Exam 12: Fundamentals of Management Control Systems

In general, there is a direct relationship between the quality of the information provided to managers and the quality of decisions made using that information.

Decentralization is the delegation of the authority to make decisions in the organization's name to subordinates.

There is no single accounting measure that can fully measure the performance of a profit or investment center.

One advantage of decentralization is faster response time to changes in the organization's environment by local managers.

An operating unit of an organization is called an investment center if it is responsible:

Maryland Hotels operates a centralized call center for the reservation needs of its time-share units. Costs associated with use of the center are charged to the time-share group (Luxury, Resort, Standard, and Budget) where a reservation is made on the basis of time on a call. Idle time of the reservation agents, time spent on calls where no reservation is made, and the fixed cost of the equipment are allocated on the number of reservations made in each group. Due to recent increased competition in the time-share business, the company has decided that it is necessary to more accurately allocate its costs to price its services competitively and profitably. During the current period, the use of the call center for each group was as follows (in thousands of seconds for time usage and in number of reservations): Division Time Usage Number of Reservations Luxury 750,000 50,000 Resort 1,250,000 100,000 Standard 2,000,000 300,000 Budget 1,500,000 250,000 During this period, the cost of the computer center amounted to $2,410,000 for personnel and $1,240,000 for equipment and other costs. Required: Determine the allocation to each of the divisions using: (You may round all decimals to three places.) a. a single rate based on time used. b. multiple rates based on time used (for personnel costs) and number of reservations (for equipment and other cost).

Mesa Telcom has three divisions, commercial, retail, and consumer, that share the common costs of the company's computer server network. The annual common costs are $2,400,000. You have been provided with the following information for the upcoming year: Connections Time on Network (hours) Commercial 60,000 120,000 Retail 80,000 150,000 Consumer 100,000 330,000 - What is the allocation rate for the upcoming year, assuming Mesa Telcom uses the single-rate method and allocates common costs based on the number of connections?

It is possible for performance evaluation systems and/or management control systems to contribute to unethical or fraudulent behavior.

Waverley Services has three divisions, commercial, retail, and consumer, that share the common costs of the company's computer server network. The annual common costs are $1,200,000. You have been provided with the following information for the upcoming year: Connections Time on Network (hours) Commercial 30,000 120,000 Retail 40,000 150,000 Consumer 50,000 290,000 Required: a. What is the allocation rate for the upcoming year assuming Waverley uses the single-rate method and allocates common costs based on the number of connections? Calculate the allocated amount for each division. b. What is the allocation rate for the upcoming year assuming Waverley uses the single-rate method and allocates common costs based on the time on network? (Do not round rate - carry out six decimal places.) Calculate the allocated amount for each division. c. The cost accountant determined $850,000 of the server network's costs were fixed and should be allocated based on the number of connections. The remaining costs should be allocated based on the time on the network. What is the total server network costs allocated to each division? (Round immediate calculations to three decimal places.)

The Document Creation Center (DCC) for Arlington Corp. provides photocopying and document services for three departments in the Minneapolis office. The following budget has been prepared for the year. Available capacity 8,000,000 pages Budgeted usage: Software Development 1,600,00 pages Training 3,000,00 pages Management 2,400,000 pages Cost equation \ 280,000+\ 0.03 per page - If DCC uses a dual-rate for allocating its costs, how much cost will be allocated to the Management Department, assuming the Management Department actually made 2,100,000 copies during the year?

The primary reason to use a dual-rate allocation system is to focus a manager's performance evaluation on factors under the manager's direct control.

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?

Seattle Corporation has two operating divisions - Inland Division and Coast Division. The company's Customer Service Department provides services to both divisions. The variable costs of the Customer Service Department are budgeted at $29 per order. The Customer Service Department's fixed costs are budgeted at $381,600 for the year. The fixed costs of the Customer Service Department are determined based on the peak period orders. Percentage of Peak Period Capacity Required Budgeted Orders Inland Division 25\% 1,500 Coast Division 75\% 5,700 At the end of the year, actual Customer Service Department variable costs totaled $219,905 and fixed costs totaled $383,860. The Inland Division had a total of 1,520 orders and the Coast Division had a total of 5,690 orders for the year. Required: a. Prepare a report showing how much of the Customer Service Department's costs should be charged to each of the operating divisions at the end of the year. b. How much of the actual Customer Service 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?

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

The Sarbanes-Oxley Act of 2002 requires that management of publicly traded companies:

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 current 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.

Properly developed and implemented management control systems influence subordinates to act in the organization's best interest.

________ is the delegation of decision-making authority to lower management levels within the organization.

The Barton Creek Company has three client-contact departments: Market Research, Branding, and Promotion. Each department requires the services of the Legal Department for the contracts that each undertakes. The size of the Legal Department was based on long-run estimates of contracts. Information on the Legal Department's budgeted and actual costs is as follows: The budget for the Legal Department is $400,000 + $15/contract. The budgeted volume of contracts is as follows: Market Research 200 Branding 400 Promotion 800 The actual number of contracts for Market Research was 207, for Branding was 512, and for Promotion was 820. Required: (Use four decimal places in your calculations.) a. If a single charging rate based on budgeted usage is used, how much of the cost of the Legal Department would be allocated to each of the producing departments? b. If a dual charging rate is used, how much of the cost of the Legal Department would be allocated to each of the producing departments?

Which of the following statements is/are true regarding managerial decisions? (A) The design and use of management control systems affects how an individual makes and implements decisions. (B) Rational managers will always make decisions that are in the best interest of the organization employing them.