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

Exercise 26

Cost Allocation for Travel Reimbursement

Your company has a travel policy that reimburses employees for the “ordinary and necessary” costs of business travel. Employees often mix a business trip with pleasure by either extending the time at the destination or traveling from the business destination to a nearby resort or other personal destination. When this happens, an allocation must be made between the business and personal portions of the trip. However, the travel policy is unclear on the allocation method to follow.

Consider this example. An employee obtained a business-class ticket for $9,537 and traveled the following itinerary:

From	To	Miles	One-Way Regular Fare	Purpose
Chicago	Paris	4,140	$3,650a	Business
Paris	Rio de Janeiro	5,700	4,320	Personal
Rio de Janeiro	Chicago	5,300	3,250	Return

a A restricted round-trip fare of $4,900 was available on these dates.

Required

a. Compute the business portion of the airfare and state the basis for the indicated allocation that is appropriate according to each of the following independent scenarios:

(1) Based on the maximum reimbursement for the employee.

(2) Based on the minimum cost to the company.

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b. Write a short report to management explaining the method that you think should be used and why. You do not have to restrict your recommendation to either of the methods in requirement (a).

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.

Compensation system

Compensation system are made effective and attractive for managers in order to motivate for them for the best performance and achieve organizational objectives. Contingent compensation is part of compensation system where part of remuneration is based on performance. Paying commission to sales person based on sales revenue is part of compensation system that motivates sales teams to deliver their best, which eventually helps to achieve organizational objectives.

Contingent compensation may result in dysfunctional results also. Sales managers may take some decisions to meet their individual goals, that are not in the interest of organization. For example, sale managers may make false commitments or mislead customers about the benefits of sales schemes so that they can meet their sales targets.