Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 10

Evaluating Management Control Systems

Chama Car Detailing operates several stores in the Los Angeles area. The company is decentralized. At the corporate level, there are two operating managers: Deana Brown is in charge of personnel and Mike Gallegos is in charge of store operations. Deana’s performance is based on the average wage of the store personnel (excluding store managers) relative to a target wage. All hiring is done at the corporate level. Mike’s performance is based on store profits relative to targeted profits. Managers that meet their targets receive a bonus equal to 30 percent of their base salary. Information on performance last year follows:

Personnel		Store Operations
Target wage	$15.13	Target profit	$745,000
Actual wage	13.12	Actual profit	637,000

Required

a. Evaluate the performance of Deana and Mike based on the performance measures the company uses.

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b. Assess the management control system used at Chama Car Detailing and provide recommendations for changes, if any are required. Be sure to discuss:

•   Decision authority

•   Performance measures

•   Compensation

Step 1 of 2

The company C Car has two operating managers at the top level which are DB and MG. DG is a personnel manager and MG is in charge of stores operations. DB performance is based on the average wage of the store personnel and the MG performance is measured on the basis of store profit relative to targeted profit.

a.

As per the company’s way of performance measurement DB has done well as compared to MG.

DB has saved $2.01 in wages in the last year, as the target wage is $15.13 and the actual wage was $13.12. DB has saved $2.01 in the last year therefore the company has to pay bonus to DB at the rate of 30% on basic salary.

MG has a target of profit of $745,000 whereas the actual profits earned in the last year was $637,000 which shows MG has not performed well due to which the profits are lower than the targeted profit.