Responsibility Accounting and Performance Measures Flashcards
1A corporation uses an accounting system that charges costs to the manager who has been delegated
the authority to make the decisions incurring the costs. For example, if the sales manager accepts a rush order that
will result in higher-than-normal manufacturing costs, these additional costs are charged to the sales manager
because the authority to accept or decline the rush order was given to the sales manager. This type of accounting
system is known as
A. Responsibility accounting.
B. Functional accounting.
C. Reciprocal allocation.
D. Transfer price accounting.
Answer (A) 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 them to the manager’s responsibility center. However, controllability is not an absolute
basis for establishment of responsibility. More than one manager may be able to influence a cost, and
responsibility may be assigned on the basis of knowledge about the incurrence of a cost rather than the
ability to control it.
2The basic purpose of a responsibility accounting system is
A. Budgeting.
B. Motivation.
C. Authority.
D. Variance analysis.
Answer (B) is correct.
The basic purpose of a responsibility accounting system is to motivate management to perform in a
manner consistent with overall company objectives. The assignment of responsibility implies that
some revenues and costs can be changed through effective management. The system should have
certain controls that provide for feedback reports indicating deviations from expectations. Higher-level
management may focus on those deviations for either reinforcement or correction.
3A 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.
Answer (C) is correct.
Managerial performance should ideally 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.
4In 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 about which the manager is knowledgeable and informed.
Answer (B) is correct.
Control is the process of making certain that plans are achieving the desired objectives. A controllable
cost is one that is influenced by a specific responsible manager at a given level of production within a
given time span. For example, fixed costs are often not controllable in the short run.
5A 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.
Answer (D) is correct.
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.
6The least complex segment or area of responsibility for which costs are allocated is a(n)
A. Profit center.
B. Investment center.
C. Contribution center.
D. Cost center.
Answer (D) is correct.
A cost center is a responsibility center that is accountable only for costs. The cost center is the least
complex type of segment because it has no responsibility for revenues or investments.
7Responsibility accounting defines an operating center that is responsible for revenue and costs as
a(n)
A. Profit center.
B. Revenue center.
C. Division.
D. Operating unit.
Answer (A) is correct.
A profit center is responsible for both revenues and costs, whereas a cost center is responsible only for
costs.
8Decentralized firms can delegate authority and yet retain control and monitor managers’ performance
by structuring the organization into responsibility centers. Which one of the following organizational segments
is most like an independent business?
A. Revenue center.
B. Profit center.
C. Cost center.
D. Investment center.
Answer (D) is correct.
An investment center is the organizational type most like an independent business because it is
responsible for its own revenues, costs incurred, and capital invested. The other types of centers do not
incorporate all three elements.
9A corporation uses a responsibility accounting system in its operations. Which one of the following
items is least likely to appear in a performance report for a manager of one of the assembly lines?
A. Direct labor.
B. Materials.
C. Repairs and maintenance.
D. Depreciation on the manufacturing facility.
Answer (D) is correct.
A well-designed responsibility accounting system establishes responsibility centers within an
organization. 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. Thus, a manager of an assembly line is responsible for direct labor, materials, repairs and
maintenance, and supervisory salaries. The manager is not responsible for depreciation on the
manufacturing facility. (S)he is not in a position to control or influence capital budgeting decisions
10A 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. Which type of system is being used?
A. Contribution accounting.
B. Cost-benefit accounting.
C. Flexible budgeting.
D. Responsibility accounting.
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.
11A manufacturer uses an accounting system that charges costs to the manager who has been
delegated the authority to make the decisions incurring the costs. For example, if the sales manager accepts a rush
order that requires the incurrence of additional manufacturing costs, these additional costs are charged to the sales
manager because the authority to accept or decline the rush order was given to the sales manager. This type of
accounting system is known as
A. Functional accounting.
B. Contribution accounting.
C. Reciprocal allocation.
D. Profitability accounting.
Answer (D) is correct.
Profitability accounting is accounting for profit centers. When sales managers have the authority and
responsibility to control costs, they are a profit center.
12In a highly decentralized organization, the best option for measuring the performance of subunits is
the establishment of
A. Marketing centers.
B. Product centers.
C. Revenue centers.
D. Cost centers.
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.
13A 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 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.
C. Authority to make decisions over the most significant costs of operations including the power to choose
the sources of supply.
D. Authority to provide specialized support to other units within the organization.
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).
14A segment of an organization is referred to as an investment 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 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.
C. Authority to make decisions over the most significant costs of operations including the power to choose
the sources of supply.
D. Authority to provide specialized support to other units within the organization.
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.
15A 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. The company is using a type of system called
A. Transfer-pricing accounting.
B. Flexible budgeting.
C. Responsibility accounting.
D. Activity-based budgeting.
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 the manager. Managers may control revenues, costs, and/or investment 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.