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    Responsibility Accounting and Transfer Pricing: Illustrative Problem 13.1 Evaluation of A Cost Center

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    Tsundere Dorado
    The document discusses responsibility accounting and transfer pricing, explaining that responsibility accounting recognizes various decision centers within an organization and traces costs and revenues to areas of responsibility, while cost centers and profit centers are units where managers are responsible for minimizing costs or generating revenues and controlling costs, respectively. An example evaluates a cost center and profit center to analyze manager performance and determine if a product line should be dropped.

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    Responsibility Accounting and Transfer Pricing: Illustrative Problem 13.1 Evaluation of A Cost Center

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    Tsundere Dorado
    99 views4 pages
    The document discusses responsibility accounting and transfer pricing, explaining that responsibility accounting recognizes various decision centers within an organization and traces costs and revenues to areas of responsibility, while cost centers and profit centers are units where managers are responsible for minimizing costs or generating revenues and controlling costs, respectively. An example evaluates a cost center and profit center to analyze manager performance and determine if a product line should be dropped.

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    The document discusses responsibility accounting and transfer pricing, explaining that responsibility accounting recognizes various decision centers within an organization and traces costs and revenues to areas of responsibility, while cost centers and profit centers are units where managers are responsible for minimizing costs or generating revenues and controlling costs, respectively. An example evaluates a cost center and profit center to analyze manager performance and determine if a product line should be dropped.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    99 views4 pages

    Responsibility Accounting and Transfer Pricing: Illustrative Problem 13.1 Evaluation of A Cost Center

    Uploaded by

    Tsundere Dorado
    The document discusses responsibility accounting and transfer pricing, explaining that responsibility accounting recognizes various decision centers within an organization and traces costs and revenues to areas of responsibility, while cost centers and profit centers are units where managers are responsible for minimizing costs or generating revenues and controlling costs, respectively. An example evaluates a cost center and profit center to analyze manager performance and determine if a product line should be dropped.

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    © All Rights Reserved
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    of 4

    CHAPTER 13 A responsibility cost report may be prepared using the format in

    Figure 13.2.
    Illustrative Problem 13.1 Evaluation of a Cost Center
    RESPONSIBILITY ACCOUNTING The department supervisors at Meredith, Inc. are authorized to
    purchase the direct and indirect materials needed in production,
    AND TRANSFER PRICING hire and assign the production workers, and incur various overhead
    costs for their department. The equipment used in the department
    is acquired at a higher management level, but supervisors are
    responsible for proper care and maintenance. The salaries of the
    RESPONSIBILTY ACCOUNTING supervisors are shown under the cost supervision.
    Is the system that recognizes various decision center
    throughout an organization and traces costs (and revenues, assets During the year, Department 7 manufactured 40,000 units as
    and liabilities where pertinent) by areas of responsibilities. budgeted. Budgeted and actual costs for Department 7 are given
    below:
    OBJECTIVE
    Through responsibility accounting, managers will be
    compelled to set managerial targets and formulate strategies to
    attain the firm’s overall objectives.

    COST CENTER
    This is a unit within the organization wherein the manager is
    responsible for minimizing costs subject to some output constraints.

    REQUIRED:
    1. Compute the budgeted unit cost of the product and the
    actual unit cost.
    2. Prepare a responsibility cost report. Show cost variations
    from the budget.
    3. Does it appear that the supervisor was responsible for a
    large part of the variation between budgeted and actual
    costs?
    Requirement 3:
    Solution: From the computations shown above, it can be observed that P900
    Requirement 1: of the total P5,000 unfavorable cost variation are traceable to direct
    costs over which the department supervisor had control. Therefore,
    Budgeted cost per unit = P 431,300 he was responsible only for the 18% unfavorable cost variation. A
    40,000 large part of the unfavorable cost variation could be traced to the
    = P 10.7825 costs which were allocated to his department and over which he did
    not have any control or authority. He therefore should not be made
    Actual cost per unit = P 436,300 answerable for the unfavorable variances arising from
    40,000 noncontrollable and indirect costs. Performance of the manager of
    a cost center is considered satisfactory if he is able to provide
    = P 10.9075
    quality goods or services within the budgeted costs.
    Requirement 2: PROFIT CENTER
    This is a unit or segment within the organization wherein
    the manager is responsible for the generation of revenues and
    control of costs incurred in that center.

    Figure 13.3 shows the pro-forma income statement of a profit


    center.
    Illustrative Problem 13.2 Evaluation of a Profit Center Illustrative Problem 13.2 Evaluation of a Profit Centers
    The Nicki Company, a wholesaling company, purchases and RTW Fashion Inc. operates with three divisions, A, B, and C. Division
    repackages three products for resale. During recent months, the A produces revenue of P1,200,000 for the year, Division B produces
    company has recommended that the profit picture would improve if revenue of P700,000 and Division C produces P600,000. The total
    Product 3 were dropped since it has been showing loss. An income costs of the year for each division:
    statement of last month, which is considered to be typical, is given
    below:

    REQUIRED:
    1. List the costs by division that can be directly attributed to
    that division.
    2. Do all three divisions provide an amount over their direct
    REQUIRED: costs to the total operation? Identify any divisions that does
    Do an analysis to show whether the sales manager’s not.
    recommendation should be accepted or not. Assume that Product 3 3. Is there any division that covers direct costs but does not
    could not be replaced with some other line, and also assume that bear its full share of costs of the total operations? Identify
    the fixed costs would not change. that division, if any.
    4. Which division(s) can bear all of its share of the allocated
    Solution: Nicki Company cost?

    Solution: RTW Fashion Inc.


    Supporting Analysis:

    Conclusion:
    Product 3 contributes P17,500 to the recovery of indirect expenses.
    Therefore, in the absence of any other better alternative, it should
    not be dropped.
    Answer:
    1. Direct costs of the divisions:
    Division A P680,000
    Division B P720,000
    Division C P480,000
    2. No. Not all divisions provide an amount over their direct
    costs to the total operation. Division B does not cover its
    direct cost by P20,000
    3. Division C contributes but cannot cover P80,000 of the
    allocated cost.
    4. Division A.

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