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CHAPTER 12 Responsibility Accounting and Total Quality ManagementANSWERS TO REVIEW QUESTIONS 12-1 A responsibility-accounting system fosters goal congruence by establishing the performance criteria by which each manager will be evaluated. Development of performance measures and standards for those measures can help to ensure that managers are striving toward goals that support the organization's overall objectives. Goal congruence results when the managers of subunits throughout an organization strive to achieve objectives that are consistent with the goals set by top management. In order for the organization to be successful, the managers and employees throughout the organization must be striving toward consistent goals. Several benefits of decentralization are as follows: (a) The managers of an organization's subunits have specialized information and skills that enable them to manage their departments most effectively. (b) Allowing managers autonomy in decision making provides managerial training for future higher-level managers. (c) Managers with some decision-making authority usually exhibit greater motivation than those who merely execute the decisions of others. (d) Delegating some decisions to lower-level managers provides time relief to upperlevel managers. (e) Delegating decision making to the lowest level possible enables an organization to give a timely response to opportunities and problems. Several costs of decentralization are as follows: (a) Managers in a decentralized organization may have a narrow focus on their own units' performance. (b) Managers may tend to ignore the consequences of their actions on the organization's other subunits.

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(c) In a decentralized organization, some tasks or services may be duplicated unnecessarily. 12-4 (a) Cost center: A responsibility center, the manager of which is accountable for the subunit's costs. (An example is a production department in a manufacturing firm.) (b) Revenue center: A responsibility center, the manager of which is accountable for the subunit's revenue. (An example is a sales district in a wholesaling firm.) (c) Profit center: A responsibility center, the manager of which is accountable for the subunit's profit. (An example is a particular restaurant in a fast-food chain.) (d) Investment center: A responsibility center, the manager of which is accountable for the subunit's profit and the capital invested to generate that profit. (An example is a commuter airline division of an airline company.) 12-5 It would be appropriate to change a particular hotel from a profit center to an investment center if the manager of the hotel is given the authority to make significant investment decisions affecting the hotel's resources. Flexible budgeting allows a performance report to be constructed in a meaningful way. The performance report should compare actual expenses incurred with the expenses that should have been incurred, given the actual level of activity. The expenses that should have been incurred given the actual level of activity can be obtained from the flexible budget. Under activity-based responsibility accounting, management's attention is directed toward activities, rather than being focused primarily on cost, revenue, and profit measures of subunit performance. Activity-based responsibility accounting uses the database generated by an activity-based costing system coupled with nonfinancial measures of operational performance for key activities. Such an approach can help management eliminate non-value-added activities and improve the cost effectiveness of activities that do add value to the organization's product or service. Attention to the following two factors may yield positive behavioral effects from a responsibility-accounting system. (a) When properly used, a responsibility-accounting system does not emphasize blame. The emphasis should be on providing the individual who is in the best position to explain a particular event or financial result with information to help in understanding reasons behind the event or financial result.

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2002 The McGraw-Hill Companies, Inc.Solutions Manual

(b) Distinguishing between controllable and uncontrollable costs or revenues helps the individuals who are evaluated under a responsibility-accounting system to feel as though they are evaluated on the basis of events and results over which they have some control or influence. 12-9 Rarely does a single individual completely control a result in an organization. Most results are caused by the joint efforts of several people and the joint impact of several events. Nevertheless, there is usually a person who is in the best position to explain a result or who is in the best position to influence the result. In this sense, performance reports based on controllability really are based on a manager's ability to influence results.

12-10 (a) Cost pool: A collection of costs to be assigned to a set of cost objects. (An example of a cost pool is all costs related to material handling in a manufacturing firm.) (b) Cost object: A responsibility center, product, or service to which a cost is assigned. (The various production departments in a manufacturing firm provide examples of cost objects. For example, the material-handling cost pool may be allocated across the various production departments that use material-handling services.) 12-11 Cost allocation (or distribution): The process of assigning costs in a cost pool to the appropriate cost objects. (An example of cost allocation would be the assignment of the costs in the material-handling cost pool to the production departments that use material-handling services. For example, the material-handling costs might be allocated to production departments on the basis of the weight of the materials handled for each department.) 12-12 An example of a common resource in an organization is a computer department. The resource includes the computer itself, the software, and the computer specialists who run the computer system and assist its users. The opportunity costs associated with one person using the computer resource include the possibility that another user will be precluded from or delayed in using the computer resource. Allocating the cost of the computer services department to the users makes the users aware of the opportunity cost of using the computer. 12-13 A computer system has a limited capacity at any one time. Allocating the cost of using the service to the user makes the user aware that his or her use of the system may preclude someone else from using it. Thus, the user is made aware of the potential opportunity cost associated with his or her use.

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12-14 A cost allocation base is a measure of activity, physical characteristic, or economic characteristic associated with the responsibility centers, which are the cost objects in the allocation process. One sensible allocation base for assigning advertising costs to the various components of a large theme park is the number of people patronizing the park's various components. Presumably, the number of people attending a certain part of the theme park is an indication of how popular that part of the park is. Notice that in most cases the sales revenue generated by the various components of the theme park is not a viable allocation base, since most theme parks have a single admission fee for the entire park. 12-15 Marketing costs are distributed to the hotel's departments on the basis of budgeted sales dollars so that the behavior of one department does not affect the costs allocated to the other departments. If, on the other hand, the marketing costs had been budgeted on the basis of actual sales dollars, then the costs allocated to each department would have been affected when only one department's actual sales revenue changed. 12-16 A segmented income statement shows the segment margin for each major segment of the enterprise. 12-17 Many managerial accountants believe that it is misleading to allocate common costs to an organization's segments. Since these costs are not traceable to the activities of segments, they can be allocated to segments only on the basis of a highly arbitrary allocation base. 12-18 It is important in responsibility accounting to distinguish between segments and segment managers, because some costs that are traceable to a segment may be completely beyond the influence of the segment manager. Proper evaluation of the segment as an investment of the company's resources requires that these costs be included with costs associated with the segment. However, in evaluations of the manager's performance, these costs should be excluded, since the manager has no control over them. 12-19 Three key features of a segmented income statement are as follows: contribution format, identification of controllable versus uncontrollable expenses, and segmented reporting, which shows income statements for the company as a whole and for each of its major segments. 12-20 A common cost for one segment can be a traceable cost for another segment. For example, the salary of the general manager of a hotel is traceable to that segment of the entire hotel company. However, the salary of the hotel's general manager is a common cost for each of the departments in that hotel, such as the food and beverage department and the hospitality department. 2002 The McGraw-Hill Companies, Inc.Solutions Manual

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12-21 Customer profitability analysis refers to using the concepts of activity-based costing to determine how serving particular customers causes activities to be performed and costs to be incurred. Exa

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