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

Exercise 21

Internal Controls

One of the authors of this book has a favorite sandwich shop where one person makes the sandwich and another person rings up the sale and takes the customer’s cash. At first, this author thought that having two people involved had something to do with him. After carefully observing the sandwich shop’s operations, he observed that two employees were involved in every sandwich production and sale. The person who made the sandwich did not ring up the sale or take the money from the sale.

Required

a. What type of internal control is provided in this example? Why is the shop manager/owner providing that internal control?

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b. Is there an even better internal control?

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c. Could the employees get around this internal control?

Step 1 of 4

Management control system

Management control system is needed to manage the complications arising out of decentralization like dysfunctional decision making. Owners of the organization use structure and procedures of management control system to influence the actions of its managers and other employees to ensure smooth implementation of organizational strategies. Management controls system comprises of three elements such as delegation fo decision making authorities, evaluation of performance and measurement systems and finally awarding compensation and rewards for performance.

Internal control system

Nature of business, size and activities varies from company to company and these factors determines the requirement of internal control policies and procedures. Companies are dependent on their internal control system to manage their business activities. An internal control system comprises of many policies and procedures that are used to confirm consistent accounting, safeguard assets, encourage well-organized business operations and inculcate the culture of following the company policies.