Exam 12: Fundamentals of Management Control Systems

The Document Creation Center (DCC) for Atlas Corp. provides document services for three departments in the St. Louis office. The following budget has been prepared for the month. Budgeted usage: Software Development 160,000 pages Training 300,000 pages Management 340,000 pages Cost equation \ 31,000+\ 0.03 per page Required: If DCC uses a dual-rate for allocating its costs based on usage, how much cost will be allocated to the three user departments? (Use three decimal places in your calculations.)

What is the purpose of a management control system?

Describe two disadvantages of decentralization.

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?

One advantage of centralization is better use of top management's time on strategic decisions.

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

When managers are held responsible for costs and the input-output relationship is well specified, a(n) ________ is established.

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. Total support service costs to be allocated are $3,200,000. The relevant figures for the year just completed follow: Allocation base Individual Corporate Data purchased \ 40,000 \ 80,000 Research hours 24,000 30,000 Interview hours 1,000 10,000 Number of reports 16,000 3,000 Required: (a) Which allocation base would be preferred by each manager? Which allocation base would be least preferred? (b) Provide arguments that each manager would make for his/her preferred allocation base. How would each manager argue against his/her least preferred allocation base?

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.

Which of the following is not a characteristic of a decentralized organization?

Warehouse Services is a service department in the Vancouver Company, providing storage service to three operating departments. The company charges the costs of this department to operating departments on the basis of cubic feet occupied. Last year, Warehouse Services budgeted variable storage cost of $0.15 per cubic foot occupied. The budgeted total fixed cost was $120,000 and was determined by the long-term storage needs of the operating departments. Actual storage space occupied during the year, along with long-term storage needs of operating departments, is given below: Actual variable storage costs amounted to $0.16 per cubic foot occupied. Actual fixed storage costs were $123,000. Required: a. Compute the amount of variable storage cost that should be charged to each operating department at the end of the year for performance evaluation purposes. b. Compute the amount of fixed storage cost that should be charged to each operating department at the end of the year for performance evaluation purposes.

Delegated decision authority is the specification of what decisions a subordinate can make in the organization.

The following is a summarized income statement for McClaron Manor Co.'s profit center 12608 for April: $\begin{array}{l}\text { Contribution Margin }&&\$175,000\\\text { Period Expenses } & \$ 11,000\\\text { Manager' s Salary } & \$ 2,000 \\\text { Corporate Expense Allocation } & \$ 8,000&\$(21,000)\\\text { Net Income }&&\$154,000\end{array}$ Which of the following amounts is most likely subject to the control of the profit center's manager? (CPA, adapted)

The least complex segment or area of responsibility for which costs are allocated is a(n): (CMA adapted)

Terrain, Inc. has a maintenance department that provides services to the company's two operating departments. The variable costs of the maintenance department are charged on the basis of the number of maintenance hours logged in each department. Last year, budgeted variable maintenance costs were $8.60 per maintenance hour and actual variable maintenance costs were $8.75 per maintenance hour. The budgeted and actual maintenance hours for each operating department for last year appear below: Required: a. Compute the amount of variable maintenance department cost that should have been charged to each operating department at the end of the year for performance evaluation purposes. b. Compute the amount of actual variable maintenance department cost that should not have been charged to the operating departments at the end of the year for performance evaluation purposes.

Barrington Box Enterprises has two divisions, large and small, that share the common costs of the company's communications network. The annual common costs are $4,500,000. You have been provided with the following information for the upcoming year: Calls Time on Network (hours) Large 100,000 120,000 Small 80,000 320,000 - The cost accountant determined $2,700,000 of the communication network's costs were fixed and should be allocated based on the number of calls. The remaining costs should be allocated based on the time on the network. What is total communication network costs allocated to the Small Box Division, assuming the company uses dual-rates to allocate common costs?

Sumner Corporation has four divisions, commercial, retail, research, and consumer, that share the common costs of the company's computer server network. The annual common costs are $3,500,000. You have been provided with the following information for the upcoming year: Connections Time on Network (hours) Cormmercial 70,000 120,000 Retail 90,000 150,000 Research 20,000 100,000 Consumer 100,000 330,000 Required: (Use three decimal places in your calculations.) a. What is the allocation rate for the upcoming year assuming Sumner uses the single-rate method and allocates common costs based on the number of connections? b. What is the allocation rate for the upcoming year assuming Sumner uses the single-rate method and allocates common costs based on the time on network? Calculate the allocated amount for each division.

Which of the following statements is/are true regarding compensation? (A) Fixed compensation is generally not linked to measured performance; i.e., it is independent of measured performance. (B) Properly designed management control systems have contingent compensation items but not fixed compensation items.

Barrington Box Enterprises has two divisions, large and small, that share the common costs of the company's communications network. The annual common costs are $4,500,000. You have been provided with the following information for the upcoming year: Calls Time on Network (hours) Large 100,000 120,000 Small 80,000 320,000 - What is the allocation rate for the upcoming, year assuming Barrington Box uses the single-rate method and allocates common costs based on the time on the network ?

Which of the following statements is true regarding decentralization?