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141. Traffic Services Company has recently expanded by acquiring two smaller companies in
the transportation industry. Prior to these acquisitions, Traffic 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. Causeway, 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. Causeway 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. Causeway 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.
142. Ladue, Inc. has used a decentralized form of organizational structure for the past five
years. The controller, Ms. Trevino, has noticed that some of the divisions are still using fixed
assets that are fully depreciated and that there has been little acquisition activity in these
divisions. Coupled with this are very high ROIs, especially when compared to the other divisions
that seem to have a regular program of disposition and replacement of fixed assets.
She takes her concerns and observations to the Financial Vice President who says he will review
her findings and look into the problem.
Required:
1) What are the potential negative effects of decentralization?
2) Specifically discuss the issues involved in suboptimization.
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143. Ricardo, Inc. is just starting up. The management team has decided from the beginning
that decentralization was the preferred organizational style and has made this clear in all
interviews and discussions with potential employees. Mr. Pangea, the CEO, is unsure about the
best way to evaluate his division managers. He has heard the terms return on investment, residual
income, economic value added, and flexible budgets but wants to know the pros and cons of each.
Required:
Briefly describe ROI, residual income, EVA, and other approaches to performance evaluation.
Discuss, where appropriate, how to calculate the measure and problem areas in the development
of some of the numbers.
144. The manager of a business unit of a large corporation made some projections regarding
sales and profits for the upcoming final quarter of the year. The managers’ performance
evaluation and compensation depended significantly on his ability to meet budget goals. The
manager discovered that the final quarter would have to be a particularly good quarter in order to
meet these goals. He decided to implement a sales program offering liberal payment terms in
order to pull some sales that would normally occur next year into the current year. Customers
accepting delivery in the fourth quarter would not have to pay the invoice for 140 days. Also, he
sold some equipment that was not being used and realized a significant profit on the sale.
Required:
Are these actions ethical? Why or why not?
145. 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?
146. The executive vice president of Wicker Pen Company wants to establish an accounting–
based performance measurement system for the company’s new plant. The company has an
accounting information system sufficient to support a fairly sophisticated performance
measurement system. The new plant is going to be considered an investment center since its
products will be markedly different from others the company currently sells. The new plant will
have no internal dealings with other plants within the company.
Required:
What are some of the key steps that should be undertaken in the establishment of an accounting–
based performance measurement system?
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147. The fixed costs of operating the maintenance facility of General Hospital are $4,500,000
annually. Variable costs are incurred at the rate of $30 per maintenance-hour. The facility
averages 40,000 maintenance-hours a year. Budgeted and actual hours per user for 20X3 are as
follows:
Assume that budgeted maintenance-hours are used to calculate the allocation rates.
Required:
a. If a single-rate cost-allocation method is used, what amount of maintenance cost will be
budgeted for each department?
b. If a single-rate cost-allocation method is used, what amount of maintenance cost will be
allocated to each department based on actual usage? Based on budgeted usage?
c. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be
budgeted for each department?
d. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be
allocated to each department based on actual usage? Based on budgeted usage for fixed
operating costs and actual usage for variable operating costs?
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148. The Alex Miller Corporation operates one central plant that has two divisions, the Lamp
Division and the Flashlight Division. The following data apply to the coming budget year:
Budgeted costs of the operating the plant for 10,000 to 20,000 hours:
Budgeted long-run usage per year:
Assume that practical capacity is used to calculate the allocation rates. Further assume that
actual usage of the Lamp Division was 700 hours and the Flashlight Division was 400 hours for
the month of June.
Required:
a. If a single-rate cost-allocation method is used, what amount of operating costs will be
budgeted for the Lamp Division each month? For the Flashlight Division each month?
b. For the month of June, if a single-rate cost-allocation method is used, what amount of cost will
be allocated to the Lamp Division? To the Flashlight Division? Assume actual usage is used to
allocate operating costs.
c. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted
for the Lamp Division each month? For the Flashlight Division each month?
d. For the month of June, if a dual-rate cost-allocation method is used, what amount of cost will
be allocated to the Lamp Division? To the Flashlight Division? Assume budgeted usage is used to
allocate fixed operating costs and actual usage is used to allocate variable operating costs.
149. 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
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150. The order entry department of Ahura 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.
Domingo Perez, 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 Perez 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?
