Responsibility Accounting and Performance Measures

Question 1

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 1

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.

Question 2

2The basic purpose of a responsibility accounting system is
A. Budgeting.
B. Motivation.
C. Authority.
D. Variance analysis.

Answer 2

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.

Question 3

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 3

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.

Question 4

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 4

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.

Question 5

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 5

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.

Question 6

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 6

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.

Question 7

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 7

Answer (A) is correct.
A profit center is responsible for both revenues and costs, whereas a cost center is responsible only for
costs.

Question 8

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 8

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.

Question 9

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 9

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

Question 10

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 10

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.

Question 11

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 11

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.

Question 12

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 12

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.

Question 13

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 13

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).

Question 14

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 14

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.

Question 15

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 15

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.

Question 16

16A tech firm 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
A. Responsibility accounting.
B. Functional accounting.
C. Transfer-pricing accounting.
D. Contribution accounting

Answer 16

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.

Question 17

17If 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?
A. Supervisory salaries.
B. Materials.
C. Repairs and maintenance.
D. Equipment depreciation.

Answer 17

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.

Question 18

18Which of the following is not true of responsibility accounting?
A. Managers should only be held accountable for factors over which they have significant influence.
B. The focus of cost center managers will normally be more narrow than that of profit center managers.
C. Every factor that affects a firm’s financial performance ultimately is controllable by someone, even if that
someone is the person at the top of the firm.
D. When a responsibility account system exists, operations of the business are organized into separate areas
controlled by individual managers

Answer 18

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

Question 19

19A 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
A. Corporate administrative costs.
B. Personnel costs.
C. Fixed computer facility costs.
D. Variable computer operational costs.

Answer 19

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

Question 20

20In a responsibility accounting system, managers are accountable for
A. Variable costs but not for fixed costs.
B. Product costs but not for period costs.
C. Incremental costs.
D. Costs over which they have significant influence.

Answer 20

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 accounting

Question 21

21Which of the following types of responsibility centers include controllable revenues in their
performance reports?
Cost Investment Profit
Centers Centers Centers
A. Yes Yes Yes
B. Yes No No
C. No Yes Yes
D. No No No

Answer 21

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.

Question 22

22Periodic internal reports used for performance evaluation purposes and based on a responsibility
accounting system should not include
A. Allocated fixed overhead.
B. A distinction between controllable and noncontrollable costs.
C. An organization chart.
D. Variances between actual and budgeted controllable costs.

Answer 22

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.

Question 23

23Which one of the following best identifies a profit center?
A. The Information Technology Department of a large consumer products company.
B. A large toy company.
C. The Production Operations Department of a small job-order machine shop company.
D. A new car sales division for a large local auto agency.

Answer 23

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.

Question 24

24Characteristics of a responsibility accounting system include all of the following except that
A. Responsibility for performance according to budget must be linked to the appropriate authority.
B. The system should encourage employee involvement and participation.
C. Cost centers are responsible for revenues as well as common costs.
D. Each level of management is responsible for its department’s operations and employees

Answer 24

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

Question 25

25Responsibility costs motivate managers of responsibility centers to act in the organization’s interest. The attribute that would be least persuasive in deciding to allocate costs to responsibility centers is that they A. Are limited to staff services, such as consulting or internal audit. B. Can be influenced by actions of the center’s manager. C. Are helpful in measuring support used by the responsibility center. D. Are used in product pricing.

Answer 25

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 center’s 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.

Question 26

26Making segment disclosures is an advantage to a company because it A. Facilitates evaluation of company management by providing data on particular segments. B. Eliminates the interdependence of segments. C. Masks the effect of intersegment transfers. D. Provides competitors with comparative information on the company’s performance.

Answer 26

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.

Question 27

27A 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. Cost center. B. Revenue center. C. Profit center. D. Investment center.

Answer 27

Answer (B) is correct. The departmental budget contains only revenue amounts, no costs.

Question 28

28An 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 manager’s control are not included in the performance reports. This method of accounting is known as A. Contribution margin reporting. B. Segment reporting. C. Absorption cost accounting. D. Responsibility accounting.

Answer 28

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.

Question 29

29The role of a marketing manager for a local recreational sports complex in the marketing department is to advertise events, meet potential clients, and plan future events. The marketing manager is responsible for the revenues and costs of each event and reports to the sports complex manager. The marketing department is an example of which type of responsibility center? A. Investment center. B. Cost center. C. Profit center. D. Revenue center.

Answer 29

Answer (C) is correct. A profit center is responsible for revenues and expenses.

Question 30

30A 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.

Answer 30

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.

Question 31

31A 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 managers’ performance, each cosmetics store would most appropriately be considered a(n) A. Cost center. B. Revenue center. C. Profit center. D. Investment center.

Answer 31

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.

Question 32

32The maintenance department of a hotel would be considered a(n) A. Cost center. B. Revenue center. C. Profit center. D. Investment center.

Answer 32

Answer (A) is correct. A cost center is only responsible for costs. The maintenance department of a hotel typically only incurs costs and therefore would likely be considered a cost center.

Question 33

33A 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. Profit center. B. Cost center. C. Revenue center. D. Investment center.

Answer 33

Answer (A) is correct. 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.

Question 34

34Accountants for Hire is a firm that specializes in providing accounting-related services to a wide range of clients across several geographical areas. The accounting-related services vary and the unique qualifications required in each local market may differ significantly. Each geographical office has a manager who controls the type of accounting services offered to clients as well as the hiring of necessary staff to provide those services. The CEO is in the process of determining the appropriate responsibility centers to use for performance management in the organization. Based on this business scenario, which one of the following is the best type of responsibility center for each geographical area’s office? A. Cost center. B. Investment center. C. Profit center. D. Revenue center

Answer 34

Answer (C) is correct. A profit center is responsible for revenues and expenses but not for the amount of capital invested. The managers control services offered and hiring. Each office therefore is a profit center because its manager is responsible for revenues and expenses

Question 35

35Ordinarily, 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

Answer 35

Answer (B) is correct. 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.

Question 36

36Controllable revenue would be included in a performance report for a Profit Center Cost Center A. No No B. No Yes C. Yes No D. Yes Yes

Answer 36

Answer (C) is correct. A profit center is a segment of a company responsible for both revenues and expenses. A profit center has the authority to make decisions concerning markets (revenues) and sources of supply (costs).

Question 37

37Which of the following is not a potential disadvantage of a cost center? A. Increased monitoring of costs. B. The potential for cost shifting. C. Long-term issues may be disregarded. D. The complexity of allocating service department costs to cost centers.

Answer 37

Answer (A) is correct. A cost center is a responsibility center that is responsible for costs only. This allows the management of the cost center to scrutinize costs more closely than if they were responsible for more than just costs. As such, this represents an advantage of a cost center rather than a disadvantage.

Question 38

38An investment center is responsible for each of the following except: A. Revenues. B. Earnings per share. C. Expenses. D. Invested capital.

Answer 38

Answer (B) is correct. Investment centers are responsible for revenues, expenses, and invested capital. However, due to the fact that they usually represent only a subsidiary or division of a company, they are not responsible for the overall firm’s earnings per share