C.2. Responsibility Centers

The least complex segment or area of responsibility for which costs are allocated is
a(n):
CalculatorTime Value Tables

A. Profit center.
B. Investment center.
C. Contribution center.
D. Cost center.
Explanation
Choice "D" is correct. A responsibility center is any part, segment, or subunit of an

organization. A segment may be a division, a product line, a geographical area, or any
other meaningful unit. Companies will have different segments based on their activities.
The four primary types of responsibility centers are cost centers, revenue centers, profit
centers, and investment centers. A cost center, which does not generate any revenue,
is responsible only for the incurrence of costs. A revenue center is only responsible for
the revenue it generates and is not accountable for costs. A profit center is a
department responsible for both revenues and expenses but is not responsible for
providing a return on the invested capital. An investment center is responsible for profit
(revenues and costs) and for providing a return on the capital that has been invested by
the larger organization to which the investment center belongs and is the most complex
segment or area of responsibility. A contribution center, while not a primary type of
center, is responsible for revenue and direct (variable) costs.
Of the choices given, the cost center is the only one that is only responsible for one
area: costs. Each of the other centers has responsibility for revenues and at least some
element of cost. The cost center is therefore the least complex.
Choice "A" is incorrect. A profit center is responsible for revenues and expenses.
Because a profit center is responsible for both costs and revenues, the manager of a
profit center can be evaluated on both costs and revenues generated by the profit
center. A profit center is more complex than a cost center.
Choice "B" is incorrect. An investment center is responsible for profit (revenues and
costs) and for providing a return on the capital that has been invested by the larger
organization to which the investment center belongs. An investment center is similar to
a complete business by itself because the investment center is responsible for a return
on investment. An investment center is more complex than a cost center and a profit
center.
Choice "C" is incorrect. A contribution center is responsible for revenue and direct costs.
A contribution center is more complex than a cost center.
Strategic Business Units (SBUs) are classified into different types based on the
responsibility levels assigned to their managers. Which SBU has the least amount of
responsibility?

A. Cost SBU.
B. Revenue SBU.
C. Profit SBU.
D. Investment SBU.
Explanation
Choice "A" is correct. Managers in a cost SBU only have responsibility for one
dimension of financial performance and it is one that they control entirely, the level of
costs incurred.
Choice "B" is incorrect. Revenue SBUs represent a greater responsibility than cost
SBUs. Managers of a revenue SBU only have responsibility for one dimension of
financial performance, but revenue generation is not under the control of the managers.
Clearly the uncertainty associated with generating sales increases the risk and difficulty
associated with the manager's responsibility.
Choice "C" is incorrect. Profit SBUs represent a greater responsibility than either cost or
revenue SBUs. Profit SBUs require the manager to maintain control of revenues, and
costs AND the relationship between the two.
Choice "D" is incorrect. Investment SBUs represent the organizational segment with the
highest level of responsibility. Managers not only consider cost, revenues and their
relationship, but also the relationship between profits generated and assets invested.
Responsibility accounting defines an operating center that is responsible for revenue
and costs as a(n):

A. Profit center.
B. Revenue center.
C. Operating unit.
D. Investment center.
Explanation
Choice "A" is correct. A profit center is responsible for revenue and costs.
Choice "B" is incorrect. A revenue center is responsible for revenue only.
Choice "C" is incorrect. An operating unit is typically a division, which is not precisely
defined.
Choice "D" is incorrect. An investment center is responsible for revenues, expenses,

and invested capital.
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.
Explanation
Choice "C" is correct. Responsibility for costs, and the authority to do something about
them, are necessary for a successful responsibility accounting system.
Choice "A" is incorrect. Allocation of variable costs is easy; allocation of other

controllable costs is harder.
Choice "B" is incorrect. All costs are not controllable at one level.
Choice "D" is incorrect. All costs, in the long run, are variable, and controllable at some
level.
The manager for a profit center is responsible for generating profits:

A. And making investments but not controlling costs.
B. And controlling costs but not making investments.
C. And controlling costs and making investments.
D. But not controlling costs or making investments.
Explanation
Choice "B" is correct. A manager for a profit center is responsible for generating profits
and controlling costs, but usually has no control over making investments.
Choice "A" is incorrect. The manager for a profit center is responsible for generating
profits and controlling costs but not for making investments.
Choice "C" is incorrect. The manager for a profit center is responsible for generating
Choice "D" is incorrect. The manager for a profit center is responsible for generating
Characteristics of a responsibility accounting system include all of the
following except that:

A. Cost centers are responsible for revenues as well as common costs.
B. Responsibility for performance according to budget must be linked to the appropriate
authority.
C. Each level of management is responsible for his or her department's operations and
employees.
D. The system should encourage employee involvement and participation.
Explanation
Choice "A" is correct. A responsibility accounting system is a formal financial and

nonfinancial information communication system used to control operations and evaluate
performance. A responsibility accounting system is based on responsibility centers,
where activities are under managers' control. A cost center is a responsibility center
whose manager is responsible for costs but not for revenues. In addition, common costs
should not be charged to a cost center, but allocated among all centers involved.
Choice "B" is incorrect. Responsibility for performance according to budget must be

linked to the appropriate authority is a characteristic of a responsibility accounting
system.
Choice "C" is incorrect. Each level of management is responsible for his or

her department's operations and employees is a characteristic of a responsibility
accounting system.
Choice "D" is incorrect. The system should encourage employee involvement and
participation is a characteristic of a responsibility accounting system.
Which one of the following best identifies a profit center?

A. The production operations department of a small job‐order machine shop company
B. A new car sales division for a large local auto agency
C. A large toy company
D. The information technology department of a large consumer products company
Explanation
Choice "B" is correct. A profit center is a responsibility center whose manager is

responsible for revenues as well as costs. Profit is used to measure performance of a
new car sales division of a local auto agency, which best identifies a profit center
because it has its own costs and revenues.
Choice "A" is incorrect. The production operations department of a small job‐order

machine shop company does not best identify a profit center.
Choice "C" is incorrect. A large toy company best identifies an investment center, as
it will be responsible not only for generating profits but for generating profits on assets
and investments.
Choice "D" is incorrect. The information technology department of a large consumer

products company does not best identify a profit center.
Which of the following usually makes a manager resposible for all financial business
decisions?

A. Investment center
B. Profit center
C. Revenue center
D. Cost center
Explanation
Choice "A" is correct. The investment center gives its manager control over that center's
investments, costs, and revenues. The other types listed have less autonomy than an
investment center.
Choice "B" is incorrect. Profit center does not make a manager responsible for all
financial business decisions.
Choice "C" is incorrect. Revenue center does not make a manager responsible for all
Choice "D" is incorrect. Cost center does not make a manager responsible for all
Which is not an example of responsibility accounting?

A. Cost center.
B. Profit center.
C. Product center.
Explanation
Choice "C" is correct. Product center does not refer to any responsibility or decision
center.
Choice "A" is incorrect. Cost centers are responsible for costs only.
Choice "B" is incorrect. Profit centers are responsible for revenues and expenses.
Choice "D" is incorrect. Investment centers are responsible for revenues, expenses and
invested capital.
Fairmount, Inc. 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. Transfer price accounting.
D. Contribution accounting.
Explanation
Choice "A" is correct. Responsibility accounting is a system of accounting that

recognizes various responsibility or decision centers throughout an organization and
reflects the plans and actions of each of these centers by assigning particular revenues
and costs to the one having the responsibility for making decisions about these
revenues and costs.
Choice "B" is incorrect. This term is not defined.
Choice "C" is incorrect. Transfer pricing deals with prices charged by one business
segment to another within a company.
Choice "D" is incorrect. Contribution accounting measures performance based on the

contribution of a business segment.
A companyʹs production manager is accountable for controlling costs while
manufacturing quality products. The manager also provides recommendations for
equipment improvements and replacements. In this market, customers are very
sensitive to the productʹs quality. What type of responsibility center is the production
manager in charge of?

A. Cost center
B. Investment center
C. Profit center
D. Revenue center
Explanation
Choice "A" is correct. Responsibility accounting is a system that assigns revenue, costs,
and/or capital to units of an enterprise (also known as a responsibility centers). The
different types of responsibility centers include cost centers, revenue centers, profit
centers, and investment centers. A managerʹs performance evaluation is based on the
type of center the manager operates and how effectively the manager meets the goals
of that center.
In a cost center, the manager is only held accountable for controlling costs. The cost
center manager is not accountable for revenues, profits, or return on investment.
Choice "B" is incorrect. Investment centers are the highest level of responsibility
accounting. Managers are held accountable for the profit the investment centers earn
relative to the cost of the investment in assets.
Choice "C" is incorrect. In a profit center, the manager is held accountable for the
difference between revenues and expenses but is not responsible for the cost of
investment in assets.
Choice "D" is incorrect. A revenue center focuses management control solely on the
revenue earned by the center.
Strategic Business Units (SBUs) are classified into different types based on the
responsibility levels assigned to their managers. Each of the following items are reasons
for classifying Strategic Business Units as cost, revenue, profit, or
investment, except to:

A. Promote goal congruence.
B. Communicate segment goals to managers for improved operational and financial control.
C. Highlight different responsibility levels among managers in highly centralized organizations.
D. Isolate financial measurement for segment performance.
Explanation
Choice "C" is correct. Strategic Business Units are established in a decentralized

environment not a centralized environment. Highlighting different responsibility levels in
centralized environments is not a reason for using cost, revenue, profit and investment
SBUs.
Choice "A" is incorrect. Goal congruence is a valid reason for SBU classification.
Choice "B" is incorrect. Improved operational and financial control is a valid reason for
classification of SBUs by type.
Choice "D" is incorrect. Isolating the relevant measure of financial performance is

appropriate to SBU classification.
Elmhurst Corporation is considering changes to its responsibility accounting system.
Which of the following statements is/are correct for a responsibility accounting system?
I. In a cost SBU, managers are responsible for controlling costs but not revenue.
II. The idea behind responsibility accounting is that a manager should be held responsible for
those items, and only those items, that the manager can actually control to a significant
extent.
III. To be effective, a good responsibility accounting system must provide for both planning
and control. Planning without control and control without planning is not effective.
IV. Common costs that are allocated to a SBU are normally controllable by the SBU's
management.
A. I and II only are correct.
B. II and III only are correct.
C. I, II, and III are correct.
D. I, II, and IV are correct.
Explanation
Choice "C" is correct.
In this question, they want to know which of a series of statements is/are correct for a
responsibility accounting system. "None of the above" is not an available option, and
neither is "All of the above."
Statement I says that, in a cost SBU, managers are responsible for controlling costs but
not revenue. Statement I is correct.
Statement II says that the idea behind responsibility accounting is that a manager
should be held responsible for those items, and only those items, that the manager can
actually control to a significant extent. Statement II is correct.
Statement III says that, to be effective, a good responsibility accounting system must
provide for both planning and control. Planning without control and control without
planning is not effective. Statement III is correct.
Statement IV says that common costs that are allocated to a SBU are normally
controllable by the SBU's management. Common costs that are allocated are
normally not controllable by an SBU's management. Statement IV is incorrect.
The budgeting process which uses management by objectives and input from individual
managers is an example of the application of:

A. Flexible budgeting.
B. Human resource management.
C. Responsibility accounting.
D. Capital budgeting.
Explanation
Choice "C" is correct. Management by objectives improves the performance of an

organization by defining objectives agreeable to both management and employees.
Responsibility accounting is the process of identifying and classifying revenues and
expenses goals according to those that are controlled by the manager and those that
are not controlled by the manager. Responsibility accounting uses management by
objectives (MBO) and input from the manager being evaluated.
The budgeting process, which uses management by objectives and input from individual
managers, is an example of the application of responsibility accounting. Responsibility
accounting allows departments and managers to be evaluated based on the revenue
and expenses for which the departments and managers are responsible.
Choice "A" is incorrect. A flexible budgeting system is one that is able to adjust (or flex)
to accommodate changes in the activity level of production. A flexible budget may be
used to analyze the company performance at either an overall consolidated level or a
departmental level. A flexible budgeting system is not an application of management by
objectives.
Choice "B" is incorrect. Human resource management is a broad term, includes human
resource audits, human resource plans, and human resource training. This option is a
distractor.
Choice "D" is incorrect. Capital budgets are budgets for long-lived assets and are not an
application of management by objectives.
Company management wishes to develop a reporting system that will reflect
management's desire to decentralize decision-making activities. Management has
examined a system that will show each manager's budgeted costs, actual costs, and
variances between budget costs and actual costs. The type of system which
management is developing is a:

A. Flexible budgeting system.
B. Static budgeting system.
C. Responsibility accounting system.
D. Cost accounting system.
Explanation
Choice "C" is correct. Responsibility accounting uses management by objectives

("MBO") and input from the manager being evaluated. Responsibility accounting is the
process of identifying and classifying revenues and expenses according to those that
are controlled by the manager and those that are not controlled by the manager. A
responsibility accounting system is one that measures the plans and actions of each
responsibility center.
The type of system this company is developing is a responsibility accounting system

because each manager is responsible for her or his budgeted costs, actual costs, and
variances between budgeted costs and actual costs.
Choice "A" is incorrect. A flexible budgeting system is one that is able to adjust (or flex)
to accommodate changes in production activity levels. The type of system the company
is developing is not a flexible budgeting system.
Choice "B" is incorrect. A static budget is one that is designed for only one volume of
production. The type of system the company is developing is not a static budgeting
system.
Choice "D" is incorrect. A cost accounting system is a comprehensive term for the
overall cost accounting function of a firm.
The Stonebrook Company uses a performance reporting system that reflects the
company's decentralization of decision making. The departmental performance reports
show actual costs and budgeted costs incurred during the period. Any variances from
the budget are assigned to the individual department manager who controls the costs.
Stonebrook is using a type of system called:

A. Transfer-pricing accounting.
B. Flexible budgeting.
C. Responsibility accounting.
D. Activity-based budgeting.
Explanation
Choice "C" is correct. Responsibility accounting is a system of accounting that

recognizes various responsibility or decision centers throughout an organization.
expenses according to those that are controlled by the manager and those that are not
controlled by the manager.
The company's accounting system meets the criteria for responsibility accounting as
there is decentralized decision making and any variances from the budget are assigned
to the individual department manager who controls the costs.
Choice "A" is incorrect. Transfer pricing is the price charged by one segment of the
company to another segment of the same company. The system described in this
question does not determine the price to be charged by one segment to another and is
not a transfer-pricing system.
Choice "B" is incorrect. Flexible budgeting is a system of budgeting using variable

components so that the budget may be adjusted to actual volumes (production levels).
The system described in this question is not a flexible budgeting system.
Choice "D" is incorrect. Activity-based budgeting is a budgeting system using activities

as the fundamental cost object. The system described in this question is responsibility
accounting because these variances are assigned to the individual/department who is
responsible for the variance.
Digital Tech 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, then 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. Program budgeting.
Explanation
Choice "A" is correct. Responsibility accounting is a system of accounting that

recognizes various responsibility or decision centers throughout an organization.
expenses according to those that are controlled by the manager and those that are not
controlled by the manager.
The company uses an accounting system that charges costs to the manager who has
the authority to make decisions incurring the costs. This accounting system is a
responsibility accounting system because the costs are charged to the manager who
decides to incur the cost.
Choice "B" is incorrect. Functional accounting gathers costs by function. Functional

accounting may or may not charge costs to the manager responsible. The current
accounting system is not a functional accounting system.
Choice "C" is incorrect. Transfer-pricing is the price charged by one segment of the
company to another segment of the same company. The system described in this
question does not determine the price to be charged by one segment to another and is
not a transfer-pricing system.
Choice "D" is incorrect. Program budgeting is a system of budgeting that treats a

program as an autonomous business unit. This option is a distractor.
Fox Enterprises' income statement for profit center store No. 2 for July includes:
Contribution margin $90,000

Manager's salary $50,000
Depreciation on facilities $10,500
Allocated corporate expenses $9,500
The profit center's manager would most likely be able to control which of the following:

A. $140,000.
B. $150,500.
C. $160,000.
D. $90,000.
Explanation
Choice "D" is correct. Profit centers are responsible for both costs and revenues.
Because profit is a function of both revenue and costs, a manager for a profit center is
responsible for generating profits. The contribution margin is the amount that
contributed toward fixed expenses and profits. Therefore, the manager can only have
control over the contribution margin (Sales − Variable costs). The other items included
are not under the manager's control.
Choice "A" is incorrect. The profit center's manager would not be able to control his or
her own salary.
Choice "B" is incorrect. The profit center's manager would not be able to control his or
her own salary or depreciation on facilities.
Choice "C" is incorrect. The profit center's manager would not be able to control his or
her own salary, depreciation on facilities, or allocated corporate expenses.
A company's sales department is responsible for generating income but has few
controllable costs. Conversely, the production department manager is responsible for
controlling costs but not setting prices. Which of the following places each department in
the best responsibility center based on the managers' responsibilities?

A. Sales: cost center; production: profit center.
B. Sales: profit center; production: cost center.
C. Sales: cost center; production: revenue center.
D. Sales: revenue center; production: cost center.
Explanation
Choice "D" is correct. A revenue center is often used in place of a profit center when the
manager is not expected to control costs and thus is concerned only with revenue. The
production facility cannot directly sell or generate profits, so it is treated as a cost center
because it is responsible only for costs.
Choice "A" is incorrect. "Sales: cost center; production: profit center" does not place
each department in the best responsibility center based on the managers'
responsibilities.
Choice "B" is incorrect. "Sales: profit center; production: cost center" does not place
responsibilities.
Choice "C" is incorrect. "Sales: cost center; production: revenue center" does not place
responsibilities.
Decentralized 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.
Explanation
Choice "D" is correct. An investment center is most like an independent business.

Investment centers are responsible for revenues, expenses, and invested capital.
Choice "A" is incorrect. A revenue center is responsible for revenues only.
Choice "B" is incorrect. A profit center is responsible for revenues and expenses, but
not invested capital.
Choice "C" is incorrect. A cost center is responsible for costs only.

Sara Bellows, manager of the telecommunication sales team, has the following
department budget:
Target billings—long distance $350,000

Target billings—phone card 75,000
Target billings—toll-free 265,000
Her responsibility center is best described as a:

A. Cost center.
B. Revenue center.
C. Profit center.
Explanation
Choice "B" is correct. Responsibility accounting requires dividing a company into

strategic business units (SBU), called responsibility centers, to facilitate performance
measurement and management. A revenue center is a department whose manager is
responsible for generating revenues and is accountable for the revenue his/her
department generates.
Choice "A" is incorrect. Cost centers are centers whose managers are responsible and
accountable for costs incurred during a period. Examples include maintenance
departments where the person in charge must keep an eye on the costs incurred while
not being responsible for revenues or profits of the entity. The manager of the
telecommunications team mentioned in the question is responsible for revenues, not
costs. The performance of the telecommunication manager is based on achieving the
targeted billing volume or sales volume.
Choice "C" is incorrect. Profit centers are departments whose managers are responsible
and accountable for the amount of profits they generate compared to budgeted
amounts. A manager responsible for product "X" for example, is held accountable for all
revenues generated and all costs incurred, therefore, the profits of his/her division. The
manager of the telecommunications team mentioned in the question is responsible for
revenues, not profits.
Choice "D" is incorrect. Investment centers are evaluated by owners who had invested
their money. They evaluate based on the return on investment. That is, profits
compared to amounts invested. A newly created branch of the company is an
investment center. The manager of the telecommunications team mentioned in the
question is responsible for revenues, not return on investment.
A firm that uses reporting segments shows a bottom line for each segment that includes
traceable fixed costs but not common fixed costs. Which of the following is this bottom
line called?

A. Controllable costs
B. Operating income
C. Net income
D. Segment margin
Explanation
Choice "D" is correct. The segment margin of a segment is its contribution margin less
all traceable fixed costs for the segment.
Choice "A" is incorrect. The bottom line that includes traceable fixed costs but not
common fixed costs is not called controllable costs.
Choice "B" is incorrect. The bottom line that includes traceable fixed costs but not
common fixed costs is not called operating income.
Choice "C" is incorrect. The bottom line that includes traceable fixed costs but not
common fixed costs is not called net income.
The production manager of the Super T-shirt Co. is responsible for the activity of her
department and the costs associated with production. Super T-shirt adheres to a
responsibility center budget process, and the manager's performance is measured by
how well she performs to budget. Recently, the dark horse team won the local college
basketball tournament. As a result, the sales department, which operates as a profit
center, received an order for 10,000 t-shirts, but only if they could be delivered in three
days. The production manager said she could meet the schedule, but only by incurring
overtime pay that would cause her to be over budget for hourly wages paid. What would
be the best course of action for the sales department and the production manager to
undertake in this case?

A. Accept the order and charge the overtime to the production manager's budget.
B. Refuse the overtime and produce only what the production department is capable of while
staying within the budget.
C. Accept the order and ignore the effect on the production department budget when conducting
the performance review.
D. Charge the overtime to the sales department's budget.
Explanation
Choice "D" is correct. A manager is responsible for all activities that fall under his/her
control. A production manager is therefore responsible for costs associated with the
production department that he/she can control. Any costs that are incurred because of
another manager's decision should not be charged to the production department
manager's performance report because the production department does not control
them. All costs within a company are controllable by someone and should be reported
on the performance report of that manager.
Because this sales department operates as a profit center and accepts a rush order, it
should report the extra cost of the rush order. The overtime required should not be
charged to the production department because the manager may reject the order as not
beneficial to the department goals. The key issue is to ask the question, "Who made the
decision?" In this question, it is the sales manager who made the decision to accept the
rush order, therefore, she is the person who controls the costs associated with this
decision.
Choice "A" is incorrect. The production manager did not accept the order and may even
reject the order based on the negative effect it will reflect on his performance report.
The sales manager made the decision to accept the rush order; therefore, the additional
costs of the rush order are controllable by the sales manager, not the production
manager.
Choice "B" is incorrect. The rush order may be of value to the company as a whole. The
incremental revenues resulting from accepting this order may be higher than the
incremental costs of accepting the rush order, and would make this choice incorrect.
XYZ Co. has two business units selling two different products. Business unit A produces
and sells sprinkler heads and requires customers to pay for their purchase prior to the
production of the sprinkler heads. Business unit A recognizes revenue at the time of
payment. Business unit B produces and sells household faucets and allows customers
to pay for the faucets after they are delivered to the customer. Business unit B
recognizes revenue when the customer receives the product. What is the likely effect
that will occur by management in measuring and comparing the performance of each
business unit?

A. Business unit A will have overstated revenue in comparison to business unit B.
B. Business unit A and business unit B can be effectively compared.
C. Business unit A will have understated revenue in comparison to business unit B.
D. Management cannot effectively compare the business units.
Explanation
Choice "D" is correct. In comparing business units that have different revenue
recognition policies, it is necessary for executive management to understand that
business units will report results separately based on their individual revenue and
expense recognition policies and, as such, the reports cannot be compared without
reconciliation that negates the impact of the different accounting policies.
Choice "A" is incorrect. The likely effect that will occur by management in measuring
and comparing the performance of each business unit is not that business unit A will
have overstated revenue in comparison to business unit B.
Choice "B" is incorrect. The likely effect that will occur by management in measuring
and comparing the performance of each business unit is not that business unit A and
business unit B can be effectively compared.
Choice "C" is incorrect. The likely effect that will occur by management in measuring
and comparing the performance of each business unit is not that business unit A will
have understated revenue in comparison to business unit B.
Which of the following statements regarding divisionalization is true?

A. It is important to apportion indirect overheads properly to divisions to provide relevant
information on divisional performance.
B. Divisional reporting focuses on the net profit each division makes after apportionment of
indirect overheads
C. Where an organization is working within the constraints of scarce resources, management will
evaluate each division's performance per unit of scarce resources. This evaluation method will
allow a ranking to occur and may result in the elimination of certain business units in favor of
growth in other divisions.
D. It is vital that there be a low level of goal congruence in an organization if divisionalization is
to be successful.
Explanation
Choice "C" is correct. Companies can be divided into divisions in accordance with the
products or services. A divisional structure will lead to decentralization of the decision-
making process, and divisional mangers may have the freedom to set selling prices,
choose suppliers, make product mix, and implement output decisions. Divisionalization
can improve the quality of decisions made because divisional managers may know local
conditions better, and decisions may be made more quickly. However, divisionalization
may lead to different divisions not all working together toward common, company-wide
goals.
Where an organization is working within the constraints of scarce resources,

divisionalization will allow the company to evaluate each division's performance per unit
of scarce resource. This evaluation method will allow a ranking to occur and may result
in the elimination of certain business units in favor of growth in other divisions.
Choice "A" is incorrect. It is not important to apportion indirect overheads properly to

divisions to provide relevant information on divisional performance. Indirect overheads
not controllable at divisional levels are not apportioned when senior management is
assessing controllable divisional performance.
Choice "B" is incorrect. Divisional reporting focuses on the contribution margin, not the
net profit, each division makes after apportionment of indirect overheads. Net profit is
not the key focus when senior management is comparing divisions; rather, contribution
margin is the key focus.
Choice "D" is incorrect. It is vital that there is a high, not low, level of goal congruence in
an organization if divisionalization is to be successful.
All of the following are true of a contribution approach to an income statement except:

A. The contribution approach helps decide whether to make or buy a good.
B. The contribution approach helps analyze product lines.
C. Managers can view their cost by function.
D. The contribution approach could be used to evaluate a profit center manager's performance
regarding fixed and variable controllable costs.
Explanation
Choice "C" is correct. Under the contribution approach, managers can view costs by
their behavior instead of by function, such as sales, administration, or production.
Choice "A" is incorrect. "The contribution approach helps decide whether to make or
buy a good" is a true statement regarding a contribution approach to an income
statement.
Choice "B" is incorrect. "The contribution approach helps analyze product lines" is a true
statement regarding a contribution approach to an income statement.
Choice "D" is incorrect. "The contribution approach could be used to evaluate a profit
center manager's performance regarding fixed and variable controllable costs" is a true
statement regarding a contribution approach to an income statement.
When using a contribution margin format for internal reporting purposes, the major
distinction between segment manager performance and segment performance is:

A. Direct variable cost of selling the product.
B. Direct fixed cost controllable by others.
C. Unallocated fixed cost.
D. Direct fixed cost controllable by the segment manager.
Explanation
Choice "B" is correct. The segment manager's performance is measured by the

controllable segment margin. Segment performance is measured by deducting fixed
costs, which are controllable by others from the controllable segment margin.
Controllable segment margin = Contribution margin − Fixed costs controllable by

segment manager
Contribution margin = Sales − All variable costs
Choice "A" is incorrect. When using a contribution margin format for internal reporting
purposes, the major distinction between segment manager performance and segment
performance is not direct variable cost of selling the product.
Choice "C" is incorrect. When using a contribution margin format for internal reporting
performance is not unallocated fixed cost.
Choice "D" is incorrect. When using a contribution margin format for internal reporting
performance is not direct fixed cost controllable by the segment manager.
Which of the following business unit profitability measures would allow a manager to be
evaluated based on whether or not the business unit can be profitable even when
common costs are deducted from the unit's profits?

A. Contribution margin
B. Indirect profit
C. Controllable profit
D. Income before taxes
Explanation
Choice "D" is correct. The measure of income before taxes deducts all fixed and
variable costs from a business unit's profits except taxes. This measure forces a
manager to be realistic about the level of profitability needed to sustain the unit.
Choice "A" is incorrect. Contribution margin does not allow a manager to be evaluated
based on whether or not the business unit can be profitable even when common costs
are deducted from the unit's profits.
Choice "B" is incorrect. Indirect profit does not allow a manager to be evaluated based
on whether or not the business unit can be profitable even when common costs are
deducted from the unit's profits.
Choice "C" is incorrect. Controllable profit does not allow a manager to be evaluated
based on whether or not the business unit can be profitable even when common costs
are deducted from the unit's profits.
Consider the following for Gridiron Sporting Goods Manufacturing Co. for the prior year:
 The company produced 1,500 units and sold 1,300 units, both as budgeted.
 There were no beginning or ending work‐in‐process inventories and no beginning
finished goods inventory.
 Budgeted and actual fixed costs were equal, all variable manufacturing costs
were affected by production volume only, and all variable selling costs were
affected by sales volume only.
 Budgeted per-unit revenues and costs were as follows:
Per Unit
Sales price $50
Direct materials $15
Direct labor $10
Other variable manufacturing costs $5
Fixed manufacturing costs $3
Variable selling costs $6
Fixed selling costs $2
Fixed administrative costs $1
The contribution margin earned by Gridiron Sporting Goods Manufacturing Co. for the
prior year was:

A. $32,500.
B. $26,000.
C. $18,200.
D. $10,400.
Explanation
Choice "C" is correct. The contribution margin equals total sales minus all variable costs
expensed. Provided that there was no work‐in‐process and no beginning finished
goods, the contribution margin is $18,200 (1,300 units × ($50 − $15 − $10 − $5 − $ 6).
Fixed costs are not included in the computation of contribution margin.
Choice "A" is incorrect. This answer did not consider other variable manufacturing costs
or variable selling costs in the calculation of contribution margin.
The receipt of raw materials for a company's production of certain products and the
shipping of the completed goods to its customers is under the control of the warehouse
supervisor. The warehouse supervisor's time is spent approximately 70 percent on
receiving activities and 30 percent on shipping activities. Separate staffs of employees
are employed for the receiving and shipping functions. The labor‐related costs for the
warehousing function are:
Warehouse supervisor's salary $ 65,000

Receiving clerks' wages $ 85,000
Shipping clerks' wages $ 67,000
Employee benefit costs (40% of salary and wage costs) $ 86,800
The company utilizes a responsibility accounting system for reporting the performance
of business segments. All costs on the report are classified as period or product costs.
The total labor‐related costs attributable to product costs under the control of the
warehouse supervisor would appear on the responsibility accounting performance
report as:

A. $152,000.
B. $119,000.
C. $238,800.
D. $303,800.
Explanation
Choice "B" is correct. The responsibility accounting report lists only the costs over which
the warehousing supervisor has control. The supervisor's salary should be excluded
from the report as the salary is controlled by a superior. Only the product costs should
be considered in the responsibility accounting report. Therefore, the shipping clerks'
wages are excluded as well, as they are considered a selling expense (period cost).
The only product cost included is the receiving clerks' wages of $85,000 and the fringe
benefit associated with the receiving clerks of $34,000 ($85,000 × 40%) for a total of
$119,000.
Choice "A" is incorrect. The shipping clerks' wages are excluded as they are considered
a selling expense. Additionally, this answer did not consider employee benefit costs.
Choice "C" is incorrect. Shipping clerks' wages are excluded as they are considered a
selling expense. Only a portion of the employee benefit costs would be included.
Misallocation of common costs may cause divisional performance distortions when:

A. Common costs as a percentage of total costs is relatively low.
B. Supporting activities are relatively homogeneous across different product lines.
C. Supporting activities are relatively heterogeneous across different product lines.
D. The company's generic competitive strategy is differentiation.
Explanation
Choice “C” is correct. Common costs are shared by more than one responsibility center.
Common costs, although not controllable by the manager, must be factored in the price
charged to customers. If common costs are not allocated, the company may be
exposed to the risk of not covering all costs of the organization when setting prices for
its products.
Activities that are relatively heterogeneous across product lines indicate that the various
lines likely use differing amounts of these supporting activities. A misallocation may
cause some product lines to receive too much cost and others not enough cost, which
may distort divisional performance.
Choice “A” is incorrect. If common costs are relatively low compared with total costs, the
impact of misallocation will be somewhat insignificant.
Choice “B” is incorrect. If supporting activities are relatively homogeneous across

product lines, this indicates that the various lines will likely use similar amounts of these
supporting activities. A misallocation in this case will not be significant enough to cause
divisional performance distortions.
Choice “D” is incorrect. A company's competitive strategy is not related to the allocation
of common costs.
A principal motivation for the allocation of common costs is:

A. Inventory valuation.
B. Matching of costs and revenue.
C. Desire to show full cost of product or service.
D. All of the above are motivations.
Explanation
Choice "D" is correct. Common costs are costs of operating a business that cannot be
allocated on any cause-and-effect basis to any specific user or division. Examples of
common costs are the chief executive officer's salary, the costs of the financial reporting
function of the accounting department, and the costs of the budget department. These
examples are all administrative functions in the organization and their services cannot
be traced to specific products or departments in any meaningful way. If any one
segment of the business were to be discontinued, the common costs would continue.
Reasons to allocate the common costs of a firm to the individual centers include:
1. Proper valuation of inventory

2. Proper matching of revenue and expense
3. Desire to show the full cost of products to aid in pricing decisions
Even though each department may be covering its own individual allocated costs, if all
of the common costs are not allocated to the operating departments, the company risks
not covering all of its costs as a whole because the company does not have the
necessary information.
Choice "A" is incorrect. A principal motivation for the allocation of common costs
includes inventory valuation. Common costs cannot be traced to specific products or
departments in any meaningful way, but they must be included in inventory valuation in
order to recover common costs. This choice correctly considers inventory valuation as a
motivation but ignores the other two motivations explained above.
Choice "B" is incorrect. A principal motivation for the allocation of common costs
includes the proper matching of revenue and expense. If all of the common costs are
not allocated to the operating departments, the company risks not matching all of the
company's costs against revenue. This option ignores the other two motivations
explained above.
Choice "C" is incorrect. A principal motivation for the allocation of common costs is the
desire to cost products fully in order to aid in pricing decisions. If all of the common
costs are not allocated to the operating departments, the company risks not covering all
of its costs as the prices may not reflect the full cost of the product. This choice ignores
the other two motivations explained above.
An IT analyst of a U.S. hotel management company needs to travel to two subsidiary
hotels that are located in Los Angeles and Las Vegas. Separate round-trip airfares from
his home in Chicago to Los Angeles and Las Vegas are $600 and $500, respectively.
The IT analyst decides to combine those two trips into one trip (from Chicago to Los
Angeles to Las Vegas to Chicago) that costs $800. The company considers the Los
Angeles hotel as the primary organizational segment and allocates $600 of the IT
analyst's airfare to the Los Angeles hotel. The common cost allocation method used by
the hotel management company is the:

A. Stand-alone cost allocation method.
B. Incremental cost allocation method.
C. Volume-based cost allocation method.
D. Activity-based cost allocation method.
Explanation
Choice “B” is correct. When using the incremental cost allocation method, the primary
user is allocated costs based on the assumption that it is the only user that is benefitting
from an activity. The largest user is designated as the primary user.
Under the incremental cost allocation method, since Los Angeles is considered the
primary user, it receives costs equal to the amount that would be incurred if the trip
were only to Los Angeles, or $600.
Choice “A” is incorrect. The stand-alone method allocates costs based on usage. The
scenario does not indicate a usage factor such as the IT analyst's hours spent in each
hotel or any other usage factor.
Choice “C” is incorrect. Volume-based is not a common cost allocation method.
Choice “D” is incorrect. Activity-based is not a common cost allocation method.

Lawson Co. discloses segment financial information for its operating segments. The
following information is available for Year 1:
Operating Segments Sales Traceable Expenses Nontraceable Expenses

Segment A $ 600,000 $ 360,000
Segment B $ 800,000 $ 600,000
Segment C $ 400,000 $ 340,000
Total $1,800,000 $1,300,000 $300,000
Nontraceable expenses are allocated based on the ratio of a segment's income before
nontraceable expenses. The segment profit for Operating Segment B is
(approximately):

A. $80,000.
B. $66,667.
C. $61,538.
D. $200,000.
Explanation
Choice "A" is correct. Segment profit = Sales − Traceable expenses − Nontraceable

expenses
First, calculate income before nontraceable expenses for each segment:
 Segment A: $600,000 − $360,000 = $240,000

 Segment B: $800,000 − $600,000 = $200,000
 Segment C: $400,000 − $340,000 = $60,000
 Total income before nontraceable expenses is $500,000 ($240,000 + $200,000 +
$60,000)
Second, calculate the percentage of total income before nontraceable expenses for
each segment:
 Segment A: $240,000 ÷ $500,000 = 48%

 Segment B: $200,000 ÷ $500,000 = 40%
 Segment C: $60,000 ÷ $500,000 = 12%
A company has $80,000 in common costs, plus departments 1 and 2 have $40,000 and
$60,000 in individual costs, respectively. The segments share a fleet of vehicles (the
costs of which are included in common costs): department 1 uses the vehicles for five
months out of the year and department 2 uses the vehicles for the remaining seven
months. Using stand‐alone cost allocation, what is allocated to department 1?

A. $40,000
B. $80,000
C. $66,667
D. $33,333
Explanation
Choice "D" is correct. The stand‐alone cost allocation method allocates common costs,
so the individual costs are ignored. The common cost is allocated by months of use:
$80,000 × (5 ÷ 12) = $33,333.
Choice "A" is incorrect. Using stand‐alone cost allocation, $40,000 would not be
allocated to department 1.
Choice "B" is incorrect. Using stand‐alone cost allocation, $80,000 would not be
Choice "C" is incorrect. Using stand‐alone cost allocation, $66,667 would not be
Which one of the following allocation approaches will ensure that the production
departments do not underestimate their planned usage of service at the start of
the budget period as well as make the service departments cost efficient?

A. The use of actual rates and actual hours for both fixed and variable costs
B. Budgeted rates and standard hours allowed for output attained for variable costs, and budgeted
rates and capacity available for fixed costs
C. The use of rates and quantities based on long-term historical averages for both variable and
fixed costs
D. The use of a budgeted lump-sum amount based on estimates provided by the production
departments for both variable and fixed costs
Explanation
Choice "B" is correct. Cost allocation should be based on predetermined allocation rates
that are established before actual operations start, using standard hours and budgeted
rates so application rates are known before actual operations take place for better
planning and efficient production activity. Using a single-rate method of allocation for
both fixed and variable indirect costs is generally less accurate than using a dual-rate
method. In a dual-rate method, fixed costs are separated from variable costs. Each will
be accumulated in a different cost pool for better measurement and each cost pool is
allocated differently, keeping the cost behavior relationship intact.
Variable costs are allocated based on standard rates and standard hours allowed for
each unit produced while fixed costs are allocated based on the available capacity. This
choice is the best strategy for cost allocation since variable costs will continue to be
treated as variable in total while fixed costs will continue to be fixed in total regardless of
the changes in the level of activity. This dual-rate method of allocation is preferable. The
use of budgeted rates and standard hours ensures that all departments know what rates
will be charged and how many hours will be charged. This allows usage to be properly
planned and encourages service providers to be efficient.
Choice "A" is incorrect. Using actual rates and actual hours to allocate both fixed and
variable costs is not the preferable method for allocating costs. This method of
allocation heavily relies on a single-rate method of allocating indirect costs regardless of
the cost behavior. This method will result in higher variances and ignores the fact that
fixed costs do not change in total. Fixed costs allocated will be subject to larger
deviation and heavily depend on the actual number of hours used. Add to all of that the
fact that information about actual rates and actual hours is not available on a timely
basis for better planning.
Choice "C" is incorrect. Using long-term historical averages for both fixed and variable
cost allocation are not appropriate, especially because the history of a company does
not necessarily repeat itself. Standard rates and standard hours allowed are measures
A college has a central copying facility. The copying facility has two main users: the
business and the arts departments. The following data are assembled from the budget
prepared for the coming year:
Fixed costs per year $60,000

Variable cost per copy $0.05
Budgeted usage for the business department 120,000 copies
Budgeted usage for the arts department 240,000 copies
Actual usage for the business department 80,000 copies
Actual usage for the arts department 200,000 copies
The college allocates the fixed copying costs using the budgeted usage, while the
variable costs are allocated based on actual usage.
If the dual-rate allocation method is used, what amount of the copying facility costs will
be allocated to the arts department?

A. $40,000
B. $52,857
C. $52,000
D. $50,000
Explanation
Choice "D" is correct. Dual allocation is based on the separation of fixed and variable
costs accumulated into overhead cost pools, and then allocating the variable cost
according to utilization and the fixed costs according to capacity.
$50,000 will be allocated to the arts department as follows:
Fixed cost allocated based on budgeted copies
($60,000 ÷ 360,000) × 240,000 copies $40,000

Variable cost allocated based on actual usage
$0.05 × 200,000 copies $10,000

Total cost allocated to the arts department $50,000
Choice "A" is incorrect. $40,000 will be allocated to the arts department only if the fixed
cost is allocated equally to both users as follows:
Indirect overhead allocation can be treated in a variety of methods. Some methods
encourage managers to control costs while other methods do little to promote cost
awareness. Which of the following allocation methods do not encourage cost control?
I. Allocation based on sales.

II. Allocation based on usage of overhead.
III. Allocation to head office.
IV. Allocation based on full cost recovery.
A. I and II only.
B. II, III, and IV only.
C. I and III only.
D. I, III, and IV only.
Explanation
Choice "C" is correct. Indirect overhead costs are not traceable to a specific department
or business units. These costs are allocated to various units based on defined
parameters. Some methods of allocation encourage managers to control costs while
other methods do little to promote cost awareness. If an allocation method impacts
divisional performance, divisional managers become cost conscious and implement
cost controls.
Allocations based on sales do little to promote cost awareness because such

allocations are based on sales, which are not under control of manufacturing divisions.
Allocations to the head office do not encourage cost control by managers because
managers of divisions are not impacted by the costs incurred.
Choice "A" is incorrect. Allocations based on sales do not promote cost control.
Allocations based on usage of overhead will promote cost awareness, as the allocations
are based on usage and costs are associated with that usage.
Choice "B" is incorrect. Allocations based on usage of overhead and allocations based
on full cost recovery do encourage cost control, as explained above.
Choice "D" is incorrect. Allocations based on full cost recovery do encourage cost
control. Allocations based on sales and allocations to the head office do not encourage
cost control.
One method of addressing indirect overhead costs is to allocate these costs to business
units on the basis of sales value. Which of the following statements is not true of this
method of allocation?

A. It can be seen by managers as unfair in that high sales are penalized with high-cost
allocations.
B. It does not take account of a business units' varying usage of the activity that causes the
overhead cost.
C. It is a complicated method which can be difficult to understand.
D. Cost control is not promoted.
Explanation
Choice "C" is correct. Indirect overhead costs are not traceable to a specific department
or to business units. These costs are allocated to various units based on defined
parameters. One method of addressing indirect overhead costs is to allocate these
costs to business units on the basis of sales value. This method is a simple and
straightforward manner to allocate indirect cost but can be perceived by managers as
unfair in that high sales are penalized with high-cost allocations. Another limitation is
that allocations based on sales value do not consider a business units' varying usage of
the activity that causes the overhead cost. Allocations based on sales value do not
promote cost control.
The allocation of indirect costs to business units based on sales value is a simple, not a
complicated, method.
Choice "A" is incorrect. Managers can perceive allocations of overhead costs based on
sales as unfair because high sales are penalized with high-cost allocations.
Choice "B" is incorrect. Allocation of overhead costs based on sales does not take
account of a business units' varying usage of the activity that causes the overhead cost.
Choice "D" is incorrect. Allocation of overhead costs based on sales does not promote
cost control, as entire indirect overhead costs incurred are allocated regardless of the
amount of overhead costs incurred.
An organization 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 CEO salary allocated on the basis of net segment sales.

II. Corporate training 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 the four cost items, the item that would most logically be included in the segment
performance reports prepared on a responsibility accounting basis would be the:

A. Fixed computer facility costs.
B. Corporate administrative costs.
C. Training costs.
D. Variable computer operational costs.
Explanation
Choice "D" is correct. The variable computer costs should be included because the
segments are charged for actual usage, which is under their control. The standard rate
used is set at the beginning of the year and is known by the segment managers. The
efficiencies and inefficiencies of the computer department are not passed on to the
segments. Both procedures promote a degree of control by segments.
Choice "A" is incorrect. Fixed computer facility costs would not most logically be
included in the segment performance reports prepared on a responsibility accounting
basis.
Choice "B" is incorrect. Corporate administrative costs would not most logically be
included in the segment performance reports prepared on a responsibility accounting
basis.
Choice "C" is incorrect. Training costs would not most logically be included in the
segment performance reports prepared on a responsibility accounting basis.

C.2. Responsibility Centers

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

C.2. Responsibility Centers

Uploaded by

Copyright:

Available Formats

The least complex segment or area of responsibility for which costs are allocated is

CalculatorTime Value Tables

Choice "D" is correct. A responsibility center is any part, segment, or subunit of an

CalculatorTime Value Tables

CalculatorTime Value Tables

Choice "B" is incorrect. A revenue center is responsible for revenue only.

Choice "D" is incorrect. An investment center is responsible for revenues, expenses,

CalculatorTime Value Tables

Choice "A" is incorrect. Allocation of variable costs is easy; allocation of other

CalculatorTime Value Tables

CalculatorTime Value Tables

Choice "A" is correct. A responsibility accounting system is a formal financial and

Choice "B" is incorrect. Responsibility for performance according to budget must be

Choice "C" is incorrect. Each level of management is responsible for his or

CalculatorTime Value Tables

Choice "B" is correct. A profit center is a responsibility center whose manager is

Choice "A" is incorrect. The production operations department of a small job‐order

Choice "D" is incorrect. The information technology department of a large consumer

CalculatorTime Value Tables

CalculatorTime Value Tables

CalculatorTime Value Tables

Choice "A" is correct. Responsibility accounting is a system of accounting that

Choice "B" is incorrect. This term is not defined.

Choice "D" is incorrect. Contribution accounting measures performance based on the

CalculatorTime Value Tables

CalculatorTime Value Tables

Choice "C" is correct. Strategic Business Units are established in a decentralized

Choice "D" is incorrect. Isolating the relevant measure of financial performance is

Choice "C" is correct.

CalculatorTime Value Tables

Choice "C" is correct. Management by objectives improves the performance of an

CalculatorTime Value Tables

Choice "C" is correct. Responsibility accounting uses management by objectives

The type of system this company is developing is a responsibility accounting system

CalculatorTime Value Tables

Choice "C" is correct. Responsibility accounting is a system of accounting that

Choice "B" is incorrect. Flexible budgeting is a system of budgeting using variable

Choice "D" is incorrect. Activity-based budgeting is a budgeting system using activities

CalculatorTime Value Tables

Choice "A" is correct. Responsibility accounting is a system of accounting that

Choice "B" is incorrect. Functional accounting gathers costs by function. Functional

Choice "D" is incorrect. Program budgeting is a system of budgeting that treats a

Contribution margin $90,000

CalculatorTime Value Tables

CalculatorTime Value Tables

CalculatorTime Value Tables

Choice "D" is correct. An investment center is most like an independent business.

Choice "A" is incorrect. A revenue center is responsible for revenues only.

Choice "C" is incorrect. A cost center is responsible for costs only.

Target billings—long distance $350,000

Her responsibility center is best described as a:

CalculatorTime Value Tables

Choice "B" is correct. Responsibility accounting requires dividing a company into

CalculatorTime Value Tables

CalculatorTime Value Tables

CalculatorTime Value Tables

CalculatorTime Value Tables

Where an organization is working within the constraints of scarce resources,

Choice "A" is incorrect. It is not important to apportion indirect overheads properly to

CalculatorTime Value Tables

CalculatorTime Value Tables

Choice "B" is correct. The segment manager's performance is measured by the

Controllable segment margin = Contribution margin − Fixed costs controllable by