CHAPTER 13 A responsibility cost report may be prepared using the format in
Figure 13.2.
RESPONSIBILITY ACCOUNTING
AND TRANSFER PRICING
RESPONSIBILTY ACCOUNTING
Is the system that recognizes various decision center
throughout an organization and traces costs (and revenues, assets
and liabilities where pertinent) by areas of responsibilities.
OBJECTIVE
Through responsibility accounting, managers will be
compelled to set managerial targets and formulate strategies to
attain the firm’s overall objectives.
COST CENTER
This is a unit within the organization wherein the manager is
responsible for minimizing costs subject to some output constraints.
Illustrative Problem 13.1 Evaluation of a Cost Center
The department supervisors at Meredith, Inc. are authorized to
purchase the direct and indirect materials needed in production,
hire and assign the production workers, and incur various overhead
costs for their department. The equipment used in the department
is acquired at a higher management level, but supervisors are
responsible for proper care and maintenance. The salaries of the
supervisors are shown under the cost supervision.
During the year, Department 7 manufactured 40,000 units as
budgeted. Budgeted and actual costs for Department 7 are given
below:
REQUIRED:
1. Compute the budgeted unit cost of the product and the
actual unit cost.
2. Prepare a responsibility cost report. Show cost variations
from the budget.
3. Does it appear that the supervisor was responsible for a
large part of the variation between budgeted and actual
costs?
 Requirement 3:
Solution: From the computations shown above, it can be observed that P900
Requirement 1: of the total P5,000 unfavorable cost variation are traceable to direct
costs over which the department supervisor had control. Therefore,
Budgeted cost per unit = P 431,300 he was responsible only for the 18% unfavorable cost variation. A
40,000 large part of the unfavorable cost variation could be traced to the
= P 10.7825 costs which were allocated to his department and over which he did
not have any control or authority. He therefore should not be made
Actual cost per unit = P 436,300 answerable for the unfavorable variances arising from
40,000 noncontrollable and indirect costs. Performance of the manager of
a cost center is considered satisfactory if he is able to provide
= P 10.9075
quality goods or services within the budgeted costs.
Requirement 2: PROFIT CENTER
This is a unit or segment within the organization wherein
the manager is responsible for the generation of revenues and
control of costs incurred in that center.

Figure 13.3 shows the pro-forma income statement of a profit

center.
Illustrative Problem 13.2 Evaluation of a Profit Center
The Nicki Company, a wholesaling company, purchases and
repackages three products for resale. During recent months, the
company has recommended that the profit picture would improve if
Product 3 were dropped since it has been showing loss. An income
statement of last month, which is considered to be typical, is given
below:
REQUIRED:
Do an analysis to show whether the sales manager’s
recommendation should be accepted or not. Assume that Product 3
could not be replaced with some other line, and also assume that
the fixed costs would not change.
Solution: Nicki Company
Conclusion:
Product 3 contributes P17,500 to the recovery of indirect expenses.
Therefore, in the absence of any other better alternative, it should
not be dropped.
Illustrative Problem 13.2 Evaluation of a Profit Centers
RTW Fashion Inc. operates with three divisions, A, B, and C. Division
A produces revenue of P1,200,000 for the year, Division B produces
revenue of P700,000 and Division C produces P600,000. The total
costs of the year for each division:
REQUIRED:
1. List the costs by division that can be directly attributed to
that division.
2. Do all three divisions provide an amount over their direct
costs to the total operation? Identify any divisions that does
not.
3. Is there any division that covers direct costs but does not
bear its full share of costs of the total operations? Identify
that division, if any.
4. Which division(s) can bear all of its share of the allocated
cost?
Solution: RTW Fashion Inc.
Supporting Analysis:
Answer:
1. Direct costs of the divisions:
Division A P680,000
Division B P720,000
Division C P480,000
2. No. Not all divisions provide an amount over their direct
costs to the total operation. Division B does not cover its
direct cost by P20,000
3. Division C contributes but cannot cover P80,000 of the
allocated cost.
4. Division A.