I.

BACKGROUND OF THE CASE

Honey Donuts, Inc. is a family controlled corporation that sells 26 varieties of doughnuts. It
started its operation in the Makati area in 1989 with the owner, Mr. Mark Honrado, as general
manager. As such, he was in charge of purchasing and production while his wife, Susana
Honrado, took charge of sales and the Coffee Shop. Mrs. Honrado was assisted by a sales lady. A
part-time accountant reports to the office every Saturday to keep the books.
After its first year of successful operation in Makati, Mr. Honrado was considering to open a
branch along Katipunan Road to tap the students market and another branch within a large
shopping mall, at Shoemart, EDSA. For all three outlets, he was certain that he could still do the
purchasing function. Mr. Honrado plans to retain the baking operations in Makati. Baking is
done between 11:00 p.m. and 4:00 a.m. daily. He was afraid that the same quality will not be
maintained if production is done at the branch level, and more importantly, he was concerned
about how he could control costs in all branches if the baking will be done at the brances.
Honey doughnuts make use of four main doughs namely: sweet dough, angel food, yeast raise
and munchkins. From these main doughs, 26 different varieties are produced with differences in
icings and fillings only. Different product lines were shown below, to wit
The doughs comprise 80% of total cost to produce doughnut. Selling price is computed at total
cost times 1.5. The policy of the company is Never to sell tomorrow todays unsold donuts
II. STATEMENT OF THE PROBLEM
If Mr. Honrado will have one hour to spend daily for each new branch, what should he look at?
At what time should he go?
At the branch level, design the appropriate internal control systems for key operation. Determine
the minimum number of personnel that Mr. Honrado must employ for the new branches.
III. AREAS OF CONSIDERATION

The overall structure of the family corporation consist of the following personnel, Mr.
Honrado who is in charge of all the purchasing and production and his wife took charge
of Sales and the Coffee Shop in assistance of a saleslady, and a part-time accountant who
keeps the books of the company
Opening of two new branches along Katipunan Road and at Shoemart, EDSA.
Mr. Honrado plans to retain the baking operations in Makati. Baking is done between
11:00 p.m. and 4:00 a.m. daily.
The Companys policy Never to sell tomorrow todays unsold donuts

IV. ALTERNATIVE COURSES OF ACTION

Design new operating control guidelines for Production, Selling and Accounting
Design new management control guidelines on product sales report including its
individual product performance and Financial Accounting reports.
Design both new operating and management control guidelines.

V. ANALYSIS
1. Operating Controls
Production
To ensure high quality of there products at a minimum cost centralized production
is to be maintained. The company should maintain an inventory system that could
account the daily production of goods. It should consider the list unsold donut that was
daily return to them with use of return slips or delivery list of unsold items for the day.
They could account the average sales of each product line on different branches to
prevent spoiled goods and minimized costs through purchasing only the necessary raw
materials needed for the production. To ensure that freshness of the products everyday
baking and delivery is done. It shall be prepared only based on stock needed.
Delivery
One (1) Delivery boy and one (1) truck driver will be hired. Dispatch around 5:30 am
from Makati Branch to Katipunan Branch arrives at around 7am, and then 8:00 am from
Katipunan Branch to Shoe Mart Branch arrive at around 9:00 am. Ensure that all products
need by the branch was properly delivered and completed. Daily pick-up unsold products
and spoiled goods.
Selling
The company should develop internal control for cash and merchandise. At the
branches, cash sales should be protected from fraudulent act. As we know cash are
susceptible to theft by staff and outsiders. The company should design a control tool such
as use of cash register system where they could account the cash shortage or over and a
company policy of depositing sales for the day within 3:00 pm and remaining sales for
the day would be kept on the small vault with the two employees of the store would only
know the password any cash shortage would be accounted against the two employees of
the branch and this would be deposited the following day. The Sales should tally with the
total amount of items that was sold. The merchandise inventory should follow a policy
that on every delivery it should be accompanied by receiving receipt with duplicate copy
forwarded to the main office that should tally with the delivery receipt any discrepancy
should be indicated as well as any damage or spoiled goods in the receiving receipt. At

the end of each shifting the morning shift employee would handover all the Inventory and
Sales reports to the afternoon shift employee who would then counter check the data if
tallies with the record and issue an turnover slip/or acknowledgement receipt. The
afternoon shift then would be responsible for the remaining items and cash, after his shift
he would then account for the remaining products that was unsold of which it would be
pick up by the main office. He would prepare two copies of delivery list of unsold items
together with the return goods receipts, the original copy would remain in the branch and
duplicate would be forwarded to the main office upon pick up and also forwards Order
Slip for the items to be sold on the following day. Enumerated below is the detailed set up
of the branch:
1.

Store and Manpower Operation - each branch will compose of 2 sales

personnel
Katipunan - store Hours (8am to 9pm)
7:00am-4:00pm (Morning)
1:00pm-10:00pm (Afternoon)
Shoemart, Edsa Store Hours (10am to 9pm)
9:00am-5:00pm (Morning)
2:00pm-10:00pm (Afternoon)

Accounting
A standard form should be established on Delivery Receipt, Receiving Receipt
and Order Slip each form should be pre numbered and in duplicate copy to account for
any missing or cancelled documents. Form like Delivery Receipt should contain approval
of the shipment from the head office. Duplicate copy of Receiving Receipt and Order Slip
together with the daily Sales Report, Bank Deposit slips with the report of cash total
deposited for the day (original to Head office, duplicate to Branch) , Inventory List of
Unsold donuts and any other documents needed to be forwarded to the head office by the
branch is enclosed in a envelop address to Mrs. Honrado and it would be send through
the pick up of the unsold donuts and be received by assigned staff through
acknowledgement receipt (with detailed description of all items transmitted to the head
office). Documents forwarded by the branch will be stamped received by the head office
with initials of the assistant of Mrs. Honrado and forward the necessary document to Mrs.
Honrado for the Sales and Accounting purposes and the Inventory list and Order Slip to
Mr. Honrado.
For daily small disbursement such as transportation cost, water bill and other small
expenses for both branch and Head office should be from petty cash fund established in
each office handled by a custodian. For branches it should be accounted by each shift
before handing over to the other shift that the cash count was accurate both of them will
be liable for any shortage and head office by sales assistant which duly approved by Mrs.

Honrado. But capital expenditure or other expenses will be transacted by the head office
with Mr. Honrados approval.
On Purchase Requisition with regards with raw materials of the donuts, the basis would
be from the prior sales report given by the branch together with Purchase Order prepared
should be with approval of Mr. Honrado as well as for Production or Baking of donuts
(eg. Items to be baked and its quantity) and using Order Slip as the basis of production.
2. Management Control
Mr. Mark Honrado as the owner and general manager exercises personal control over the
business that would allow him to have knowledge of the overall operation as well
performance of each individual. It would be easier for him to implement guidelines and
policy. With regards to Purchasing, Production and Delivery of the items it should be
duly approved by him. The branch should also submit the daily sales report, inventory
report and cash report in order for him study any improvements that needed to be done in
each branches and to monitor if the company still in line with its goal or study the
outcome of expanding its business. The Accountant should also report weekly the
consolidated Financial Statements of the company as a whole and Profit of each branch to
see the overall performance and standing of each branches.
Mr. Honrado shall visit the branch accordingly to his time and shall not set a schedule so
that he can randomly do a surprise audit with regards to branch operation. He could also
see the performance of each employee on how the reports are done or their day to day
activities like what time they arrived what they do on closing or opening time or even on
lean hours (no customers are coming to the store), cleanliness of the facilities, how Staff
attends with the customer needs are they friendly and courteous.

VI. RECOMMENDATION
In analysis of the case we recommend that both the new design operating and management
control should be implemented in order to safeguard its asset as well as the company standing. If
all the policy and procedure are properly implemented it would both benefit the organization as a
whole, as well as the employees because attaining the goal of the company, that is to gain
additional profit from expanding operation would give a stable employment for its employees
and additional incentive and benefits in the long run.
If there is an established set of standards, policies and procedures. The company would have
easier flow of transaction and activities. Lapses and Errors could easily be check, corrected and
improved.