Chapter 9, Problem 9.46P

Cost allocation, responsibility accounting, ethics (continuation of Problem 9-45). In 2018, only 876,000 Mealman meals were produced and sold to the hospitals. Wright suspects that hospital controllers had systematically inflated their 2018 meal estimates.

1. 1. Recall that Mealman uses the master-budget capacity utilization to allocate fixed costs and to price meals. What was the effect of production-volume variance on Mealman’s operating income in 2018?

Required

1. 2. Why might hospital controllers deliberately overestimate their future meal counts?
2. 3. What other evidence should Meals To Go’s president seek to investigate Wright’s concerns?
3. 4. Suggest two specific steps that Wright might take to reduce hospital controllers’ incentives to inflate their estimated meal counts.