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(Trimester 2, 2016/2017)
Reference textbook: Management Control Systems, performance measurement,
evaluation and incentives, by Merchant and Stede, 3rd Edition.
Page 22-26: CASE STUDY 1: Atlanta Home Loan
1. Identify the devices (controls) that Al Fiorini used to control his business both
before and after he went back to school. Classify each control as a results,
action, or personnel/cultural type of control.
2. What went wrong? Did Al use the wrong types of controls? Did he use the right
types of controls but fail to design or implement them properly? Or was he just
3. What should Al do now? Why?


1. Evaluate the control environment and control system at Alcon Laboratories, Inc.
What are the strengths, weaknesses, and dangers inherent in the control
2. What changes, if any, would you suggest to Mr. Leone and Dr. Raval? How
would your suggestions improve control at Alcon Laboratories? Specifically
address the concerns of Mr. Leone as they relate to the planning, budgeting,
measurement, and reporting processes that are used.
3. How can the productivity of research and development be measured?
4. On what basis should Nestle S.A. evaluate the management of Alcon
Laboratories, Inc. and the performance of the subsidiary?


1. The accounting records of Boston Company revealed the following costs: direct
materials used, $200,000; direct labour, $400,000; manufacturing overhead,
$300,000; and selling and administrative expenses, $200,000. Boston's product
costs total:

A. $900,000.
B. $600,000.
C. $700,000.
D. $1,100,000.
E. None of the other answers are correct.

2. Jurong Appliance produces washers and dryers in an assembly-line process.

Labour costs incurred during a recent period were: corporate executives, $400,000;
assembly-line workers, $150,000; security guards, $40,000; and plant supervisor,
$110,000. The total of Jurong's direct labour cost was:
A. $110,000.
B. $150,000.
C. $190,000.
D. $300,000.
E. $700,000.

3. Depreciation of factory equipment would be classified as:

A. operating cost.
B. "other" cost.
C. manufacturing overhead.
D. period cost.
E. administrative cost.

4. The accounting records of Tilda Company revealed the following information:

Tilda's cost of goods sold is:

A. $508,000.
B. $529,000.
C. $531,000.
D. $553,000.
E. None of the other answers are correct.

5. The true statement about cost behaviour is that:

A. variable costs change on a per-unit basis and change in total as activity changes.
B. fixed costs are constant on a per-unit basis and change in total as activity
C. fixed costs are constant on a per-unit basis and are constant in total as activity
D. fixed costs change on a per-unit basis and are constant in total as activity
E. variable costs are constant on a per-unit basis and are constant in total as activity

6. The following terms are used to describe various economic characteristics of

Opportunity cost; Differential cost; Marginal cost; Sunk cost; Average cost
Choose one of the preceding terms to characterize each of the amounts described
below. Each term may be used only once.
A. The cost of including one extra child in a day-care center.
B. The cost of merchandise inventory purchased five years ago. The goods are now
C. The cost of feeding 300 children in a public school cafeteria is $450 per day, or
$1.50 per child per day. What economic term describes this $1.50 cost?
D. The management of a high-rise office building uses 3,000 square feet of space in
the building for its own administrative functions. This space could be rented for
$30,000. What economic term describes this $30,000 of lost rental revenue?
E. The cost of building an automated assembly line in a factory is $700,000; a
manually operated assembly line would cost $250,000. What economic term is used
to describe the $450,000 variation between these two amounts?

7. Briefly define and discuss the terms in each of the pairs that follow.
A. Direct and indirect costs
B. Direct materials and indirect materials
C. Manufacturing overhead and direct labour

8. The relevant range is that range of activity:

A. where a company achieves its maximum efficiency.

B. where units produced equal units sold.
C. where management expects the firm to operate.
D. where the firm will earn a profit.
E. where expected results are abnormally high.

9. Seagull, Inc., uses the high-low method to analyse cost behaviour. The company
observed that at 20,000 machine hours of activity, total maintenance costs averaged
$7.50 per hour. When activity jumped to 50,000 machine hours, which was still within
the relevant range, the average total cost per machine hour was $6. On the basis of
this information, the company's fixed maintenance costs were:

A. $250,000.
B. $50,000.
C. $150,000.
D. $300,000.
E. None of the other answers is correct.

10. Consider the graphs that follow (the horizontal axis represents activity; the
vertical axis represents total dollars).

A. Straight-line depreciation on machinery.

B. The cost of chartering a private airplane. The cost is $800 per hour for the first 6
hours of a flight; it then drops to $600 per hour.
C. The wages of table service personnel in a restaurant. The employees are parttime workers who can be called upon for as little as 4 hours at a time.
D. Weekly wages of store clerks who work 40 hours each week. One clerk is hired
for every 125 sales made during the month.
E. The cost of tires used in the production of trucks.
F. Outbound shipping charges that increase at a decreasing rate as sales rise
because the firm can use more efficient modes of transportation (e.g., full trailer
loads, full rail cars, etc.). Gradually, however, at high levels of sales, freight costs
start to increase at an increasing rate, which reflects more transactions made to
customers in far-away locations.
G. Equipment leasing costs that are computed at $2 per machine hour worked. The
company pays a maximum of $120,000 per month.
H. The monthly cost of a franchise fee for a fast-food restaurant. The franchisee
must pay $20,000 plus 5% of gross dollar sales.

I. The cost of electricity during peak demand periods, which is based on the following
Up to 20,000 kilowatt hours (KWH): $4,000
Above 20,000 kilowatt hours: $4,000 + $0.02 per KWH

11. Majestic sells a single product at $14 per unit. The firm's most recent income
statement revealed unit sales of 80,000, variable costs of $800,000, and fixed costs
of $560,000. Management believes that a $3 drop in selling price will boost unit sales
volume by 20%. Which of the following correctly depicts how these two changes will
affect the company's break-even point?

A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

12. Falcon Company is operating at capacity and desires to add a new service to its
rapidly expanding business. The service should be added as long as service
revenues exceed:

A. variable costs.
B. fixed costs.
C. the sum of variable costs and fixed costs.
D. the sum of variable costs and any related opportunity costs.
E. the sum of variable costs, fixed costs, and any related opportunity costs.

13. Which of the following costs should be used when choosing between two
decision alternatives?

A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

14. Consider the following costs and decision-making situations:

I. The cost of existing inventory, in a keep vs. disposal decision.
II. The cost of special electrical wiring, in an equipment acquisition decision.
III. The salary of a supervisor who will be transferred elsewhere in the organization,
in a department-closure decision.
Which of the above costs is (are) relevant to the decision situation noted?

A. I only.
B. II only.
C. III only.
D. I and II.
E. II and III.

15. Okayama Enterprises, which produces various goods, has limited processing
hours at its manufacturing plant. The following data apply to product no. 333:
Sales price per unit: $7.50
Variable cost per unit: $6.50
Process time per unit: 5 hours
Management is now studying whether to devote the firm's limited hours to product
no. 333 or to other products. What key dollar amount should management focus on
when determining no. 333's "value" to the firm and deciding the best course of action
to follow?

A. $0.20.
B. $1.00.
C. $5.00.
D. $7.50.
E. $6.50.

16. Triton Manufacturing has 27,000 labour hours available for producing X and Y.
Consider the following information:

If Triton follows proper managerial accounting practices, how many units of Product
X should it produce?
A. 5,000.
B. 1,500.
C. 8,000.
D. 4,500.
E. 6,000.
17. The following costs relate to a variety of decision settings:

Consider each of the nine costs listed and determine whether it is relevant or
irrelevant to the decision cited. If the cost is irrelevant, briefly explain why.

18. Farifield Corporation manufactures faucets. Several weeks ago, the company
received a special-order inquiry from KEK, Inc. KEK desires to market a faucet
similar to Fairfield's model no. 88 and has offered to purchase 3,000 units. The
following data are available:
Cost data for Fairfield's model no. 88 faucet: direct materials, $45; direct labor, $30
(2 hours at $15 per hour); and manufacturing overhead, $70 (2 hours at $35 per
The normal selling price of model no. 88 is $180; however, KEK has offered
Fairfield only $115 because of the large quantity it is willing to purchase.
KEK requires a design modification that will allow a $4 reduction in direct-material
Fairfield's production supervisor notes that the company will incur $8,700 in
additional set-up costs and will have to purchase a $3,300 special device to
manufacture these units. The device will be discarded once the special order is
Total manufacturing overhead costs are applied to production at the rate of $35 per
labour hour. This figure is based, in part, on budgeted yearly fixed overhead of
$624,000 and planned production activity of 24,000 labour hours.
Fairfield will allocate $5,000 of existing fixed administrative costs to the order as
"part of the cost of doing business."
A. One of Fairfield's staff accountants wants to reject the special order because
"financially, it's a loser." Do you agree with this conclusion if Fairfield currently has
excess capacity? Show calculations to support your answer.
B. If Fairfield currently has no excess capacity, should the order be rejected from a
financial perspective? Briefly explain.
C. Assume that Fairfield currently has no excess capacity. Would outsourcing be an
option that Fairfield could consider if management truly wanted to do business with
KEK? Briefly discuss, citing several key considerations for Fairfield in your answer.