TUTORIAL SHEET - 1
MANAGEMENT CONTROL SYSTEMS AND RESPONSIBILITY ACCOUNTING
TRUE / FALSE:
LEARNING OBJECTIVE 1
1. A management control system is a logical integration of management accounting tools to gather and report data and to evaluate performance.
2. The purpose of performance measures is to set direction and to motivate managers.
3. The first and most basic component in a management control system is the employee’s goals.
4. Measures of performance should not be consistent with organizational goals.
5. In the management control system, feedback and learning affect all phases.
LEARNING OBJECTIVE 2
6. Objectives are specific tangible actions or activities that can be carried out and observed on a long-term basis.
7. A responsibility center for controlling revenues as well as costs is called a revenue center.
8. The term cost center is used indiscriminately to describe centers that may or may not be assigned responsibility for the capital investment.
9. A set of machines may be a responsibility center for a production supervisor.
10. The entire organization may be a responsibility center for the president.
11. Responsibility centers usually have a single goal that the management control system monitors.
12. A profit center can exist in nonprofit organizations.
13. Investment center managers are responsible for controlling only revenues and expenses.
LEARNING OBJECTIVE 3
14. A well-designed management control system ignores nonfinancial objectives and focuses on financial objectives to develop and report measures of performance.
15. Improvements in business processes must take place across all parts of the value chain.
16. Nonfinancial measures include profit targets and required return on investment.
17. Good performance measures should only focus on long-term concerns.
18. Good performance measures should be reasonably subjective.
19. Financial measures often are lagging indicators that arrive too late to help prevent problems.
20. Some management experts have said that the only sustainable competitive advantage is the rate at which a company’s managers learn.
21. Organizational learning may be monitored by measuring employee turnover.
22. Measuring the number of defects can assess the improvement in organizational learning.
LEARNING OBJECTIVE 4
23. Goal congruence exists when individuals aim at shortterm goals and groups aim at longterm organizational goals.
24. The second step in designing a management control system is to determine how employees will react to evaluations that use agreed-upon performance measures.
25. Managerial effort does not necessarily have to accompany goal congruence.
26. Managerial effort means just to work harder and faster.
27. The vast majority of employees are motivated by the same thing.
28. A management control system can become perfect.
29. Both benefits and costs of management control systems are often difficult to measure.
LEARNING OBJECTIVE 5
30. Segments are responsibility centers for which a separate measure of revenues and costs is obtained.
31. Managers on all levels are held responsible for the total segment contribution.
32. No cost is completely under the control of a manager.
33. Evaluations of the responsibility center manager’s performance should ignore uncontrollable costs.
34. The contribution margin is especially helpful for predicting the impact on income of long-run changes in activity volume.
35. Discretionary fixed costs are usually considered as uncontrollable when evaluating a segment manager.
36. Determining controllability is rarely a problem when a company allocates service department costs to other departments.
37. Fixed costs not controllable by a segment manager usually include depreciation and property taxes.
38. Unallocated costs usually include central corporate costs when evaluating a segment manager.
LEARNING OBJECTIVE 6
39. A balanced scorecard is used by for-profit companies, nonprofit organizations, and governmental agencies.
40. Key performance indicators for a balanced scorecard are usually grouped in two categories.
41. Financial indicators are not included in a balanced scorecard.
LEARNING OBJECTIVE 7
42. The four categories of quality cost include production costs, appraisal costs, internal failure costs, and external failure costs.
43. Decreasing cycle time results in bringing products or services more quickly to customers.
44. Productivity is a measure of inputs divided by outputs.
45. Internal delays and lost sales are examples of opportunity costs for a company.
46. Total quality management is the application of quality principles to the most important of an organization’s departments to satisfy customers.
47. Cycle time is an important cost driver.
48. The shorter a product or service is in process, the more costs it consumes.
49. Increased productivity can be shown by maintaining the number of inputs but increasing the number of outputs.
50. Service organizations focus on increasing the productivity of labor.
51. A measure of labor productivity may include sales revenue divided by number of employees.
52. When comparing productivity measures over time, changes in the process or in the rate of inflation can cause the comparison to be misleading.
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LEARNING OBJECTIVE 8
53. Control systems in nonprofit organizations will never be as highly developed as in profit-seeking firms because measurements are more difficult.
54. The key to successful management control in any organization is proper training and motivation of employees, and consistent monitoring of objectives.
55. Critical failure factors are actions that must be done well to drive the organization towards its goal.
56. A management control system must evolve with changing times, or the organization risks not being able to manage its resources effectively or efficiently.
57. Once a management control system is designed for an organization, it will meet the organization’s goals indefinitely.
58. Systems designers in organizations must contend with particularly difficult trade-offs among objectives.
59. A management control principle that will not change is that nonfinancial performance measures are not as good as financial performance measures.
Section 2
1.The following information pertains to the West Division of Jupiter Company.:
Net Sales $21,000
Variable costs:
Cost of merchandise sold 7,200
Operating expenses 2,700
Fixed costs:
Controllable by segment manager 2,400
Controllable by others 1,000
Unallocated costs 600
The contribution margin is:
a. $7,100
b. $7,700
c. $11,100
d. $8,700
2. The following information pertains to the Lower Division of Venus Company:
Net Sales $21,000
Variable costs:
Cost of merchandise sold 7,200
Operating expenses 2,700
Fixed costs:
Controllable by segment manager 2,400
Controllable by others 1,000
Unallocated costs 600
The contribution controllable by a segment manager is:
a. $7,100
b. $7,700
c. $11,100
d. $8,700
3. The following information is available for Learning R’ Us and its two
divisions - Books and Periodicals:
Company Books Periodicals
as a whole Division Division
Net sales $100,000 $60,000 $40,000
Fixed costs:
Controllable by
division manager 16,500 12,500 4,000
Controllable by others 8,000 5,000 3,000
Variable costs:
Cost of merchandise sold 24,500 17,500 7,000
Operating expenses 16,400 10,000 6,400
Unallocated costs 1,000
______is the contribution margin for the Books Division.
a. $32,500
b. $42,500
c. $20,000
d. $15,000
4 The following information is available for Learning R’ Us and its two
divisions - Books and Periodicals:
Company Books Periodicals
as a whole Division Division
Net sales $100,000 $50,000 $50,000
Fixed costs:
Controllable by
division manager 16,500 12,500 4,000
Controllable by others 8,000 5,000 3,000
Variable costs:
Cost of merchandise sold 24,500 17,500 7,000
Operating expenses 16,400 10,000 6,400
Unallocated costs 1,000
______is the contribution margin for the Periodicals Division.
a. $29,600
b. $36,600
c. $43,000
d. $32,600
5. The following information is available for Learning R’ Us and its two
divisions - Books and Periodicals:
Company Books Periodicals
as a whole Division Division
Net sales $100,000 $60,000 $40,000
Fixed costs:
Controllable by
division manager 16,500 12,500 4,000
Controllable by others 8,000 5,000 3,000
Variable costs:
Cost of merchandise sold 24,500 17,500 7,000
Operating expenses 16,400 10,000 6,400
Unallocated costs 1,000
______is the contribution controllable by the manager of the Books Division.
a. $32,500
b. $42,500
c. $20,000
d. $35,000
LEARNING OBJECTIVE 7
6. Benjamin Corporation and Franklin Corporation are two companies in the same industry. Comparative data for 20X1 and 20X6 are given below.
Benjamin Franklin Corporation Corporation
Sales revenue 20X1 $905,520 $1,090,000
20X6 1,950,000 2,962,500
Number of employees 20X1 1,750 2,500
20X6 2,250 4,375
Assume that each 20X1 dollar is equivalent to 1.90 of the 20X6 dollars, due to inflation.
Required:
a. Compute Benjamin Corporation's and Franklin Corporation's 20X1 and 20X6 revenue per employee in 20X6 dollars.
b. Compare Benjamin Corporation's change in productivity between 20X1 and 20X6 with that for Franklin Corporation. Do you note any problems that may require action?
7. Enormous Company and Petite Company are two of the largest mail order companies in the U.S. Given
below is selected information for these two companies for 20X3 and 20X5.
Enormous Petite
Customer orders 20X3 2,300,000 2,700,000
20X5 2,600,000 3,400,000
Number of employees 20X3 1,000 1,200
20X5 1,200 1,400
Required:
a. Compute the 20X3 and 20X5 productivity measures in terms of customer orders per employee for Enormous Company and Petite Company.
b. Compare the change in productivity between 20X3 and 20X5 for Enormous Company and Petite Company. Do you note any problem areas?
Answer:
a. Enormous Company
20X3: 2,300,000 / 1,000 = 2,300 orders per employee
20X5: 2,600,000 / 1,200 = 2,167 orders per employee
Petite Company
20X3: 2,700,000 / 1,200 = 2,250 orders per employee
20X5: 3,400,000 / 1,400 = 2,429 orders per employee
b. Enormous Company’s productivity declined 133 orders per employee or 5.8%, while Petite Company’s productivity increased 179 orders per employee or 7.9%. Petite Company is headed in the right direction, while Enormous Company is definitely headed in the wrong direction.
LEARNING OBJECTIVE 8
8. Why will control systems in nonprofit organizations probably never be as highly developed as are those in profit-seeking firms?
Answer:
1. Organizational goals and objectives are less clear. Also, they are often multiple, requiring difficult trade-offs.
2. Professionals tend to dominate nonprofit organizations and are less receptive to the installation or improvement of formal control systems.
3. Measurements are more difficult because there is no profit measure and there are large amounts of discretionary fixed costs, which make the relationships of inputs to outputs difficult to specify and measure.
4. There is less competitive pressure from other organizations or “owners” to improve management control systems.
5. The role of budgeting is often more a matter of playing bargaining games with sources of funding to get the largest possible authorization.
6. Motivations and incentives of individuals may differ from those in for-profit organizations.
9. What are the management control principles that will always be important?
Answer:
1. Always expect that individuals will be pulled in the direction of their own self-interest.
2. Design incentives so that individuals who pursue their own self-interest also achieve the organization’s objectives.
3. Evaluate actual performance based on expected or planned performance, revised, if possible, for actual output achieved.
4. Consider nonfinancial performance to be just as important as financial performance.
5. Array performance measures across the entire value chain of the company.
6. Periodically review the success of the management control system.
7. Learn from the management control successes (and failures) of competitors around the world.
10. The Desks R’ Us Company provided the following information:
Company Office Home
as a whole Division Division
Net sales $100,000 $66,000 $34,000
Fixed costs:
Controllable by
division managers 16,000 10,000 6,000
Controllable by
Others 10,000 5,000 5,000
Variable costs:
Cost of
merchandise sold 38,000 22,000 16,000
Operating expenses 8,000 5,000 3,000
Unallocated costs 6,000
Required:
Prepare a contribution approach income statement for the company as a whole and also for the divisions.
Answer:
Company Office Home
as a whole Division Division
Net sales $100,000 $66,000 $34,000
Variable costs:
Cost of goods sold 38,000 22,000 16,000
Operating expenses 8,000 5,000 3,000
Contribution margin $54,000 $39,000 $15,000
Less: fixed costs
controllable by
division managers 16,000 10,000 6,000
Contribution
controllable by
division managers $38,000 $29,000 $9,000
Less: fixed costs
controllable by others 10,000 5,000 5,000
Contribution by division $28,000 $24,000 $4,000
Less: unallocated costs 6,000
Income before taxes $22,000
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