Chapter 22
CONTROL: THE MANAGEMENT CONTROL ENVIRONMENT
Changes from the Tenth Edition
This chapter was revised to clarify the differences between the two types of expense centers: standard cost centers and discretionary expense centers. The new chapter also explains better why only a minority of companies uses residual income-type measures (e.g., EVA, economic profit) of the performances of their investment centers. All other changes were minor.
Approach
This chapter and the following one are a sharp change of pace from the preceding chapters because there are no numerical techniques or procedures to be learned. Instead, the chapters establish a framework and describe concepts that are essential to an understanding of the chapters that follow. It is probably desirable to point out this change of pace in assigning the chapter so that students will know what to expect.
Since the text expands on material that was discussed in Chapter 15, it may be desirable to ask students to reread Chapter 15 at this point. Points that were obscure when Chapter 15 was first assigned should now be clearer.
Although the topic has come up several times previously, it probably is desirable to emphasize again the fact that there are three types of management accounting information, each of which is appropriate to certain types of problems but not to others, and that mistakes are made when the wrong type of data is used. Illustration 22-3 is designed to make this point, particularly with reference to the differences between responsibility accounting and full cost accounting. It may be well to discuss this exhibit in detail. There is sometimes a tendency to play down the importance of full cost accounting because it is not useful in the control of responsibility centers, but this reflects an erroneous “either-or” attitude. It is not a case of choosing either one approach or the other, each approach is needed in a company, and each has its own uses.
Cases
Behavioral Implications of Airline Depreciation Accounting Policy Choices shows students that companies’ measurement choices vary widely and motivates a discussion as to whether these choices affect manager’s decisions, and if so how.
Zumwald AG is a transfer pricing case, with the emphasis on the behavioral effects of the transfer pricing alternatives.
Enager Industries, Inc., is a case on the introduction of an ROI measurement scheme for business divisions. It can be used to discuss almost any aspect of investment centers.
Problems
Problem 22-1: Arbia Company
Relevant Costs
a. For financial statements—full costs of Department 7:
$50,990, or $50.99 per unit for units sold or left in inventory.
b. Decisions to make or buy Part No. 105—differential costs:
Purchase cost
$31.00
per unit
Materials and labor cost if make 29.82 per unit
Savings if make
$1.18
(assuming no fixed costs are differential)

c. Assessing performance of manager of Department 7:
Costs for which manager is responsible are the variable and fixed costs of Department 7, $36,700. Costs allocated to Department 7, $14,290, cannot be controlled by the manager. Nevertheless, they are often shown on responsibility center reports to indicate their magnitude.
Problem 22-2: Golub Company
a. The sales manager's complaint is justified. Product A has the largest net sales of the three products and under the allocation method used in the first year would, therefore, be charged the largest amount for advertising expense. However, the actual amount of advertising expense incurred on behalf of Product A, and hence the responsibility of the manager of Product A, is smaller than that incurred on behalf of Product B.
b. Product A should be charged $10,000 because that is the amount spent on behalf of Product A. It would be acceptable to charge Product A with an allocated portion of the institutional advertising, based on sales volume, but this amount should be separated from the $10,000 for which Product A is responsible.
Problem 22-3
The