Sherman Company uses a performance reporting system that reflects the company’s decentralization of decision making. The departmental performance report shows one line of data for each subordinate who reports to the group vice president. The data presented show the actual costs incurred during the period, the budgeted costs, and all variances from budget for that subordinate’s department. Sherman is using a type of system called

Answer (D) is correct. In a responsibility accounting system, managerial performance should be evaluated only on the basis of those factors directly regulated (or at least capable of being significantly influenced) by the manager. For this purpose, operations are organized into responsibility centers. Costs are classified as controllable and noncontrollable, which implies that some revenues and costs can be changed through effective management. If a manager has authority to incur costs, a responsibility accounting system will charge those costs to the manager’s responsibility center.