Responsibility Accounting and Performance Measures Paper 3
Periodic internal reports used for performance evaluation purposes and based on a responsibility accounting system should not include
Answer (A) is correct. Allocated fixed overhead should not be included in internal reports based on a responsibility accounting system because it cannot be controlled by a manager of a responsibility center.
Which one of the following best identifies a profit center?
Answer (D) is correct. Management of a profit center is responsible for revenues and expenses but not invested capital. Of the four responsibility centers listed, a new car sales division for a large local auto agency is the only one that fits this description.
Characteristics of a responsibility accounting system include all of the following except that
Answer (C) is correct. Management of a cost center is, by definition, only responsible for costs. To make management answerable for revenues as well undercuts the purpose of sound responsibility accounting.
Responsibility costs motivate managers of responsibility centers to act in the organizationís interest. The attribute that would be least persuasive in deciding to allocate costs to responsibility centers is that they
Answer (A) is correct.
Responsibility costs are designed to motivate managers of a
responsibility center to act in the best interest of the organization.
Therefore, the costs should be allocated only if they (1) can be influenced
by the actions of the centerís management, (2) are helpful in measuring
support given to the responsibility center, (3) improve comparability, or
(4) are used in product pricing. Whether the costs are from staff, line, or
other services has no bearing on whether they should be allocated.
Furthermore, some organizations encourage the use of services such as
consulting or internal audit by not charging their costs to responsibility
centers. See SMA 4B, Allocation of Service and Administrative Cost.
Making segment disclosures is an advantage to a company because it
Answer (A) is correct.
Segment reporting is an aspect of responsibility accounting. It facilitates
evaluation of company management and of the quality of the economic
investment in particular segments.
Sara Bellows, manager of the telecommunication sales team, has the following department
Billings -- long distance $350,000
Billings -- phone card 75,000
Billings -- toll free 265,000
Her responsibility center is best described as a
Answer (B) is correct.
Bellowsís departmental budget contains only revenue amounts, no costs.
An organization employs a system of internal reporting that furnishes departmental managers with revenue and cost information on only those items that are subject to their control. Items not subject to the managerís control are not included in the performance reports. This method of accounting is known as
Answer (D) is correct. Responsibility accounting stresses that managers should only be held responsible for factors under their control. To achieve this objective, the operations of the business are broken down into responsibility centers. Costs are classified as controllable and noncontrollable to assign responsibility. The assignment of responsibility implies that some revenues and costs can be changed through effective management. A responsibility accounting system should have certain controls that provide for feedback reports indicating deviations from expectations. Management may then focus on those deviations for either reinforcement or correction.
Jonathan Roger is the marketing manager for a local recreational sports complex. Rogerís role in the marketing department is to advertise events, meet potential clients, and plan future events. Roger is responsible for the revenues and costs of each event and reports to the sports complex manager. Rogerís marketing department is an example of which type of responsibility center?
Answer (C) is correct. A profit center is responsible for revenues and expenses
A manager who is accountable for both income statement and balance sheet items is responsible for a(n)
Answer (B) is correct. An investment center is responsible for revenues, expenses, and invested capital. Thus, a manager accountable for both income statement and balance sheet items is responsible for an investment center since his or her responsibilities include revenues, expenses, and invested capital.
A cosmetics company is expanding its marketing presence by placing stores within a national department store chain. The cosmetics company hires its own store managers who are responsible for generating sales. The company pays rent per square foot to the department store. For the purpose of assessing the managersí performance, each cosmetics store would most appropriately be considered a(n)
Answer (B) is correct A revenue center is responsible for revenues only. Since the store managers are only responsible for generating sales, assessing based on revenues is appropriate.