Responsibility centers and controllability

Question 1

What are the 4 types of responsibility centers?

Answer 1

• Cost center
• Revenue center
• Profit center
• Investment center

Question 2

Explain what a cost center is.

Answer 2

Controls costs, but not revenue og investments.

Goals:
- Minimize total costs for a fixed output.
- Maximize output for a fixed budget.

Performance evluation:
Center’s actual costs with target-or standard cost levels for the amount and type of work done

Question 3

Explain what a revenue center is.

Answer 3

Controls revenue, but not cost or investment.

E.g. price, the mix of stock carried, and promotional activities.

Examples: appliance department in a department store, regional sales office, restaurant in a chain, gas station owned by a large refinery.

Most revenue centers incur costs (e.g., salaries, advertising costs, and selling costs) but have varying degrees of control over those costs.

Performance evaluation:
Deduction of these “traceable costs ” when computing the center’s net revenue.

Question 4

Explain what a profit center is.

Answer 4

Controls both costs and revenue, but not investment.

Examples:
Fast food unit in a chain if sufficiently large that:
–Costs may vary due to differences in controlling labor costs, food waste, and scheduled hours
–Revenues may also shift significantly based on how well staff manages the property.

Performance evaluation:
Actual profits (compared to budget).

Question 5

Explain what an investment center is.

Answer 5

Control costs, revenue and investments (all 3).

Performance evaluation:
ROI or residual income
–Generate maximum profits from the resources at their disposal.
–Invest in additional resources only when such an investment will produce an adequate return.

Question 6

What is the definition of the controllability principle?

Answer 6

Employees are responsible only for what they can influence.

Question 7

What are the 9 steps in a segment margin statement?

Answer 7

Revenue
Variable direct costs
CONTRIBUTION MARGIN
Variable overheads
SEGMENT MARGIN
Fixed overheads (avoidable)
INCOME
Fixed overheads (unavoidable)
PROFIT

Might be constructed slightly different based on the info.

Question 8

Segment margin reports: what are some pitfalls?

Answer 8

• Non-financial factors affecting future profits.
• Invisible interactions between units.
• Transfer pricing divides “value-added” among responsibility centers.