is a responsibility center whose manager is accountable only for controllable costs that have well-defined relationships between the center’s resourcesand products or services. b0.A
discretionary cost center
is a responsibility center whose manager is accountableonly for costs in which the relationship between resources and products or services produced is not well defined. These centers, like cost centers, have approved budgetsthat set spending limits.c0.A
is a responsibility center whose manager is accountable primarilyfor revenue and whose success is based on its ability to generate revenue.d0.A
is a responsibility center whose manager is accountable for bothrevenue and costs and for the resulting operating income.e0.An
is a responsibility center whose manager is accountable for profit generation; the manager can also make significant decisions about the resourcesthe center uses. The manager can control revenues, costs, and the investments of assetsto achieve the organization’s goals.70.An
is a visual representation of an organization’s hierarchy of responsibility for the purposes of management control. A responsibility accounting systemestablishes a communications network within an organization that is ideal for gathering andreporting information about the operations of each of these areas of responsibility. Thesystem is used to prepare budgets by responsibility area and to report on the actual performance of each responsibility center. The performance report for a responsibility center should contain only
controllable costs and revenues
—that is, the costs, revenues, andresources that the manager of the center can control.
Objective 4: Prepare performance reports for cost centers using flexible budgets and forprofit centers using variable costing.
80.Performance reports allow comparisons between actual performance and budgetexpectations. Such comparisons enable management to evaluate an individual’s performance with respect to responsibility center objectives and companywide objectivesand to recommend changes. The content and format of a performance report depend on thenature of the responsibility center.90.The performance of a cost center can be evaluated by comparing its actual costs with thecorresponding amounts in the flexible and master budgets. A
(also called a
) is a summary of expected costs for a range of activity levels. A flexible budget is derived by multiplying actual unit output by predetermined unit costs for each costitem in the report. The flexible budget is used primarily as a cost control tool evaluating performance at the end of a period.100.A profit center’s performance is usually evaluated by comparing its actual income statementwith its budgeted income statement. When
is used, the profit center manager’s controllable costs are classified as variable or fixed. The variable cost of goodssold and the variable selling and administrative expenses are subtracted from sales to arriveat the center’s contribution margin; all controllable fixed costs are subtracted from thecontribution margin to determine operating income. The variable costing income statementtakes the form of a contribution income statement rather than a traditional incomestatement. A traditional income statement (also called a
absorption costing income statement
) assigns all manufacturing costs to cost of goods sold. A variable costingincome statement uses only direct materials, direct labor, and variable overhead to compute