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Responsibility Centers

Using the figures below for each performance center, comparing 2005 actual results with the budgeted results.

Using the four responsibility centers of cost, revenue, profit, and investment:

What cost measurements are used for each of these centers?
Which centers performed better than budget, and which performed worse than budget?
What are the main causes for the performance of each center?

Here are the performance numbers for each workcenter.

Center Actual (2005) Budget Variance

Cost $325,000 $313,000 +$12,000

Revenue $5,050,000 $5,220,000 - $170,000

Profit $1,419,300 $1,544,500 - $115,200

Investment $1,673,000 $1,671,000 + $ 2,000

Solution Preview

Key concepts: Responsibility center, Management control

Let us first of all understand the concept of the responsibility center as in the question four types of responsibility centers is used. Use of responsibility centers is one of the most established and widely used techniques in financial control. Responsibility accounting breaks a large organization into smaller, more easily manageable units known as responsibility centers. Each unit is looked upon as a small business. Managers bear an element of responsibility for the performance of their respective centers.

The principle of controllability applies to responsibility accounting. The presumption underlying controllability is that every dollar earned or dollar spent is under the control of, and can be traced to, at least one manager.

Responsibility accounting represents ...

Solution Summary

This explains the concept of Responsibility Centers with practical illustration