16.1 Responsibility Centers Flashcards
A manager who is accountable for both income statement and balance sheet items is responsible for a(n)
A. Cost center
B. Investment center
C. Profit center
D. Revenue center
B. Investment center
Revenue, expenses, invested capital
A cosmetics company is expanding its marketing presence by placing stores within a national department store chain. The cosmetic 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 manager’s performance, each cosmetics store would most appropriately be considered a(n)
A. Cost center
B. Revenue center
C. Profit center
D. Investment center
B. Revenue center
Most firms allocate corporate and other support costs to division and departments for all of the following reasons except to
A. Remind profit-center managers that earnings must be adequate to cover some share of the indirect costs
B. Stimulate profit-center managers to put pressure on central managers to control service costs
C. Create competition between divisions and departments, and their managers.
D. Fix accountability and evaluate profit centers
B. Stimulate profit-center managers to put pressure on central managers to control service costs
Ordinarily, the most appropriate basis on which to evaluate the performance of a division manager is the division’s
A. Contribution margin
B. Net revenue minus controllable division costs
C. Gross profit
D. Net income minus the division’s fixed costs
B. Net revenue minus controllable division costs
Managerial performance should be evaluated on the basis of those factors controllable by the manager. Managers may control revenues, costs, and/or investment in resources. A well-designed responsibility accounting system establishes responsibility centers within the organization.
A large corporation allocates the costs of its headquarters staff to its decentralized divisions. The best reason for this allocation is to
A. More accurately measure divisional operating results
B. Improve divisional management’s morale
C. Remind divisional managers that common costs exist
D. Discourage any use of central support services
C. Remind divisional managers that common costs exist
The allocation reminds managers that support costs exist and that the managers would incur these costs if their operations were independent. The allocation also reminds managers that profit center earnings must cover some amount of support costs.
In responsibility accounting, a center’s performance is measured by controllable costs. Controllable costs are best described as including
A. Direct material and direct labor only
B. Only those costs that the manager can influence in the current time period
C. Only discretionary costs
D. Those costs which the manager is knowledgeable and informed
B. Only those costs that the manager can influence in the current time period
Control is the process of making certain that plans are achieving the desired objectives. A controllable cost is one that is directly regulated by a specific manager at a given level of production within a given time span or that the manager can significantly influence.
A successful responsibility accounting reporting system is dependent upon
A. The correct allocation of controllable variable costs
B. Identification of the management level at which all costs are controllable
C. The proper delegation of responsibility and authority
D. A reasonable separation of costs into their fixed and variable components since fixed costs are not controllable and must be eliminated from the responsibility report.
C. The proper delegation of responsibility and authority
Managerial performance ideally should be evaluated only on the basis of those factors controllable by the manager. Managers may control revenues, costs, and/or investments in resources. However, controllability is not an absolute. More than one manager may be able to influence a cost, and managers may be accountable for some costs they do not control. In practice, given the difficulties of determining the locus of controllability, responsibility may be assigned on the basis of knowledge about the incurrence of a cost rather than the ability to control it. Accordingly, a successful system is dependent upon the proper delegation of responsibility and the commensurate authority.
Which one of the following companies is likely to experience dysfunctional motivation on the part of its managers due to its allocation methods?
A. To allocate depreciation of forklifts used by workers at its central warehouse, Company A uses predetermined amounts calculated on the basis of the long-term average use of the services provided.
B. Company B uses the sales revenue of its various divisions to allocate costs connected with the upkeep of its headquarters building. It also uses return on investment to evaluate the divisional performances.
C. Company C does not allow its service departments to pass on their cost overruns to the production departments.
D. Company D’s management information system is operated out of headquarters and serves its various divisions. The allocation of the management information system-related costs to its divisions is limited to costs the divisions will incur if they were to outsource their management information system needs.
B. Company B uses the sales revenue of its various divisions to allocate costs connected with the upkeep of its headquarters building. It also uses return on investment to evaluate the divisional performances.
Managerial performance ordinarily should be evaluated only on the basis of those factors controllable by the manager. If a manager is allocated costs that (s)he cannot control, dysfunctional motivation can result. In the case of allocations, a cause-and-effect basis should be used. Allocating the costs of upkeep on a headquarters building on the basis of sales revenue is arbitrary because cost may have no relationship to divisional sales revenues. Consequently, divisional return on investment is reduced by a cost over which a division manager has no control. Furthermore, the divisions with the greatest sales are penalized by receiving the greatest allocation.
A segment of an organization is referred to as a service center if it has
A. Responsibility for developing markets and selling the output of the organization.
B. Responsibility for combining the raw materials, direct labor, and other factors of production into a final output.
C. Authority to make decisions affecting the major determinants of profit including the power to choose its markets and sources of supply.
D. Authority to provide specialized support to other units within the organization.
D. Authority to provide specialized support to other units within the organization.
A service center exists primarily and sometimes solely to provide specialized support to other units within the organization. Service centers are usually operated as cost centers.
All of the following are issues that should be considered in evaluating performance when common costs are allocated to business segments except that
A. There may be no cause-and-effect relationship between an allocated cost and the segment’s operations
B. Common costs are not controllable by segment managers
C. The allocation can be affected by the cost drivers used by other segments
D. Cost allocations are not included in the calculation of long-term cost per unit
D. Cost allocations are not included in the calculation of long-term cost per unit
Long-term cost per unit is a business metric that represents the average cost per unit of output over the long run. Whether cost allocations are included in the calculation of long-term cost per unit or not will not affect the fairness of the common cost allocation. Therefore, it will not affect the performance evaluation.
Managers are most likely to accept allocations of common costs based on
A. Fairness
B. Cause and effect
C. Ability to bear
D. Benefits received
B. Cause and effect
The difficulty with common costs is that they are indirect costs whose allocation may be arbitrary. A direct cause-and-effect relationship between a common cost and the actions of the cost object to which it is allocated is desirable. Such a relationship promotes acceptance of the allocation by managers who perceive the fairness of the procedure, but identification of cause and effect may not be feasible.
A company’s production manager is accountable for controlling costs while manufacturing quality products. The manager also provides recommendations for equipment improvements and replacements. In this market, customers are very sensitive to the product’s quality. What type of responsibility center is the production manager in charge of?
A. Revenue center
B. Investment center
C. Cost center
D. Profit center
C. Cost center
A cost center is responsible for costs only. In this case, cost drivers are the relevant performance measure and the manager is not evaluated on revenue, profit, or invested capital.
A segment of an organization is referred to as a profit center if it has
A. Authority to make decisions affecting the major determinants of profit, including the power to choose its markets and sources of supply
B. Authority to make decisions over the most significant costs of operations, including the power to choose the sources of supply
C. Authority to make decisions affecting the major determinants of profit, including the power to choose its markets and sources of supply and significant control over the amount of invested capital
D. Authority to provide specialized support to other units within the organization
A. Authority to make decisions affecting the major determinants of profit, including the power to choose its markets and sources of supply
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 manager of the telecommunication sales team has the following department budget:
Billings – long distance: $350,000
Billings – phone card: $ 75,000
Billings – toll free: $265,000
The responsibility center is best described as a
A. profit center
B. revenue center
C. cost center
D. Investment center
B. Revenue center
The departmental budget contains only revenue amounts, no costs.
A company expects its plant manager to control manufacturing costs and to set prices for the products manufactured. The company’s plant manager is evaluated as directing which type of responsibility center?
A. Investment center
B. Revenue center
C. Cost center
D. Profit center
D. Profit center
A profit center is responsible for both revenues and expenses but not for the amount of capital invested. The plant manager has control over manufacturing costs (an expense) and prices for products manufactured (a source of revenue). Accordingly, (s)he is directing a profit center.
