Responsibility Accounting: Revenue Centers

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Questions and Answers

What is the primary focus of a revenue center manager?

Controlling costs

Making investment decisions

Evaluating profitability

Generating revenue (correct)

What is included in a profit center's performance evaluation?

Only controllable revenues

Both controllable revenues and controllable costs (correct)

Only investment decisions

Only controllable costs

Which type of center is responsible for generating revenue and incurs costs, as well as having investment funds available?

Revenue center

Cost center

Profit center

Investment center (correct)

What is used to compare a revenue center's actual performance with its budgeted performance?

Revenue center performance report Signup and view all the answers

Which type of center is often a subsidiary company or a product line?

Investment center Signup and view all the answers

What is a manager of a profit center judged on?

Profitability of the center Signup and view all the answers

What is an example of a revenue center?

Central reservation office of Saudi airlines Signup and view all the answers

What does a manager of an investment center have control over?

Investment decisions such as plant expansion Signup and view all the answers

What is the primary focus of top management's review of a budget report?

The huge differences between actual results and planned objectives Signup and view all the answers

What type of center does a manager have authority to incur costs but not directly generate revenue?

Cost Center Signup and view all the answers

What is the basis of a manager's performance evaluation in a cost center?

Ability to control cost in order to meet budgeted goals for controllable costs Signup and view all the answers

What type of report is used to evaluate a manager's performance in a cost center?

Responsibility Report Signup and view all the answers

What is unique about how costs are reported in a cost center?

No distinction is made between fixed and variable costs Signup and view all the answers

What is the primary feature of a responsibility reporting system?

Each higher level can obtain the detailed report for each lower level Signup and view all the answers

What are the four basic types of responsibility centers?

Cost Centers, Revenue Centers, Profit Centers, and Investment Centers Signup and view all the answers

What is the main difference between a cost center and a revenue center?

A cost center incurs costs, while a revenue center generates revenue Signup and view all the answers

What is the primary basis for evaluating the performance of a manager of an investment center?

Return on investment (ROI) Signup and view all the answers

What is the main purpose of decentralizing operations in a company?

To provide subunit managers with more autonomy Signup and view all the answers

What is the primary goal of performance evaluation in a decentralized company?

To promote goal congruence and coordination among subunits Signup and view all the answers

What is the role of top management in a decentralized company?

To provide a framework for maintaining control and communicating goals Signup and view all the answers

What is the purpose of responsibility reports in a decentralized company?

To assess the performance of subunit managers Signup and view all the answers

What is the relationship between ROI and the performance of a manager of an investment center?

ROI is a measure of the manager's effectiveness in using assets Signup and view all the answers

What is the benefit of using ROI as a performance measure for investment centers?

It is a measure that is controllable by the manager Signup and view all the answers

What is the role of performance evaluation systems in a decentralized company?

To provide a framework for maintaining control and communicating goals Signup and view all the answers

Study Notes

Responsibility Accounting

Managers are accountable for revenues in revenue centers.
Revenue center performance reports compare actual with budgeted revenues.
Examples of revenue centers include sales regions at Kraft food and central reservation offices of Saudi airlines.

Profit Centers

Managers are judged on the profitability of the center.
Managers control operating revenues earned, such as sales, and all variable costs incurred by the center.
Examples of profit centers include individual departments of a retail store or branch bank offices.

Investment Centers

Managers incur costs, generate revenues, and have investment funds available for use.
Managers are evaluated on the profitability of the center and the rate of return earned on funds.
Investment centers often include subsidiary companies or product lines.
Managers are able to control or significantly influence investment decisions.

Responsibility Accounting for Investment Centers

Return on investment (ROI) is the primary basis for evaluating the performance of a manager of an investment center.
ROI shows the effectiveness of the manager in using the assets at their disposal.
ROI is a useful performance measure, and factors in the ROI formula are controllable by the manager.

Performance Evaluation

Performance evaluation systems provide top management with a framework for maintaining control over the entire organization.
Decentralization requires top management to communicate its goals to subunit managers and determine whether decisions are effectively meeting company goals.
Performance evaluation promotes goal congruence and coordination, communicates expectations, and permits management by exception.

Responsibility Reporting System

There are four basic types of responsibility reporting systems: cost centers, revenue centers, profit centers, and investment centers.
Each division or subunit uses one of these types of responsibility reporting systems.

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Description

This quiz covers the concept of revenue centers in responsibility accounting, including the role of managers and performance reporting. It also provides examples of revenue centers in real-world companies.