CHAPTER 22
RESPONSIBILITY CENTER ACCOUNTING
AND TRANSFER PRICING
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES
Brief
Exercises
B. Ex. 22.1
B. Ex. 22.2
B. Ex. 22.3
B. Ex. 22.4
B. Ex. 22.5
B. Ex. 22.6
B. Ex. 22.7
B. Ex. 22.8
B. Ex. 22.9
B. Ex. 22.10
Topic
Contribution margin effects
Contribution margin vs. responsibility margin
Responsibility center design
Transfer Prices
Contribution margin ratios
Identifying transfer prices
Tracing common costs
Common or traceable costs
Responsibility accounting system
Evaluating responsibility center managers
Exercises
22.1
Topic
Accounting terminology
22.2
22.3
Types of responsibility centers
Classification of costs in an income statement
22.4
22.5
22.6
22.7
22.8
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20 Easy
22.2 A,B
Regal Flair Enterprises/Brown Enterprises
Prepare a responsibility income statement and identify the business units that will provide the most benefit from short-run product promotion and from long-run expansion. Requires an understanding of the different roles of contribution margin and responsibility margin in managerial decisions. 30 Medium
22.3 A,B
Giant Chef Equipment Company/Glassware Company
Prepare a responsibility income statement and use the data to perform cost-volume-profit analysis.
30 Medium
22.4 A,B
Muscle Bound Company/Freeze, Inc.
Prepare income statements at two successive levels of responsibility.
Also, compute the return on assets for two investment centers and use data in several managerial decisions.
60 Strong
22.5 A,B
Butterfield, Inc./Sotheby, Inc.
Given income statements at two levels of responsibility, students are asked to make several decisions based upon the data and to explain the
“disappearance” of the common costs as the responsibility centers are redefined. Also calls for a revised version of one responsibility statement reflecting different sales levels.
45 Strong
22.6 A,B
Flywiz, Inc./Footware, Inc.
Students are asked to evaluate a decision to close a seemingly unprofitable unit of a business. However, upon closer examination, they may discover that seasonality is distorting the data and that products of the unprofitable unit support sales in the more profitable
This course focuses on ways in which financial statements reflect business operations and emphasizes use of financial statements in the decision-making process. The course encompasses all business forms and various sectors such as merchandising, manufacturing and service. Students make extensive use of spreadsheet applications to analyze accounting records and financial statements. Prerequisites: COMP100 and MATH114 / 4-4
(TCO 7) What is responsibility accounting? What is a cost center? How does a cost center differ
Harrison, W. T. (2013). Financial Accounting, VitalSource for DeVry University, (9th ed.). Pearson Learning Solutions.
Study BBBY’s historical results in the “Historical Performance” worksheet contained in the “BBBY” EXCEL workbook. What overall conclusion about BBBY’s recent operating and financial condition do the numbers support? Back up your conclusion by listing the six most critical observations you discern from your analysis of the numbers.
Based on your review of the financial statements, suggest a key insight about the financial health of the company. Speculate on the likely reaction to the financial statements from various stakeholder groups (employee, investors, shareholders). Provide support for your rationale.
Almost every single company that is in business faces a serious problem called cost allocation. Every company no matter what they sell or what service they provide faces the problem of allocating costs to defined cost objects. The cost allocation process is a very hard process for most. Cost allocation is a very complex and difficult procedure that requires the application of appropriate accounting procedures. These accounting methods sometimes will not provide objective and fair cost allocation because they have irrational bases that are not always reliable or appropriate. This is why accounting theory and practice steadily try to advance upon methods that are already in place and help develop new ones that could provide objective and fair cost allocation (Perčević & Dražić, 2008).
Session 1 Date September-4 Topic Introduction, overview, group assignment, product costing systems (concepts and design) Process costing systems Managing and allocating support service costs Inventory decisions Strategic issues in investment decision Managing quality and time to create value Midterm Exam Cost management and strategy The nature of management control systems Understanding strategy Strategy, balanced score card, incentive systems Organizational design & responsibility accounting Case presentation Case presentation Case presentation Case written report is due at the beginning of session 13 Final exam Chapter 1 (H) Chapter 1 (A) Chapter 2 (A) Chapter 20 (H) Chapter 18 (H) Reading Chapter 2 (H)
ounded in 1968 by Alan James, Starfire Trucking Company has grown into a sizeable operation with 90 trucks and 180 trailers. Recently,
Chapters 10 (pp. 396-405) & 16 (pp. 646-651) Cost Accounting: a managerial emphasis (Horngren et al.)
In an ideal situation, information for decision making should be both perfectly relevant and precisely accurate. However, in reality, such information is often too difficult or too costly to obtain. The degree to which information is relevant or precise often depends on the degree to which it is qualitative or quantitative. (Horngren et al, 2008) Since primary classification of costs on the income statement are by three major management functions: manufacturing, selling, and administrative, it will be definitely most relevant accounting information for Guillermo to consider. Some income statements track fixed and variable costs using the contribution approach, whereas others adopt the absorption approach that considers all direct and indirect manufacturing costs to be product costs. Both, the contribution approach and the absorption approach can be relevant for decision making. However, the key to decision making is not relying on a hard and fast rule about what to include and what to ignore. (Horngren et al, 2008) Thus, Guillermo will need to analyze all pertinent costs and revenues to determine what is and what is not relevant for his particular decision.
Discuss and exemplify each of the significant terms used above through a list of meanings a non-accountant would understand. a.
This case, as the Happy Chips Case does, illustrates the point that it is important to know where your costs and profits come from. It extends the point of Happy Chips by also introducing consideration of asset investments and return on assets. In this case, a new cost accountant introduces segmental profitability, contribution margin, and the strategic profit model to Cooper Processing Company to aid in analysis of two different distribution channels. Note to Instructors: Because this case is short and the required math is quite simple, we often use this case as part of an exam or an in-class quiz!
A responsibility centre that incurs costs (and expenses) and generates revenues is classified as a(n)
The company I have chosen for this assignment is Brides & Grooms CC. The company is a small family business which was started in 2010. The revenue grew consistently for the first three years. In the last two years the company experienced about 20% reduction in sales. The company is run by the owner, who is also responsible for the buying function. She is assisted by her two daughters who are responsible for the sales.
Cost accounting has been of great help to the business management because of various roles it plays. The information cost accountants offer different uses, some of which aid in the controllership function, as well as the industrial role. Firstly, cost accounting is useful in estimating costs and in setting prices of various products. In businesses where the cost of a good is grounded upon its estimated cost, cost accounting does a very significant use in making sure that a correct approximate is prepared (Meigs, 1998). Labor hours and essential materials are usually provided by engineering. Cost accounting uses these data and adds predicted disparities grounded upon historical performance of related goods to get a selling price. Cost accounting also utilizes labor degrees, taking into concern expected inflationary issues resulting from fluctuations in the economy (Foster & Baxendale, 2013). Cost accounting plays a vital role in helping the leadership of an organization make important decisions on a number of issues that include: