Responsibility of purchasing agent. Paula Beane owns a ...

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Responsibility of purchasing agent.
 
  Paula Beane owns a restaurant franchise that is part of a chain of southern homestyle restaurants. One of the chain's popular breakfast items is biscuits and gravy. Central Warehouse makes and freezes the biscuit dough, which it then sells to the franchise stores where it is thawed and baked in the individual stores by the cook. Each franchise also has a purchasing agent who orders the biscuits (and other items) based on expected demand. In March 2015, one of the freezers in Central Warehouse breaks down and biscuit production is reduced by 25 for 3 days. During those 3 days, Paula's franchise runs out of biscuits but demand does not slow down. Paula's franchise cook, Betty Baker, sends one of the kitchen helpers to the local grocery store to buy refrigerated ready-to-bake biscuits. Although the customers are kept happy, the refrigerated biscuits cost Paula's franchise three times the cost of the Central Warehouse frozen biscuits, and the franchise loses money on this item for those 3 days. Paula is angry with the purchasing agent for not ordering enough biscuits to avoid running out of stock and with Betty for spending too much money on the replacement biscuits.
 
  Required:
   Who is responsible for the cost of the biscuits? At what level is the cost controllable? Do you agree that Paula should be angry with the purchasing agent? With Betty? Why or why not?

Question 2

What is the effect of the following error? The owner withdrew 3,000 for personal use. The accountant debited Wages Expense for 3,000 and credited Cash for 3,000.
 a. Net Income was understated.
   b. Cash was understated.
   c. Total Owner's Equity was understated.
   d. Cash was overstated.
   e. Wages Expenses were understated.

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Answer to Question 1

The cost of the biscuits is usually the responsibility of the purchasing agent, and usually controllable by the Central Warehouse. However, in this scenario, Betty the cook has taken the responsibility for the cost of the replacement biscuits from the purchasing agent by making a purchasing decision. Because Paula holds the purchasing agent responsible for biscuit costs, and presuming that Betty knew this, Betty should have discussed her decision with the purchasing agent before sending the kitchen helper to the store.

Paula should not be angry because her employees acted to satisfy the customers on a short-term emergency basis. Presuming the Central Warehouse does not consistently have problems with their freezer, there is no way the purchasing agent could foresee the biscuit shortage and plan accordingly. Also, the problem only lasted three days, which, in the course of the year (or even the month) will not seriously harm the profits of a restaurant that sells a variety of foods. However, had they run out of biscuits for three days, this could have long-term implications for customer satisfaction and customer loyalty, and in the long run could harm profits as customers find other restaurants at which to eat breakfast.

Answer to Question 2

a