Responsibility Accounting and Performance Measures Paper 2
In a highly decentralized organization, the best option for measuring the performance of subunits is the establishment of
Answer (D) is correct. Responsibility centers may be categorized as cost centers (managers accountable for costs), revenue centers (managers accountable for revenues), profit centers [managers accountable for revenues and costs, i.e., for markets (revenues) and sources of supply (costs)], and investment centers (managers accountable for revenues, costs, and investments). Cost centers is the best answer because it is the most general. All subunits have costs but may not have revenues or investments.
A segment of an organization is referred to as a profit center if it has
Answer (A) is correct. A profit center is responsible for both revenues and expenses. For example, the perfume department in a department store is a profit center. The manager of a profit center usually has the authority to make decisions affecting the major determinants of profit, including the power to choose markets (revenue sources) and suppliers (costs).
A segment of an organization is referred to as an investment center if it has
Answer (B) is correct. An investment center is responsible for revenues, expenses, and invested capital. Return on investment is usually the key performance measure of an investment center.
The Stonebrook Company uses a performance reporting system that reflects the company’s decentralization of decision making. The departmental performance reports show actual costs incurred during the period against budgeted costs. Any variances from the budget are assigned to the individual department manager who controls the costs. Stonebrook is using a type of system called
Answer (C) is correct. A well-designed responsibility accounting system establishes responsibility centers within an organization. Managerial performance should be evaluated only on the basis of those factors controllable by th activities. A departmental performance report showing actual costs incurred against budgeted costs permits evaluation of a manager and the area for which (s)he is responsible.
Digital Tech uses an accounting system that charges costs to the manager who has the authority to make decisions incurring the costs. For example, if a sales manager authorizes a rush order that results in additional manufacturing costs, these additional costs are charged to the sales manager. This type of accounting system is known as
Answer (A) is correct. A well-designed responsibility accounting system establishes responsibility centers within an organization. Managerial performance should be evaluated only on the basis of those factors controllable by the manager. Managers may control revenues, costs, and/or investment activities. The responsibility system should induce management performance that adheres to overall company objectives. Charging the costs of a rush order to the sales manager who authorized the job creates an incentive for that individual to minimize such costs.
If a manufacturing company uses responsibility accounting, which one of the following items is least likely to appear in a performance report for a manager of an assembly line?
Answer (D) is correct. Responsibility accounting holds managers responsible only for factors under their control. The depreciation of equipment will probably not appear on the performance report of an assembly-line manager because the manager usually has no control over the investment in the equipment.
Which of the following is not true of responsibility accounting?
Answer (C) is correct. Responsibility accounting stresses that managers are responsible only for factors under their control. For this purpose, the operations of the business are organized into responsibility centers. Costs are classified as controllable and uncontrollable. This implies that some revenues and costs can be changed through effective management. Management may then focus on deviations for either reinforcement or correction. Thus, the statement that every factor is ultimately controllable by someone is not a premise of responsibility accounting.
A company plans to implement a bonus plan based on segment performance. In addition, the company plans to convert to a responsibility accounting system for segment reporting. The following costs, which have been included in the segment performance reports that have been prepared under the current system, are being reviewed to determine if they should be included in the responsibility accounting segment reports: I. Corporate administrative costs allocated on the basis of net segment sales. II. Personnel costs assigned on the basis of the number of employees in each segment. III. Fixed computer facility costs divided equally among each segment. IV. Variable computer operational costs charged to each segment based on actual hours used times a predetermined standard rate; any variable cost efficiency or inefficiency remains in the computer department. Of these four cost items, the only item that could logically be included in the segment performance reports prepared on a responsibility accounting basis would be the
Answer (D) is correct.
The variable computer cost can be included. The segments are charged
for actual usage, which is under each segment’s control. The
predetermined standard rate is set at the beginning of the year and is
known by the segment managers. Moreover, the efficiencies and
inefficiencies of the computer department are not passed on to the
segments. Both procedures promote a degree of control by the segments.
In a responsibility accounting system, managers are accountable for
Answer (D) is correct.
The most desirable measure for evaluating a departmental manager is
one that holds the manager responsible for the revenues and expenses
(s)he can control. Controllability is the basic concept of responsibility
Which of the following types of responsibility centers include controllable revenues in their
Cost Centers Investment Centers Profit Centers
Answer (C) is correct.
In investment centers, managers are responsible for all activities,
including costs, revenues, and investments. An investment center is a
profit center with significant control over the amount of capital invested.
This control extends to investments such as receivables and property,
plant, and equipment, as well as entry into new markets. A cost center,
for example, a production department, is responsible for costs only. A
profit center, for example, the appliance department in a retail store, is
responsible for both revenues and expenses.