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Acc220 acc 220 week 8 responsibility centers 2013 axia uop
- 3. Responsibility Centers Cost Center Profit Center Investment Center Incremental Analysis Examples
- 4. Types of Responsibility Centers › Cost Center › Profit Center › Investment Center
- 5. Function Accountability Budget
- 6. Function Accountability Budget
- 7. Function Accountability Budget
- 8. For Cost Centers › Retain or Replace Equipment › Eliminate an Unprofitable Segment
- 9. For Profit Centers › Make or Buy Component Parts or Finished Products › Sell Products or Process them Further
- 10. For Investment Centers › Retain or Replace Equipment › Sell Products or Process them Further
- 11. Incremental Analysis Uses for Investment Centers › Retaining or Replacing Equipment › Selling products or Processing them Further
- 12. Kieso, D., Kimmel, P., & Weygandt, J. (2003). Essentials of accounting: Tools for business decision making (2nd ed.). Hoboken, NJ: John Wiley & Sons, Inc.
Editor's Notes
- There are three basic types of responsibility centers: cost centers, profit centers, and investment centers. These centers indicate the degree of responsibility the manager has for the performance of the center (Kieso, Kimmel, & Weygandt, 2003).
- A cost center incurs costs (and expenses) but does not directly generate revenues. Managers of cost centers have the authority to incur costs. Cost centers are usually either production departments or service departments. The evaluation of a manager’s performance for cost centers is based on his or her ability to meet budgeted goals for controllable costs. Responsibility reports for cost centers compare actual controllable costs with flexible budget data. Only controllable costs are included in the responsibility report, and no distinction is made between variable and fixed costs. The responsibility report continues the concept of management by exception (Kieso, Kimmel, & Weygandt, 2003).
- A profit center incurs costs (and expenses) and also generates revenues. Managers of profit centers are judged on the profitability of their centers. Examples of profit centers include the individual departments of a retail store, such as clothing, furniture, and automotive products, and branch offices at banks. To evaluate the performance of a manager for a profit center, detailed information is needed about both controllable revenues and controllable costs. A profit center may have both direct and indirect fixed costs. The responsibility report for a profit center shows budgeted and actual controllable revenues and costs. The report is prepared using the cost-volume-profit income statement. The reports may be prepared monthly and may include cumulative year-to-date results (Kieso, Kimmel, & Weygandt, 2003).
- An investment center incurs costs (and expenses) and generates revenues. An investment center has control over the investment funds available for use. The primary basis for evaluating performance of a manager in an investment center is return on investment (ROI). The return on investment is considered to be superior to any other performance measurement because it shows the effectiveness of the manager in utilizing the assets at his or her disposal. Since an investment center is an independent entity for operating purposes, all fixed costs are controllable by its manager. More fixed costs are identified as controllable in the performance report for an investment center manager. The report also shows budgeted and actual ROI below controllable margin (Kieso, Kimmel, & Weygandt, 2003).
- Incremental Analysis uses for cost centers can include retaining or replacing equipment and eliminating an unprofitable segment. Management often has to decide whether to continue using an asset or replace it. In this case, it would be to the company’s advantage to replace the equipment. Management sometimes must decide whether to eliminate an unprofitable business segment. In deciding on the future status of an unprofitable segment, managementshould consider the effect of elimination on related product lines. It may be possible for continuing product lines to obtain some or all of the sales lost by thediscontinued product line (Kieso, Kimmel, & Weygandt, 2003).
- Incremental analysis uses for a profit center include making or buying component parts or finished products and selling products or processing them further with the expectation of selling them at a later point at a higher price. When a manufacturer assembles component parts in producing a finished product,management must decide whether to make or buy the components. Many manufacturers have the option of selling products at a given point in theproduction cycle or continuing to process with the expectation of selling them at a later point at a higher price (Kieso, Kimmel, & Weygandt, 2003).
- Incremental analysis uses for an investment center include retaining or replacing equipment and selling products or processing them further with the expectation of selling them at a later point at a higher price (Kieso, Kimmel, & Weygandt, 2003).
- We hope that this training session helped you in learning about responsibility centers. Each of the different responsibility centers has been explained as well as what each center is accountable for and why each center has its own budget. The presenter provided examples of the kinds of decisions where incremental analysis would be used in each center.Thank you for participating in this training session.