CMA Inter – P12 –Management Accounting –Responsibility Accounting

(A) Responsibility Accounting

▪ Responsibility accounting is the key management control tool in a decentralized organization.

▪ Responsibility accounting system facilitates decentralization by providing information about the

performance, efficiency, and effectiveness of organizational subunits and their managers.

▪ The term ‘responsibility accounting’ refers to the accounting process that reports how well managers

(of responsibility centers) have fulfilled their responsibility.

▪ It measures the plans (by budgets) and actions (by actual results) of each responsibility centre.

▪ Responsibility accounting systems are tailored to the organizational structure so that revenue and costs

are accumulated and reported by centers of responsibility within the organization.

▪ It operates on the premise that managers should be held responsible for their performance, the

performance of their subordinates, and all activities within their responsibility center.

▪ A responsibility accounting system produces responsibility reports that assist each successively higher

level of management in evaluating the performances of subordinate managers and their respective

organizational units.

▪ It gives information on both Monetary and Non Monetary items

(a) Monetary - Budgeted and actual revenues, Budgeted and actual costs, Variance computations for

revenues and cost, Asset investment base

(b) Non-monetary - Capacity measures, Target ROI, Desired and actual market share,Departmental or

divisional throughput, Number of defects, Number of orders backlogged, Number of customer

complaints, method of complaint resolution, etc.

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 CMA Inter – P12 –Management Accounting –Responsibility Accounting
▪ Why Responsibility accounting is the key management control tool in a decentralized organization

It helps organizational unit managers to conduct the five basic control functions:

(a) Preparing a plan (e.g., using budgets and standards) and use it to communicate output expectations

and delegate authority.

(b) Gathering actual data classified in accordance with the activities and categories specified in the

plan. The system can be used to record and summarize data for each organizational unit.

(c) Monitoring the differences between planned and actual data at scheduled intervals.

(d) Responsibility reports for subordinate managers and their immediate supervisors normally include

comparisons of actual results with flexible budget figures.

(e) Exerting managerial influence in response to significant differences. For day-to-day contact - unit

managers should be aware of any significant variances before they are reported. By the time top

management receives the reports, the problems causing the variances should have been corrected,

(f) Continuing comparing data and responding; then, at the appropriate time, the process will begin again

▪ Advantages of Responsibility Accounting

(a) It facilitates delegation of decision making.

(b) It helps management promote the concept of management by objective.

(c) It provides a guide to the evaluation of performance and helps to establish standards of

performance whichare then used for comparison purposes.

(d) It permits effective use of the concept of management by exception

▪ Disadvantages of Responsibility Accounting

1. Responsibility accounting creates some managerial issues like the “rolling up” (or aggregating) of

information to each successively higher level allows potentially important details to be

buried.

2. If different units within the responsibility accounting system compete with each other for

resources, managers could try to “promote their own agendas” by blaming other organizational

units and could lead to a lack of goal congruence.

3. Partitioning each responsibility unit as a separate part of the report, interdependencies among

units might be obscured.

4. Responsibility accounting implies that individuals in an organization cannot be responsible for

those items which they cannot control. For instance, divisional manager of the production division

can be held accountable for all direct and indirect costs incurred in his division.

5. It focuses on information and knowledge, not control.

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 CMA Inter – P12 –Management Accounting –Responsibility Accounting
▪ Question: Is there direct relationship between Responsibility and Authority.

Answer: Yes, If an individual is answerable for his or her actions

(responsible), that individual must have the authority to carry out

actions and execute decisions. There is an undermining of a

person’s performance and incentive when authority is not given

while the person is still held accountable.

(B) Responsibility Centre

▪ A responsibility centre may be defined as an area of responsibility which is controlled by an

individual. A responsibility centre is an activity such as department over which a manager exercises

responsibility.

▪ Responsibility areas may be departments (drilling or maintenance department), product lines (chemicals

or fertilizers), territories (North or South) or any other type of identifiable unit or combination of

units.

▪ There are Four types of Responsibility centers:

A: Cost or Expense Centre –

(a) It itemizes all of the expenses incurred to run a specified function, but ignores the cost of capital

invested in it, as well as any associated revenues.

(b) A cost or expense centre has no control over sales or marketing activities.

(c) In some instances, a cost center can generate revenues, but the revenues are either not under the

manager’s control or not effectively measurable.

(d) A cost center is an organizational unit whose manager has the authority only to incur costs and is

specifically evaluated on the basis of how well costs are controlled.

(e) It includes service and administrative departments. For example, a company’s human resources and

accounting departments could be considered cost centers because these units do not generate

revenues or charge for services, but they do incur costs.

(f) The primary form of control in a cost centre is against a fixed or semi variable budget that is

determined at the beginning of the year.

(g) Though this is a good start for a company that wants to implement controls over its expenditures, it

suffers from one main flaw—those responsible for cost centers are concerned only with the tight

control of costs, rather than other key company goals, such as customer service, creating new

products, or acquiring new customers.

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 CMA Inter – P12 –Management Accounting –Responsibility Accounting
B: Profit Centre or Earning Centre –
(a) A profit centre is an organizational unit whose manager is responsible for generating revenues and

managing expenses related to current activity.

(b) Profit centers should be independent organizational units whose managers have the ability to obtain

resources at the most economical prices.

(c) The manager of a profit centre is primarily responsible for generating the highest possible profit (or

least possible loss).

(d) This segment of the organization is assigned control over both costs and revenues. Net income and

contribution margins can therefore be computed for a profit center.

(e) Hence Maximum profit can be earned through:

(f) Sell products at prices that will maximize revenue.

(g) Have a goal of maximizing the centre’s profit.

(h) However, there are some cases where it is difficult to convert a cost center to a profit center,

because there is no way for it to gain revenues by directly selling its services.

C: Revenue Centre
(a) Revenue centre is strictly defined as an organizational unit that is responsible for the generation of

revenues and has no control over setting selling prices or budgeting costs.

(b) The sales department is sometimes considered to be a revenue center.

(c) For instance, in many retail stores, each sales department is considered an independent unit and

managers are evaluated based on their departments’ total revenues.

(d) A revenue center is one where the employees located in a specific functional area are solely

responsible for attaining preset revenue levels.

(e) It suffers some disadvantages as well

 Employees are essentially encouraged to obtain new sales without regard to the cost of

obtaining them.

 Sales staff will obtain orders also from customers with poor credit records or histories

of returning goods.

 Obtaining orders that are so small that the cost of processing the order exceeds the

profit gained from the sale.

 Excessive use of travel funds to meet with customers, selling products at large

discounts from the standard price, offering special promotional guarantees to customers,

allowing credits on previously purchased products.

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 CMA Inter – P12 –Management Accounting –Responsibility Accounting
D Investment Centre
(a) An investment center is an organizational unit whose manager is responsible for managing revenues and

current expenses and also over invested funds.

(b) Appropriate for those cases where investment decisions must be made very rapidly in order to take

advantage of changes in local business conditions.

(c) Important issue for those companies with rapidly expanding markets, or where consumer needs change

rapidly, where waiting for investment approval from a top authority may result in lost sales.

(d) It suffers from some Drawbacks:

 The possibility exists that those managers will not act harmoniously to accomplish the

organization’s goals. Rather, each responsibility center manager may act to optimize only his

or her own isolated performance.

 Working to achieve an independent responsibility center’s conflicting goal results in sub

optimization.

 A unique challenge for the design of responsibility centers arises from the instance in which

one responsibility center supplies its outputs largely to other internal responsibility centers.

(C) Responsibility Report

▪ Responsibility performance reporting implies the reporting phase of responsibility accounting.
▪ Responsibility reports help each successively higher level of management in evaluating the
performances of subordinate managers and their respective organizational units.
▪ Responsibility reporting has two purposes:
▪ To determine the degree of performance in the area of responsibility for which the responsibility
manager is directly responsible.
▪ To formulate measures to improve the performance of the responsibility centre manager
▪ In order to provide relevant contents in the report, only those items that are controlled by the
particular responsibility centre manager should be reported.
▪ Frequency of reporting and the quantum of details in the report can be decided in terms of
requirements.
▪ Characteristics of responsibility reporting:by Usry and Hammer
(a) Reports should fit the organization chart, i.e, the report should be addressed to the individual
responsible for the items covered by it, who, in turn, will be able to control those costs.
(b) Report should be prompt and timely.
(c) Reports should be issued with regularity.
(d) Reports should be easy to understand.
(e) Reports should convey sufficient but not excessive details.
(f) Reports should give comparative figures, i.e., a comparison of actual with budgeted figures or
of predetermined standards with actual results and the isolation of variances.
(g) Reports should be analytical.
(h) Reports for operating management should, if possible, be stated in physical units as well as in
terms of money.

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 CMA Inter – P12 –Management Accounting –Responsibility Accounting

Theory Questions:
1. Multiple Choice Question
Q1 Which of the following would be the most appropriate measure to monitor the performance of the
manager of a profit centre?
(a) Gross profit margin (b) Revenue minus all costs
(c) Revenue minus controllable costs (d) Return on capital employed
Q2 In a responsibility accounting system, managers are accountable for:
(a) Incremental costs. (b)Product costs but not for period costs.
(c) Costs over which they have control. (d)Variable costs but not for fixed costs
Q3 In designing a responsibility accounting system, one should keep in mind a certain characteristic of
each cost. This characteristic is:
(a) The degree of cost controllability by the manager;
(b) How the cost behaves with respect to volume;
(c) The accuracy of cost allocation;
(d) All of the above.
Q4 Which of the following statements are true about responsibility accounting?
(a) Responsibility accounting results in inter-departmental conflicts
(b) In responsibility center more focus is paid on products, processes or jobs
(c) No focus is paid on controlling costs
(d) None of the above
Q5 Which concept (or concepts) listed below is (are) consistent with traditional responsibility
accounting?
(a) Vertical structure. (b)Cross functional measurements.
(c) Bottom up control. (d)A and B.
Q6 In profit center revenue represents a monetary measure of output emanating from a profit center
in
a given period irrespective whether
(a) The revenue is realized or not (b)The output is sold or not
(c) Both A and B (d)None of the above
Q7 Which type of responsibility center has the greatest amount of autonomy?
(a) Revenue center. (b)Cost center.
(c) Profit center. (d)Investment center
Q8 Which of the following is responsibility center?
(a) Expense center (b)Profit center
(c) Investment center (d)All of the above
Q9 The characteristics of a responsibility system for a JIT, or lean organization include
(a) Competition between subsystems. (b)Independence of subsystems.
(c) Cross functional measurements. (d) A and B.
Q10 The responsibility centers, for control purposes, may be classified into types.
(a) Five (b)Three (c)Four (d)None
Q11 The area of focus on responsibility center is
(a) Quantum of sales (b)Quantum of production
(c) Optimum utilization of resources (d)All of the above
Q12 In responsibility cost accounting the costs in focus are
(a) Controllable costs (b)Uncontrollable costs
(c) Both A and B (d)None of the above
Q13 In responsibility accounting, responsibilities of various groups or individuals are identified in terms
of
(a) Work (b)Revenue (c)Cost (d)All

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 CMA Inter – P12 –Management Accounting –Responsibility Accounting
Q14 Responsibility Accounting is also known as
(a) Profitability accounting (b)Activity accounting
(c) Both A and B (d)None of the above
Q15 Which of the following represent arguments against traditional responsibility accounting?
(a) It tends to promote competition between segments of a company.
(b) It tends to promote subsystem, or local optimization.
(c) It tends to ignore many of the interdependencies within an organization.
(d) All of the above.
Q16 Which of the following characteristics is not associated with traditional responsibility accounting?
(a) Assumes optimization of the parts will optimize the whole.
(b) Assumes independence of the parts.
(c) Places emphasis on the performance of individuals.
(d) Attempts to control processes
Q17 Responsibility Accounting is also known as
(a) Profitability accounting (b) Activity accounting
(c) Both A and B (d)None of the above
Q18 Responsibility Accounting is also called Accounting
(a) Profitability (b)Management
(c) Authority (d)None of these
Q19 Responsibility accounting is used for ........................
(a) cost control (b)planning (c)decision making
(d)pricing
Q20 The performance of investment centre is based on ........................
(a) Cost of the centre (b)Profit of the centre
(c) Profit and investment of the centre (d)Revenue of the centre
Q21 In responsibility accounting the organization is divided into different-------centers
(a) Responsibility (b)Cost (c)Profit (d)None
Q22 A cost centre is a segment of the organization where the manager is responsible for ........................
(a) Costs (b)Inputs (c)A or B (d)None
Q23 Both costs and revenues are measured in centers
(a) Cost (b)Profit (c)Revenue (d)All
Q24 A centre where the manager is responsible for sales is ........................
(a) Cost centre (b)Revenue centre
(c)Investment centre (d)Sales Centre
Q25 The performance of investment centre is based on ........................
(a) Cost of the centre (b)Profit of the centre
(c) Profit and investment of the centre (d)Revenue of the centre
Q26 There are three departments A, B and C in a company. The sales of A, B and C are ₹ 3,52,000, ₹
2,88,000 and ₹ 1,60,000, respectively. The variable costs of A, B and C are ₹ 2,40,000, ₹1,76,000
and ₹ 1,44,000 respectively. The direct fixed costs of A, B and C are ₹ 28,000, ₹ 22,400 and
₹12,800. Rank the different departments on basis of relative profitability.
(a) A- Rank 3, B- Rank 1 and C- Rank 2 (b)A- Rank 2, B- Rank 1 and C- Rank
3
(c) A- Rank 3, B- Rank 2 and C- Rank 1 (d)Insufficient data

Q27 In a company Department A recorded loss in the first half of the current year. The sale of
department is ₹ 90,000 and uncontrollable costs are ₹ 91,000, Advice the management whether its
operations should be continued or terminated.
(a) Continued (b)Terminated (c)Insufficient information (d)None

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 CMA Inter – P12 –Management Accounting –Responsibility Accounting
Q28 In a control report of Department X, it is mentioned as indirect materials are ₹1,000, indirect
labour
₹900, Overtime Charges ₹100, Depreciation on equipment ₹500, Allocated factory overhead (38%
of factory space) ₹4,300, Allocated overhead of repair shop is ₹ 1,200. Determine total costs
treating department X as a responsibility center.
(a) ₹ 3,200 (b) ₹ 2,200 (c) ₹ 1,200 (d)D. None of the
above
Answers:
1 C 2 3 A 4 A 5 A 6 C 7 D 8 D 9 C 10 B
11 C 12 A 13 D 14 C 15 C 16 D 17 C 18 A 19 A 20 C
21 A 22 C 23 B 24 B 25 C 26 A 27 C 28 A

2. True or False:
Q1 Responsibility accounting is the system for collecting and reporting revenue and cost True
information
by areas of responsibility
Q2 A responsibility accounting system produces responsibility reports that assist each True
successively higher level of management in evaluating the performances of subordinate
managers and their respective organizational units
Q3 A key task of the management accountant is to create accounting systems that ensure that True
costs are incurred in accordance with expectations
Q4 Responsibility reports for subordinate managers and their immediate supervisors normally True
include comparisons of actual results with flexible budget figures
Q5 In the functional approach, company activities and responsibilities are organized according to True
major functions, such as marketing, manufacturing, and finance.
Q6 Goals defined for each area of responsibility should be attainable with efficient and effective True
performance.
Q7 Responsibility accounting is more far-reaching. True
Q8 A cost center is an organizational unit whose manager has the authority only to incur costs True
and is
specifically evaluated on the basis of how well costs are controlled
Q9 A profit center is an organizational unit whose manager is responsible for generating revenues True
andmanaging expenses related to current activity.
Q10 A revenue center is strictly defined as an organizational unit that is responsible for the True
generation ofrevenues and has no control over setting selling prices or budgeting costs.

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 CMA Inter – P12 –Management Accounting –Responsibility Accounting
3. Fill in the Blanks
Q1 An________is an organizational unit whose manager is responsible for managing revenuesand current
expenses.
Q2 A unique challenge for the design of_______arises from the instance in which one responsibility
center supplies its outputs largely to other internal responsibility centers
Q3 ________should be prompt and timely.
Q4 ________help each successively higher level of management in evaluatingthe performances of
subordinate managers and their respective organisational units.
Q5 __________of the production division can be held accountable for all directand indirect costs
incurred in his division.
Q6 A_________manager may emphasize production efficiency and deemphasize thepleas of sales
personnel for faster service and rush orders.
Q7 In most cases, it is relatively easy to identify______with specific managers.
Q8 The most elementary form of responsibility center is the ……………………………….
Q9 The______ resolves many of the problems just noted for the cost and revenuecenter concepts by
combining the two.
Q10 A unique challenge for the design of____arises from the instance inwhich one responsibility center
supplies its outputs largely to other internal responsibility centers.
Answers
1 Investment center 2 Responsibility centers
3 Report 4 Responsibility reports
5 Divisional manager 6 Cost centre
7 Activities 8 Cost center
9 Profit center 10 Responsibility centers

4. Essay Type Questions:

Q1 Differentiate between a cost center and a profit center.
Q2 What is the major shortcoming of using income from operations as a performance measure for
investment centers?
Q3 Differentiate between a profit center and an investment center.
Q4 How are revenue variances computed?
Q5 Why and how are support department costs allocated to operating departments?
Q6 Why should the factors under the control of the investment center manager (revenues, expenses,
and invested assets) be considered in computing the rate of return on investment?
Q7 The rates of return on investment for ABC Co.’s three divisions, East, Central, and West, are 26%,
20%, and 15%, respectively. In expanding operations, which of ABC Co.’s divisions should be given
priority? Explain.
Q8 Which factors determine whether a firm should be decentralized or centralized?
Q9 How are decentralization and responsibility accounting related?
Q10 What are the four primary types of responsibility centers, and what distinguishes them from each
other?

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 CMA Inter – P12 –Management Accounting –Responsibility Accounting

Practical Questions & Case Studies

Que 1 (S.M 516)
The processing department of a large company informs the marketing department that the price of processing
2,00,000 items will be ₹50,00,000. The marketing department submits the material for the item two weeks
later than originally planned and tells the processing department that the scheduled date of completion has
been advanced two weeks. In order to achieve the new schedule, the processing department incurs an
additional production cost of ₹16,00,000.
i. In an organization using responsibility accounting, where would the additional costs be assigned?
Would these costs be considered controllable costs? What effect might this have on future printing
orders from the marketing department?
ii. In an organization that does not use responsibility accounting, where would the various costs be
assigned? What effect might this have on future printing orders from the marketing department?
Solution:

(i) In an organization using responsibility accounting, the originally quoted price of ₹ 50,00,000 plus the

additional cost of ₹16,00,000 would be assigned to the marketing department. This would be

considered a controllable cost. The long-range effect might be that the marketing department will

become more cost- conscious and will plan activities better.

(ii) In an organization that does not employ responsibility accounting; the additional production costs most

probably would be assigned to the processing department. There would be no motivation by the

marketing department to adhere to scheduled dates or to plan processing needs in a better fashion.

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 CMA Inter – P12 –Management Accounting –Responsibility Accounting
Que 2 (S.M 516)
The receipt of raw materials used in the manufacture of products and the shipping of finished goods
to customers are under the control of the warehouse supervisor. Approximately 60% of the warehouse
supervisor’s time is spent on receiving activities and 40% on shipping activities. Separate employees handle the
receiving and shipping operations.
The labour-related costs for the warehousing function are as follows:
Warehouse supervisor’s salary ₹40,000
Receiving clerks’ wages ₹75,000
Shipping clerks’ wages ₹55,000
Employee benefit costs (30% of wage and salary costs) ₹51,000
Total ₹2,21,000
The company employs a responsibility accounting system for performance reporting purposes. The costs are
classified on the report as period or product costs.
• You are required to state the total labour-related costs to list on the responsibility accounting performance
report as product costs under the control of the warehouse supervisor for the warehousing function.
Solution:

This question focuses on product costs that are under the control of the warehouse supervisor. The

supervisor controls both receiving and shipping, but shipping is a selling cost. Thus shipping is a period cost

that is expensed in the period in which it is incurred, so shipping costs are not product costs. Therefore,

the costs for the shipping department are not part of the answer, even though they are controllable by

the warehouse supervisor. The supervisor’s salary is not controlled by the supervisor, so that is not a part

of the answer, either. The labour-related product costs that the supervisor can control include only the

wages and benefits of the receiving department. The receiving clerks’ wages are ₹75,000 and their

benefits are 30% of this amount (₹22,500). Therefore, the supervisor controls ₹ 97,500 of costs

(₹75,000 + ₹ 22,500).

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 CMA Inter – P12 –Management Accounting –Responsibility Accounting
Que 3 (S.M 517)
The following information for R & Co. for the prior year:
• The company produced 1,000 units and sold 900, both as budgeted.
• There were no beginning or ending work-in-process 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 selling variable costs were affected by sales volume only.
• Budgeted per unit revenues and costs were as follows:
Sales price ₹100
Direct materials ₹30
Direct labour ₹20
Other variable manufacturing costs ₹10
Fixed manufacturing costs ₹5
Variable selling costs ₹12
Fixed selling costs (₹3,600 total) ₹4
Fixed administrative costs (₹1,800 total) ₹2
Calculate the contribution margin earned by R & Co. for the prior year
Solution – (100-30-20-10-12)x 900 = 25200

Que 4 (S.M 517)

The Hind Company allocates national magazine advertising cost to territories on the basis of circulation, which
is determined by an index that measures relative buying power in the territories. Top management wants to
know if this method of allocation gives appropriate cost and benefit figures to make the following decisions:
• For deciding whether or not to close an unprofitable territory
• For deciding whether or not a territorial manager has obtained sufficient sales volume
• For determining how efficiently the territorial manager has operated the territory
• For determining whether or not advertising costs are satisfactorily controlled
The answers are as follows.
a. It is not appropriate for deciding to close the territory based on the allocated cost. Best way to
measure the performance is to check whether the segment is generation positive contribution or
not
b. It may be appropriate for concluding that a territorial manager has obtained sufficient sales
volume. National advertising is one of the general distribution costs to be allocated to territories
if there is evidence of cause-and-effect relationships.
c. The method is not appropriate. A territorial manager should be judged on the basis of expenses
that he or she has to control. By its nature, national advertising must be centrally controlled.
d. It is not appropriate to allocate national advertising costs to territories from a control
standpoint. Control can be exercised only over the total expenditure for national advertising
and at the source; control is not aided by allocating this total to territories.

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 CMA Inter – P12 –Management Accounting –Responsibility Accounting
Que 5 (S.M– 518)
You have a client who operates a large retail self-service grocery store that has a full range of departments.
Management has encountered difficulty in using accounting data as a basis for making decisions concerning
possible changes in departments operated, products, marketing methods, and so forth. List several overhead
costs, or costs not applicable to a particular department, and explain how the existence of such costs
(sometimes called common costs or joint costs) complicates and limits the use of accounting data in making
decisions in such a store.
Solution:

There are many examples of “common” costs to the sales department of a self-service grocery store.

Some are rent, supervision, trucking, and advertising. Common costs are usually apportioned on various

arbitrary bases to the sales departments, but for numerous managerial decisions such apportionments

produce misleading results. Decisions as to discounting a department, adding a department, enlarging a

department, or decreasing a department cannot be made based on the data produced from the

apportionments. For example, if a department is discontinued because it appears to be unprofitable, it

may be determined that the costs of other departments will increase as a result of having to absorb more

of the shared common costs. Thus, the overall operating results will be less favorable if the “unprofitable”

department is discontinued.

Que 6 (S.M 519)

The monthly service charge a bank makes on a customer’s checking account is based on the cost of handling
each account. A customer disagrees with this policy because she cannot see how it is possible to determine the
exact cost of handling her account. Do you agree with the customer? Discuss fully the problems involved in
determining cost for such a service, including the limitations of the cost figures obtained.
Solution:

This is a problem involving fixed and common costs. The depreciation and other costs associated with the

bank building, fixtures and equipment, salaries of officers, and other such items are fixed costs of

operation within very wide limits.

There would have to be a considerable change in the number of accounts before there would be any

noticeable impact on those fixed costs. It would be extremely difficult to assign many of such operating

expenses to any particular type of operation, let alone any account.

The problem of determining a reasonable and useful cost for handling an account involves obtaining data

related to costs of functions and number of transactions handled, so that the direct or semi direct costs

may be determined. Like all allocations of fixed or indirect overhead, the allocations will be arbitrary, but

they can be made in a reasonable and logical manner by using appropriate bases.

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 CMA Inter – P12 –Management Accounting –Responsibility Accounting
Que 7 (illustration7 – 519)
Consider each of the following scenarios:
1 Mr. P K. Dhawan, plant manager for the laser printer factory of Bharat Co. brushed his hair back and
sighed. December had been a bad month; two machines had broken down, and some direct labourers (all
on salary) were idled for part of the month. Materials prices increased, and insurance premiums on the
factory increased. No way out of it —costs were going up. He hoped that the marketing VP would be able
to push through some price increases, but that really wasn’t his department.
2 Ms. Sonam Kapoor was delighted to see that her ROI figures had increased for the third straight year. She
was sure that her campaign to lower costs and use machinery more efficiently (enabling her factories to
sell several older machines) was the reason why she planned to take full credit for the improvements at
her semi- annual performance review.
For each of the above independent scenarios, indicate the type of responsibility center involved
(cost,revenue, profit, or investment).
Solution:

Cost center — Total cost

Profit center — Operating Income

Que 8 (SM 526)

The printing department of a large company informs the marketing department that the price of printing
1,00,000 colour flyers will be ₹ 60,00,000. The marketing department submits the material for the flyer two
weeks later than originally planned and tells the printing department that the scheduled date of completion
has been advanced two weeks. In order to achieve the new schedule, the printing department incurs an
additional production cost of ₹15,00,000.
In an organisation using responsibility accounting, where would the additional costs be assigned? Would these
costs be considered controllable costs? What effect might this have on future printing orders from the
marketing department?
In an organisation that does not use responsibility accounting, where would the various costs be assigned?
What effect might this have on future printing orders from the marketing department?

Que 9 (SM - 527)

For each of the following service departments, identify an activity base that could be used for
charging the expense to the profit centre.
1 Central purchasing
2 Legal
3 Accounts receivable
4 Duplication services
5 Electronic data processing
6 Telecommunications

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Que 10 (SM - 528)
A manager of a fast food restaurant may be held responsible for reporting on variances in the profits of the
unit, even though he or she does not have control over either the cost of the food or the price it is sold for.
Decisions outside of the manager’s control should not be part of the manager’s performance evaluation. Even
so, the manager can and should still be held responsible for reporting on the results because he or she is in the
best position to explain the variances between actual and budgeted items. Analyse the case and comment

Que 11 (SM - 528)

Assigning some percentage of each operating department’s contribution to covering common costs reminds
each department that it is a part of a larger organization, and as such it has a responsibility to the larger
organization to maintain earnings that are adequate to cover a portion of the firm’s indirect costs;
and it formalizes their accountability for doing so. Analyse the case and comment

Que 12 (SM - 529)

In evaluating segment performance and the segment manager’s performance, it is important to distinguish
between the performance of the manager and the performance of the segment the manager manages. On a
contribution income statement by segment, direct fixed costs controllable by others are the same as non-
controllable traceable fixed costs. Costs that are traceable to a segment but controlled by someone other than
the segment manager are used in evaluating the performance of the segment, but they should not be used in
evaluating the performance of the segment manager. Analyse the case and comment

Que 13 (SM - 529)

When a company reports operating results according to responsibility center, each responsibility center’s report
contains a partial balance sheet showing the assets under its control, the liabilities incurred for the purchase of
those assets, and an operating income statement showing the responsibility center’s revenues and expenses.
However, shareholders’ equity does not appear on the individual responsibility center balance sheets because
equity belongs to the whole corporation. Equity cannot be divided up among responsibility centers, and it
cannot be affected by any decision made by any individual responsibility center manager.
Since no individual responsibility center has any equity on its balance sheet, no individual responsibility center
manager has any authority to determine how equity should be raised. Decisions about raising equity to
finance capital investments (that is, sale of new common or preferred stock or the use of retained earnings)
can be made only by senior management.
Therefore, the operating decisions made by the individual division managers affect the total assets employed
by their divisions, the working capital they have to work with, and the total assets they have available to
them (whether the assets are employed or not). The operating decisions made by the individual division
managers cannot affect shareholders’ equity. Analyse the case and comment

Que 14 (SM - 529)

There is a direct relationship between responsibility accounting and cost control. Costs are easier to control
when a responsibility accounting system is in effect. Department heads know immediately when cost overruns
occur and can work quickly to reduce them. Department heads are aware that their supervisors are receiving
data on their performance and will make efforts to perform in a more cost- efficient manner.
Analyse the case and comment

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