College of Accounting Education

3F, Business & Engineering Building

Matina, Davao City
Phone No.: (082)300-5456 Local 137

DO IT YOURSELF: RESPONSIBILITY ACCOUNTING

LET’S CHECK
Activity 1. Please encircle the letter under each item that best reflects your answer.

1. Which of the following is not an example of a responsibility center?

a. investment center c. contribution center
b. cost center d. revenue center

2. A manufacturer’s raw-material purchasing department would likely be classified as a

a. cost center c. contribution center
b. profit center d. investment center

3. The telemarketing department of a residential remodeling company would most likely be evaluated as a
a. investment center c. profit center
b. cost center d. revenue center

4. If the head of a hotel’s food and beverage operation is held accountable for revenues and costs, the food and
beverage operation would be considered a(n)
a. cost center c. profit center
b. revenue center d. contribution center

5. Decentralized firms can delegate authority by structuring an organization into responsibility centers. Which of the
following organizational segments is most likely a totally independent, standalone business where managers are
expected to “make it on their own”?
a. investment center c. contribution center
b. profit center d. revenue center

6. A responsibility center in which the manager is held accountable for the profitable use of assets or capital is commonly
known as a(n)
a. cost center c. profit center
b. revenue center d. investment center

7. The Asian Division of a multinational organization would likely be classified as a(n)

a. contribution center c. revenue center
b. investment center d. profit center

8. Which of the following would have a low likelihood of being organized as a profit center?
a. A movie theater of a company that operates a chain of theaters.
b. A maintenance department that charges a chain of theaters.
c. The billing department of an Internet Service Provider (ISP).
d. The mayor’s office in a large city.
e. Both c and d above.

9. Which of the following types of responsibility centers has accountability for revenues
a. cost center and investment center
b. investment center and profit center
c. profit center and cost center
d. revenue center and cost center

10. Responsibility accounting systems strive to

a. provide information to managers.
b. place blame on guilty individuals.
c. hold managers accountable for both controllable and noncontrollable costs.
d. provide information so that managers can make decisions that are in the best interest of their individual centers
rather than in the best interests of the firm as a whole.

11. The basic purpose of responsibility accounting system is

a. budgeting c. authority
b. motivation d. variance analysis

12. When managers of subunits throughout an organization strive to achieve the goals set by top management, the result
is
a. planning and control c. responsibility accounting
b. goal congruence d. strategic control

13. Which of the following is most likely to be a disadvantage of decentralization?

a. Lower-level employees will develop less rapidly than in a centralized organization.
b. Lower-level employees will complain of not having enough to do.
c. Top management will have less time available to devote to unique problems.
d. Lower-level managers may make conflicting decisions.

MYRA T. MIRAFLORES, CPA Page 1 of 4

 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

14. The CEO of a rapidly growing high-technology firm has exercised centralized authority over all corporate functions.
Because the company now operates in four states, the CEO is considering the advisability of decentralizing operational
control over production and sales. Which of the following conditions probably will result from and be a valid reason for
decentralizing?
a. Greater local control over compliance with federal regulations
b. More efficient use of headquarters staff officials and specialist
c. Quicker and better operating decisions
d. Greater economies in purchasing

15. 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.

LET’S CHECK
Activity 2. Read each statement. On the space provided, write T if you believe the statement is true or F if false.
_____1. Transfer prices can be used to promote goal congruence among operating segments of an organization. T
_____2. In computing a transfer price, the maximum price should be no higher than the highest market price at which the
buying segment can obtain the good or service externally. F
_____3. In computing a transfer price, the minimum price should be no lower than the incremental costs associated with the
goods plus the opportunity cost of the facilities used. T
_____4. One of the main factors to consider when using a cost-based transfer price is whether to use actual or standard costs.
T
_____5. When using a negotiated transfer price, a determination must be made if comparable substitutes are available
externally. T
_____6. Market based transfer prices are most effective for common high-cost and high-volume standardized services. T
_____7. Cost-based transfer prices are most effective for common high-cost and high-volume standardized services. F
_____8. Market based transfer prices are most appropriate customized high-volume and high-cost services. F
_____9. Negotiated transfer prices are most appropriate for low cost and low volume services. F
____10. Sub-optimization occurs when a manager of a cost center focuses on the goals of the cost center rather than on the
goals of the organization as a whole. T

LET’S ANALYZE

Activity 1. Now, it’s your turn to apply concepts on performance evaluation of an Investment Center.

Problem 1 (adapted)
Elion, a division of Elton Manufacturing, has assets of P450,000 and an operating income of P110,000.
Required:
a. What is the division’s ROI?
b. If the minimum rate of return is 12%, what is the division’s residual income?

Solution:
a. ROI = Operating Income/ Total Assets
= P110,000/P450,000
= 24.44%
b. Operating Income P110,000
Less: Minimum Required Return
(12% x P450,000) 54,000
Residual Income P 56,000

Problem 2 (adapted)
Shapes Corporation operates two (2) autonomous divisions: Circle Company and Square Company. The divisions reported
the following data with respect to their 2019 operations:
Circle Square
Net sales P 40M P400M
Segment income 5M 30M
Average assets 25M 160M
Average assets life (years) 5 5
Cost of capital 12% 12%
Required:
1. Return on investment. 20% and 18.75%
2. Residual income. P2M and P10.8M

Problem 3 (adapted)
City Recreation Corporation operates allows its divisions to operate as autonomous units. The operating data for 2019 follow,
in thousands:
Hotel Beach Spa
MYRA T. MIRAFLORES, CPA Page 2 of 4
 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Revenue P2,250 P500 P4,800

Accounts receivable 800 152 1,435
Operating assets 1,000 400 1,750
Net operating income 220 60 480
Taxable income 165 90 385
Required:
1. Compute the asset turnover for each division. 2.25, 1.25 and 2.74
2. Compute the return on sales for each division. 0.09777, 0.12 and 0.10
3. Compute the return on investment for each division. 0.22, 0.15 and 0.274

Problem 4 (adapted)
The following data pertain to Jumar Manufacturing:
Interest rate on debt capital 9%
Cost of equity capital 12%
Before-tax operating income P35M
Market value of debt capital P60M
Market value of equity capital P120M
Total assets P150M
Income tax rate 30%
Total current liabilities P15M
Required:
1. Compute the weighted-average cost of capital. 10.1%
2. Compute the economic value added. P10.865M

Activity 2. Now, let’s apply concepts on allocation of service cost.

Problem 1 (adapted)
Technicolor Company has two service departments (Black and White) and two producing departments (Red and Yellow).
Data provided are as follows:
Service Depts. Operating Depts.
Black White Red Yellow
Direct Costs P150 P300 P5,000 P6,000
Service Performed
by Dept. Black 40% 40% 20%
by Dept. White 20% 70% 10%
Required:
If Technicolor Company uses the direct method to allocate service costs,
1. What amount of the service cost is allocated to Department Yellow? 87.50
2. What is the total cost for Department Red? 5,362.50

If Technicolor Company uses the step-down method to allocate service costs,

3. What amount of the service cost is allocated to Department Red? 375
4. What is the total cost for Department Yellow? 6,075

If Technicolor Company uses the reciprocal method to allocate service costs,

5. What amount of the service cost is allocated to Department Yellow? 85
6. What is the total cost for Department Red? 5,365

Problem 2 (adapted)
YMP Tool has three service departments that support the production area. Outlined below is the estimated overhead by
department for the upcoming year.

Service Departments Estimated Overhead Number of Employees

Receiving P25,000 2
Repair 35,000 2
Tool 10,000 1
Production Departments
Assembly 25
Bottling 12

The Repair Department supports the greatest number of departments, followed by the Tool Department. Overhead cost
is allocated to departments based upon the number of employees.
Required:
a. Using the direct method of allocation, how much of the Repair Department’s overhead will be allocated to the
Tool Department? -0- since repair department is a service dept and service cost is allocated only to operating
(production) departments
b. Using the step-down method of allocation, the allocation from the Repair Department’s overhead to the Tool
Department would be __________. P875

MYRA T. MIRAFLORES, CPA Page 3 of 4

 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Problem 3 (adapted)
A hospital has a P100,000 expected utility bill this year. The janitorial, accounting and orderlies departments are service
functions to the operating, hospital rooms and laboratories departments.

The floor space assigned to each department is

Department Square Footage

Janitorial 1,000
Accounting 2,000
Orderlies 7,000
Operating 4,000
Hospital Rooms 30,000
Laboratories 6,000
Required:
How much of the P100,000 utility bill will eventually become the hospital rooms department total costs, assuming a direct
allocation based on square footage is used? P75,000

Activity 3. Now, let’s apply concepts on transfer pricing.

Problem 1: Transfer Pricing

The Pantalon Company has two divisions, Production and Marketing. Production manufactures pants, which it sells to both
the Marketing Division and to the outside market under a different brand name. Marketing operates numerous pants stores,
and it sells both Pantalon pants and other brands. The following facts also pertain to Pantalon:
▪ Sales price to retailers if sold by Production: P380 per pair
▪ Variable Cost to produce: P190 per pair
▪ Fixed Costs: P2,000,000 per month
▪ Production is operating far below its capacity.
▪ Sales price to customers if sold by Marketing: P500 per pair
▪ Variable marketing costs: 5% of sales price

Marketing has decided to reduce the sales price of Pantalon pants. The company’s variable manufacturing and marketing
costs are differential to this decision, whereas fixed manufacturing and marketing costs are not.
Required:
a. What is the minimum price that can be charged for the pants and still cover differential manufacturing and marketing
costs? P200 X = 190 + .05X
b. What is the appropriate transfer price for this decision? P190 VC: production is operating below capacity
c. What if the transfer price were set at P380? What effect would this have on the minimum price set by the marketing
manager? P400 X = 380 + .05X
d. How would you answer questions a and b if the Production Division had been operating at full capacity?
a. P400 X = 380 + .05X
b. P380 Selling Price used by Production

MYRA T. MIRAFLORES, CPA Page 4 of 4