CHAPTER 22
RESPONSIBILITY CENTER ACCOUNTING
AND TRANSFER PRICIN
G
Brief Learning
Exercises Topic Objectives Skills
B. Ex. 22.1 Contribution margin effects 22-5 Analysis
B. Ex. 22.2 Contribution margin vs. responsibility margin 22-2, 22-3 Analysis, judgment
B. Ex. 22.3 Responsibility center design 22-1, 22-2 Analysis, judgment
B. Ex. 22.4 Transfer Prices 22-6 Analysis
B. Ex. 22.5 Contribution margin ratios 22-2, 22-3 Analysis
B. Ex. 22.6 Identifying transfer prices 22-6 Analysis
B. Ex. 22.7 Tracing common costs 22-4 Analysis
B. Ex. 22.8 Common or traceable costs 22-1, 22-4 Analysis
B. Ex. 22.9 Responsibility accounting system 22-2 Analysis, judgment
B. Ex. 22.10 Evaluating responsibility center managers 22-4, 22-5 Analysis
Learning
Exercises Topic Objectives Skills
22.1 Accounting terminology 22-1, 22-4,
22-6 Analysis
22.2 Types of responsibility centers 22-1 Analysis, judgment
22.3 Classification of costs in an income statement 22-4 Analysis
22.4 Real World: Home Depot’s segments 22-1, 22-2 Analysis, research
22.5 Preparing a responsibility income statement 22-1–22–5 Analysis
22.6 Evaluation of responsibility centers and center
managers 22-1, 22-2 Analysis, judgment
22.7 Closing an unprofitable business unit 22-1–22–3, Analysis
22.8 Cost-volume-profit analysis 22-1–22–4 Analysis
22.9 Transfer pricing 22-1, 22-2,
22-6 Analysis, judgment
22.10 Types of responsibility centers 22-1–22-3 Analysis,
communication,
judgment
22.11 Corporate costs; traceable or common 22-2, 22-4 Analysis, judgment
22.12 Transfer prices and responsibility margins 22-3, 22-5, Analysis
22.13 Transfer price and international taxes 22-6 Analysis
22.14 Responsibility centers in a golf resort 22-1, 22-2 Analysis, judgment
22.15 Real World: Home Depot’s responsibility
centers 22-1–22-3 Analysis,
communication,
research
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES
Topic Skills
22.1 A,B Preparing and using responsibility income
statements 22-3–22–5 Analysis, communication
22.2 A,B Preparing and using responsibility income
statements 22-3–22–5 Analysis, communication
22.3 A,B Preparing and using responsibility income
statements 22-3–22–5 Analysis
22.4 A,B Preparing responsibility income statements
in a Responsibility accounting system 22-3–22–5 Analysis, communication,
judgment
22.5 A,B Analysis of responsibility income statements 22-3–22–5 Analysis
22.6 A,B Evaluating an unprofitable business center 22-3–22–5 Analysis, communication,
judgment
22.7 A,B Transfer pricing decisions 22-1, 22-6 Analysis, communication,
judgment
22.8 A,B Transfer pricing with external market prices 22-1, 22-6 Analysis, communication,
judgment
Critical Thinking Cases
22.1 Allocating fixed costs to responsibility
centers 22-1, 22-2,
22-4 Analysis, communication,
judgment
22.2 An ethical dilemma 22-1, 22-3,
22-6 Analysis, communication,
judgment
22.3 Hospital profit centers 22-1, 22-2,
22-5 Analysis, communication,
judgment
22.4 Real World: General Mills & Kirby
(Internet) Comparing responsibility centers 22-1–22–3 Analysis, communication,
judgment, research,
technology
22. 5 Real World: University of Minnesota
(Ethics, fraud & corporate governance) 22-1, 22-2 Analysis, communication,
judgment
Problems Learning
Objectives
Sets A, B
DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASES
Problems (Sets A and B)
Chocolatiers Company/Fasteners, Inc. Easy
Students prepare responsibility income statements and determine the
product line in which it would be most advantageous to invest
advertising dollars.
Regal Flair Enterprises/Brown Enterprises Medium
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.
Giant Chef Equipment Company/Glassware Company Medium
Prepare a responsibility income statement and use the data to perform
cost-volume-profit analysis.
Muscle Bound Company/Freeze, Inc. Strong
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.
Butterfield, Inc./Sotheby, Inc. Strong
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.
Flywiz, Inc./Footware, Inc. Easy
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 unit.
22.6 A,B 15
22.5 A,B 45
22.4 A,B 60
30
22.3 A,B 30
22.2 A,B
Below are brief descriptions of each problem and case. These descriptions are accompanied by the
estimated time (in minutes) required for completion and by a difficulty rating. The time estimates
assume use of the partially filled-in working papers.
22.1 A,B 20
Tots-To-Go/Eastrise Corporation Easy
Students are asked to evaluate a transfer price used by two responsibility
centers of a business. The manager of one center wants the transfer price
reduced. Students are to recognize that, regardless of the transfer price
used, the profit of the entire company remains the same. Students must
also consider opportunity costs and the way in which center managers
are evaluated.
Sparta and Associates/Westminster, Inc. Medium
Students investigate market-based transfer prices versus less than market
transfer prices. Students will see the loss in profits to the entire company
when divisions purchase from outside the company rather than
transferring within the company.
22.8 A,B 40
22.7 A,B 20
Land’s End Hotel Medium
A conceptual (nonnumerical) case focusing upon the problems that often
arise from efforts to allocate common fixed costs among profit centers. A
practical problem, in that many businesses make such
allocations—perhaps without recognizing the pitfalls.
Osborn Diversified Products, Inc. Medium
A computer error results in the overstatement of a division manager’s
bonus. He needs the money because he has large medical bills and a
daughter in college. The only other person who may be aware of the
problem is another division manager who is angry with the company.
This is a good problem to assign to small groups or teams of students.
Hos
p
ital Profit Centers Medium
Students identify cost and profit centers for hospitals. Students consider
the ethical implications of having a type of surgery as a profit center.
General Mills and the Kirb
y
Com
p
an
y
Medium
Internet
Students are asked to visit the web pages of two companies and decide
how responsibility centers could be assigned within each. They are also
asked to think of examples of investment centers, profit centers, and cost
centers within each firm. Finally, they are asked what characteristics lead
to the differences in the responsibility center systems.
22.5 University Ethics 20 Medium
Ethics, Fraud & Corporate Governance
Students evaluate the ethical implications when a university views
students as a profit center.
22.4 30
22.3 30
22.2 40
22.1 35
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1.
2.
3.
Management makes use of accounting information about individual responsibility centers of the
A cost center is a part of the business that incurs cost but that does not directly generate
revenue. Examples include service departments such as the accounting, janitorial, laundry, or
other departments that render services to other parts of the business.
Three types of transfer prices are market-based, cost-based, and negotiated. Market-based
transfer prices are more likely to be used when a competitive external market exists for the
An investment center is a profit center for which management can readily identify the assets
invested (without resorting to arbitrary allocations). This characteristic allows the use of “return
on investment” techniques in evaluating performance. Examples of investment centers include
hospitals or clinics.
8. The transfer price for a product will divide that product’s profits between different divisions.
13.
No. The costs relating to operations of the corporate headquarters cannot be traced to the revenue
SOLUTIONS TO BRIEF EXERCISES
B. Ex. 22.1
B. Ex. 22.2
Department B. Short-run product promotion affects revenue and variable costs but
generally does not affect long-run fixed costs. Thus, the $10,000 advertising cost
The contribution margin for the combo is $1.75 – ($0.89 + $0.37 + $0.42) = $0.07.
The small contribution margin for the combo likely implies a negative
responsibility margin. However, it is not worrisome because the bakery is a small
B. Ex. 22.7
B. Ex. 22.8 a. Traceable to each store.
b. Traceable to each store.
B. Ex. 22.9
B. Ex. 22.10 Disadvantages of allocating common costs are: 1) Because common fixed costs
The three characteristics are: 1) preparing budgets prior to operations; 2)
Measuring performance using actual results; and 3) Preparing timely and
frequent performance reports comparing actual results with the budget.
Upkeep:
$450,000 ÷ 15,000 square feet = $30/squ. Ft. 1,800 square feet = $54,000.
Human Resources:
No, Cold Moo Ice Cream does not appear to follow the characteristics of
successful responsibility centers. First, it does not appear that budgets are
prepared. Second, the performance reports are not frequent or timely and the
These steps should go a long way toward fixing some of the current problems.