager would make for his/her preferred method.How would each manager argue against his/her least preferred method?

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Question 3

Cost allocation bases are factors that cost management analysts use to assign indirect costs to cost objects.Ideally,cost-allocation bases should reflect a cause-and-effect relationship between resource spending and use.Ideally,an Activity-Based-Costing (ABC)approach will provide a more accurate and useful accounting for an organization's resources.Recent studies have found that,in spite of increasing costs and diminishing resources,very few Higher Education Institutions use the tools and techniques of an ABC cost allocation system to assign costs to academic departments.While direct costs,such as faculty salaries,are traceable to individual academic departments or courses,many indirect costs,such as facility use,computer use,and student support services,are more difficult to assign.In a traditional approach,many higher education institutions assign such costs based on a single factor,such as the number of courses taught in the university.(Source: Activity-Based Costing for Higher Education Institutions,Management Accounting Quarterly,Winter,2001)
Required:
(a)Explain why the use of a single-cost driver such as the number of courses may result in inaccurate management information as to the cost of running courses in individual academic departments.(b)For each of the indirect costs listed below,identify an appropriate cost-driver that might be used to allocate costs to determine the cost of offering a single course in an academic department if an Activity-Based-Costing model were used.• Computer use
• Facility use
• Student services
• Course design
• Lecturing/class meeting time
• Assignment grading

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Question 4

The Michael Vamosi Corporation operates one central plant that has two divisions,the Lamp Division and the Flashlight Division.The following data apply to the coming budget year:
  
Assume that practical capacity is used to calculate the allocation rates.Further assume that actual usage of the Lamp Division was 700 hours and the Flashlight Division was 400 hours for the month of June.Required:
a.If a single-rate cost-allocation method is used,what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month?
b.For the month of June,if a single-rate cost-allocation method is used,what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume actual usage is used to allocate operating costs.c.If a dual-rate cost-allocation method is used,what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month?
d.For the month of June,if a dual-rate cost-allocation method is used,what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs.

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Question 5

Decentralization is the delegation of decision-making authority to subordinates in the organization's name.A key part of this is the principal-agent relationship.Explain what this relationship is and give examples.

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Question 6

Rainier Company has a purchasing department that provides services to two factories located in Carbondale and the other in Peoria.Budgeted costs for the purchasing department consist of $55,000 per year of fixed costs and $8 per purchase order for variable costs.The level of budgeted fixed costs is determined by the peak-period requirements.The Carbondale factory requires 40% of the peak-period capacity and the Peoria factory requires 60%.During the coming year,1,800 purchase orders were processed for the Carbondale factory and 2,700 purchase orders for the Peoria factory.Required:
Compute the amount of purchasing department cost that should be charged to each factory for the year.

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Question 7

The controller of one division of a large diversified firm is compensated by salary plus bonus.The bonus is a significant part of total compensation,and is based directly on the profits of the division.Thus,the controller has an incentive to find ways to increase profits,including the delay of discretionary expenses such as research and development,delay of maintenance and repair of manufacturing equipment,and delay of sales promotions.Required:
Is finding ways to increase profits as described above unethical? Why or why not? Who is to blame,if anyone?

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Question 8

How does the separation of duties help prevent financial fraud?

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Question 9

Vargas,Inc.is just starting up.The management team has decided from the beginning that decentralization was the preferred organizational style and has made this clear in all interviews and discussions with potential employees.Mr.Ross,the CEO,is unsure about the best way to evaluate his division managers.He has heard the terms return on investment,residual income,economic value added,and flexible budgets but wants to know the pros and cons of each.Required:
Briefly describe ROI,residual income,EVA,and other approaches to performance evaluation.Discuss,where appropriate,how to calculate the measure and problem areas in the development of some of the numbers.

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Question 10

The executive vice president of Wyse Pen Company wants to establish an accounting-based performance measurement system for the company's new plant.The company has an accounting information system sufficient to support a fairly sophisticated performance measurement system.The new plant is going to be considered an investment center since its products will be markedly different from others the company currently sells.The new plant will have no internal dealings with other plants within the company.Required:
What are some of the key steps that should be undertaken in the establishment of an accounting-based performance measurement system?

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Question 11

The fixed costs of operating the maintenance facility of Indian River Hospital are $4,500,000 annually.Variable costs are incurred at the rate of $30 per maintenance-hour.The facility averages 40,000 maintenance-hours a year.Budgeted and actual hours per user for 20X3 are as follows:$$\begin{array} { | l | r | r | } 
\hline & \text { Budgeted hous } & \text { Actual hours } \
\hline \text { Building and grounds } & 10,000 & 12,000 \
\hline \text { Operating and emergency } & 8,000 & 8,000 \
\hline \text { Patient care } & 21,000 & 22,000 \
\hline \text { Administration } & \underline{ 1,000 }& \underline{ 1,200} \
\hline \text { Total } & 40,000 & 43,200 \
\hline
\end{array}$$
Assume that budgeted maintenance-hours are used to calculate the allocation rates.Required:
a.If a single-rate cost-allocation method is used,what amount of maintenance cost will be budgeted for each department?
b.If a single-rate cost-allocation method is used,what amount of maintenance cost will be allocated to each department based on actual usage? Based on budgeted usage?
c.If a dual-rate cost-allocation method is used,what amount of maintenance cost will be budgeted for each department?
d.If a dual-rate cost-allocation method is used,what amount of maintenance cost will be allocated to each department based on actual usage? Based on budgeted usage for fixed operating costs and actual usage for variable operating costs?

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Question 12

The order entry department of Dano Associated Industries is considering improvements in the order entry process,which includes preparing quotations based on customers' requests (via the sales representative)and processing orders received from customers.A typical sequence of events might begin with a sales representative meeting with a customer to discuss the type of system desired.The sales representative then fills out a paper form and faxes it or phones it in to an order entry associate,who might make several subsequent phone calls to the sales representative,the potential customer,or the manufacturing department to prepare the quote properly.These phone calls deal with such questions as exchangeability of parts,part numbers,current prices for parts,or allowable sales discounts.Order entry staff then keys in the configuration of the desired system,including part numbers,and informs the sales representative of the quoted price.Each quote is assigned a quotation number.To smooth production,manufacturing often produces systems with standard configurations in anticipation of obtaining orders from recent quotes for systems.The systems usually involve adding on special features to the standard configuration.Production in advance of orders sometimes results in duplication in manufacturing,however,because customers often fail to put the assigned quotation numbers on their orders.When order entry receives an order,the information on the order is reentered into the computer to produce an order acknowledgement.This order acknowledgement is sent to the manufacturing department,which produces the system ordered by customer.When the order acknowledgement is sent to the invoicing department,the information is reviewed again to generate an invoice to send to the customer.Enrique Ramos,the order entry manager,has received many complaints from the order entry department's internal customers regarding quality and timeliness problems,and is considering ways to improve the efficiency and quality of the order entry process.Required:
(a)Develop some indicators that Ramos could use to assess the performance of the order entry process.(b)List four possible errors that might be found in the quote and/or the order acknowledgement (i.e. ,the outputs of the order entry process).(c)What do you think are the likely causes of delays and quality problems?

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Question 13

Describe two disadvantages of decentralization.

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Question 14

Explain the difference between fixed compensation and contingent compensation.Give an example of each.

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Question 15

There are five common types of responsibility centers listed below.
Required:
Briefly describe each of the following terms and provide an example of each term.
(a)Cost Center
(b)Discretionary Cost Center
(c)Revenue Center
(d)Profit Center
(e)Investment Center

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Question 16

Describe the three main elements of a management control system.

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Question 17

Logistics Services Company has recently expanded by acquiring two smaller companies in the transportation industry.Prior to these acquisitions,Logistics Services used a centralized style of organization because it was small enough that the top management team was heavily involved in the day-to-day activities of the firm.Ms.Trane,the CEO,feels that this style is no longer suitable for the larger,more diverse organization.She has hired a consultant to help her and her management team create a new structure which,when developed on paper,will be described to the affected employees and their inputs will be sought.Since no one in the company knows much about management styles,Ms.Trane felt this would be an efficient way to get the ball rolling,but realized the consultants would not have the specialized knowledge about her company and the two acquisitions.One of the first things she feels she will need to do is to explain the benefits of decentralization that will accrue to both the company and the affected employees.Required:
Ms.Trane has asked you,as the consultant,to provide her with a general list of advantages of decentralization that she will tailor to her company before presenting it to the executives and other affected employees.

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Question 18

Koski Corporation's Maintenance Department provides services to the company's two operating divisions - the Paints Division and the Stains Division.The variable costs of the Maintenance Department are budgeted based on the number of cases produced by the operating departments.The fixed costs of the Maintenance Department are determined based on the number of cases produced by the operating departments during the peak period.Data appear below:
Required:
a.Prepare a report showing how much of the Maintenance Department's costs should be charged to each of the operating divisions at the end of the year.b.How much of the actual Maintenance Department costs should not be charged to the operating divisions at the end of the year? Who should be held responsible for these uncharged costs?

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Question 19

Describe the five basic types of decentralized units in responsibility accounting.

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Question 20

The manager of a business unit of a large corporation made some projections regarding sales and profits for the upcoming final quarter of the year.The managers' performance evaluation and compensation depended significantly on his ability to meet budget goals.The manager discovered that the final quarter would have to be a particularly good quarter in order to meet these goals.He decided to implement a sales program offering liberal payment terms in order to pull some sales that would normally occur next year into the current year.Customers accepting delivery in the fourth quarter would not have to pay the invoice for 140 days.Also,he sold some equipment that was not being used and realized a significant profit on the sale.Required:
Are these actions ethical? Why or why not?

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Quiz 12: Fundamentals of Management Control Systems