Chapter 12 – Fundamentals of Management Control Systems
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12–35. (40 min.) Cost Allocations—Comparison of Dual and Single Rates: Pacific
Hotels.
a. Allocations based on time usage:
(1)
Department
Proportion of
Total Time
Allocated Cost
Luxury …………………………..…………………………..
.15a
$180,000b
Resort …………………………..…………………………..
.10
120,000
Standard ……………………….….
.40
480,000
Budget …………………………..…………………………..
.35
420,000
$1,200,000
a 750 (750 + 500 + 2,000 + 1,750) = 750 5,000 = .15; .10 = 500 5,000;
.40 = 2,000 5,000; .35 = 1,750 5,000.
b .15 x ($700,000 + 500,000) = $180,000; $120,000 = .10 x $1,200,000;
$480,000 = .40 x $1,200,000; $420,000 = .35 x $1,200,000.
Luxury …………………………..
Resort …………………………..
.10
Standard ……..……………………
.40
280,000
.25
Budget …………………………..
245,000
.60
300,000
Chapter 12 – Fundamentals of Management Control Systems
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12–35. (continued)
b. Dual rates should be used. If a single rate (time usage) is used, there might not be a
12–36. (30 min.) Cost Allocation for Travel Reimbursement.
a.
(1) Since the round-trip cost of the Chicago-Paris portion (2 x $3,650 = $7,300) is less
than the cost of the business-class ticket, the employee could request as much as
$7,300.
15,140 miles equals .55 or 55% of the business-class ticket. This alternative would
result in a reimbursement of $5,245 (i.e., .55 x $9,537).
12–37. (30 min.) Incentives, Illegal Activities, and Ethics.
This situation is based on the alleged fraud at the company, Leslie Fay.
a. Invoice backdating records revenues in periods earlier than they should be recorded.
The dressmaker would have reported revenues and cost of goods sold for Year 1 that
Chapter 12 – Fundamentals of Management Control Systems
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12-37 . (continued)
c. Distant locations are more difficult to monitor than those close by. If he desired, the
CEO could have made frequent visits to the nearby location to observe activities. If he
opposed the fraudulent activities, he could have had a personal hand in preventing
12–38. (60 min.) River Beverages Case.
Note: It is important to understand the regional structure of the organization (Exhibit
12.3) as well as the production plant structure for the company’s Noncarbonated
Drinks plant in St. Louis (Exhibit 12.4). Instructors might want to present an
overview of this case before assigning it to students.
a. Sales projections are made at three levels:
Chapter 12 – Fundamentals of Management Control Systems
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After the sales budget is approved by top management, it is separated into a sales
budget for each plant. Since the sales budget is already established, plant managers
12-38. (continued)
The final budgets are fine tuned by the vice presidents and CEO and submitted to
the board of directors for approval in early June. (The vice presidents and CEO
must be able to justify the budgets to the board, and thus, review it and make any
vary. One example follows:
Plant managers are held responsible for sales and costs even though they only have
control over costs. Sales departments can cut prices or offer promotional campaigns
Chapter 12 – Fundamentals of Management Control Systems
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12–39. (60 min.) Pepsi and Old Bottles
Here are some of the factors contributing to the fraud.
Pepsi had strong incentives to perform well.
The company was decentralized, which reduced oversight by top management.
12–40. (60 min.) Business Environment, Performance Measures, Compensation, and
Ethics: Kidder, Peabody (GE)
a. You should report the flaw to managers responsible for the system.
b. Even though you know the system is flawed and your superiors do not change the
Chapter 12 – Fundamentals of Management Control Systems
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d. (1) Apparently the managers have some money in the budget that could be used for
investment or other opportunities that had not been used and, as a result, could