1. What are the advantages and disadvantages of decentralization within an organization?

Decentralization in a company means spreading out the power to make decisions among different groups or
people instead of keeping it all in one place. This can be good because it means decisions can be made more quickly
because they don't have to wait for approval from higher-ups. It also allows different departments to adapt to their
own situations without having to follow strict rules from a central authority. Plus, it makes employees feel more
important and motivated because they have a say in what happens. However, decentralization can also have some
disadvantages. Since different parts of the company might be making their own decisions, they might not always work
together well. This can lead to confusion and inefficiency, like when two departments end up doing the same thing
without realizing it. Also, because there isn't one person or group in charge of everything, the rules and policies might
be different depending on who you ask. This can be confusing for employees and lead to conflicts between different
parts of the company. Instead of working together towards the same goals, different departments might end up
competing with each other for resources or recognition, which can hurt the overall success of the company.

2. What are the four types of responsibility centers? What is the focus of each of these responsibility centers?

The following are the four types of responsibility centers:

 Cost Center: This center focuses on controlling costs and expenses such as keeping an eye on how much
money is being spent and trying to find ways to save.
 Revenue Center: The main focus is on generating income or revenue for the organization. It's about bringing
in money through sales or other means.
 Profit Center: This center is all about making a profit. This includes running a small business within the
bigger organization and trying to earn more money than you spend.
 Investment Center: In this center, the focus is on managing investments and maximizing returns. Also,
making smart choices about where to put the company's money to make it grow.

3. The master budget and flexible budgets are crucial tools for management. Provide a brief explanation of how
creating a master budget and flexible budgets helps management perform the management functions of planning and
control. Also, discuss the relationships between these two budget types and planning and control.

Master budgets and flexible budgets are very important for managers to plan and control their company's
money. The master budget is like the big plan for the whole year, showing how much money the company expects to
spend and make. It helps managers set goals and stay on track. Flexible budgets are like smaller plans that can
change based on what actually happens. They help managers adjust their plans if things don't go as expected. Both
types of budgets are useful for planning because they help managers prepare for the future. They also help with
control by letting managers compare the actual results to the budgets. If things aren't going according to plan,
managers can take action to fix them. So, master and flexible budgets work together to help managers manage their
company's money and keep things running smoothly.

4. If managers believe their efforts will be appropriately assessed, they will be more driven to meet goals. Justify the
usage of various bases by an organization to assess the management performance of various responsibility center
kinds.

Managers work better when they know their work will be checked fairly. Different types of managers have
different jobs, so they need to be judged in different ways. For managers in cost centers, their job is to control
spending. So, it makes sense to check how much they spend compared to what they were supposed to spend.
Managers in revenue centers are all about bringing in money. So, it's fair to judge them based on how much money
they make through sales or other ways. For profit center managers, their main goal is to make a profit. So, it's
important to see if they're making more money than they're spending. And for managers in investment centers, their
job is to manage investments wisely. So, it's smart to check if they're getting a good return on the money they're
investing. Moreover, by using different ways to assess managers in each type of responsibility center, companies can
make sure they're being fair and focusing on the right things. This helps keep everyone motivated and working
towards the company's goals.
5. The return on investment (ROl) metric is used by Hewlett Corporation to assess its managers. The managers of
the electronics and housewares departments, Bonita Mill and Cob Fill, respectively, have recently experienced a
decline in their respective departments' profits. They talk about the issue and potential solutions for better
performance over lunch. The majority of the conversation focuses on strategies to boost sales. But Cob points out
near the conclusion of the lunch break that they have only looked at one of the two factors to take into consideration.
She is curious as to whether there is a way to improve the outcome while lowering the investment and the ROI
fraction's denominator.

Now back at work, Bonita keeps thinking about what Cob said. She makes the decision to look into the subject more,
and before the quarter is over, she has sold a good deal of her older equipment and replaced it with equipment that
she leased for a brief period of time. Her ROl performance has significantly improved, but sales are still dismal.

Required:

1. Who are the stakeholders in this situation?

In this situation, the stakeholders involved are Bonita Mill and Cob Fill, who are the managers of the
electronics and housewares departments, respectively. They directly feel the effects of their departments'
performance. Also, the employees working in these departments could be affected by changes in their work
environment or job security. Hewlett Corporation, the company they work for, is also a stakeholder as it cares about
the performance of its departments and managers. Additionally, customers who purchase products from these
departments are stakeholders as well, as changes in product offerings or quality could impact their satisfaction.

2. Is Bonita's action ethical? Briefly explain.

Bonita's decision to sell off older equipment and lease new equipment to improve her ROI performance
raises ethical considerations. If this decision negatively affects the departments' ability to serve customers or maintain
quality standards, it could harm employees, customers, and the company in the long run. However, if Bonita ensured
that the replacement equipment was suitable and did not compromise product quality or customer service, her action
could be considered ethical. The ethics of Bonita's action depend on whether it prioritizes short-term financial gains
over the long-term sustainability and success of the departments and the company.

6. Pinnocle, From its enormous campus-like offices in the suburban Orlando area, Pinnocle, Inc. offers a range of
telecommunications services to business and residential clients. The company's maintenance group has been set up
as a cost center for a number of years, providing services to the user departments (sales, billing, accounting,
marketíng, research, and so on) at na cost.

The number of maintenance requests has increased significantly, and the demand is getting close to the point where
the promptness and quality of the services are starting to become problematic.

In light of this, management is investigating whether or not to turn the maintenance operation from a cost center into
a profit center and charge users for the services rendered.

Required:

a. Make a distinction between profit and cost centers. How are these centers assessed individually?

Profit centers and cost centers are different in how they operate and how they're assessed. A profit center is
focused on making money, so it's judged based on how much profit it generates. On the other hand, a cost center is
all about controlling expenses, so it's assessed based on how efficiently it manages costs.

b. What is the expected impact on the quantity of user service requests in the event that the Company transitions to a
profit-center organizational structure? Why?

If the company transitions the maintenance operation from a cost center to a profit center, it's likely that the
quantity of user service requests will decrease. This is because when users have to pay for the services they receive,
they may be more selective about what they request. They might only ask for services that are really necessary,
rather than everything they think they might need.
c. Let's say a user department has asked for a specific service, which is expensive and time-consuming to provide.
The user has agreed to pay P20,800 if the transition to a profit center is made, on top of the P17,800 real cost
incurred by the maintenance group to provide this service. In the event that Pinnocle's maintenance group is more
service-oriented and responsive, with the cost center or profit center organizational structure be more appropriate?
Why?

If the maintenance group becomes more service-oriented and responsive, it might be more appropriate to
keep it as a cost center. This is because the focus would be on providing the best service possible to the user
departments, rather than on making a profit. By keeping it as a cost center, the maintenance group can prioritize
quality and promptness without having to worry about the financial aspect as much.

7. The David Corporation produces sculpted and decorative items that are offered to home furnishing stores and
interior decorators. Two workers of David are involved in the following situation: Jeorge Orlan, the company's general
manager, and Jin Somo, the head of the billing department.

Hourly workers are heavily utilized by Somo's billing department, which is assessed as a cost center. Somo works
hard to maintain a top-notch operation because it recognizes the importance of timely receivables collection. As a
result of her constant efforts to reduce costs in the Billing Department, Somo also recognizes the necessity of making
a significant financial contribution to David's success.

Regretfully, a few weeks ago, Somo and Orlan got into a heated argument about the subpar business that she is
managing. As numerous complaints regarding incorrect invoices and consumer statements have surfaced, Orlan
voiced his dissatisfaction over the absence of timely billings to customers and the overall disregard for detail.

Required:

a. What does the phrase "responsibility accounting" mean?

Responsibility accounting means assigning responsibility for certain areas of a company's operations to
specific individuals or departments. It's about holding people accountable for their actions and the results they
produce in their assigned areas.

b. What performance metric or metrics would businesses typically use to assess a cost-center manager?

Businesses typically use performance metrics like cost efficiency, accuracy, timeliness, and customer
satisfaction to assess a cost-center manager. These metrics help evaluate how well the manager controls costs while
maintaining quality and meeting deadlines.

c. Is Orlan's anger toward Somo justified in any way? Did Jin make a mistake in her attempt to save costs,
considering the nature of the Billing Department? Describe.

Orlan's anger toward Somo may be somewhat justified if there have been numerous complaints about
incorrect invoices and consumer statements. While Somo's efforts to reduce costs are commendable, they shouldn't
come at the expense of accuracy and customer satisfaction. If Somo's cost-cutting measures have led to a decline in
service quality, then Orlan's dissatisfaction is understandable. Somo may have made a mistake by prioritizing cost
reduction over maintaining the quality and accuracy of the billing department's operations.

d. Is it possible to assess the billing department as a profit center? Why?

It may not be appropriate to assess the billing department as a profit center because its primary function is
to manage the billing process efficiently and accurately, rather than generate revenue directly. While timely billing and
collections are crucial for cash flow and financial stability, the billing department's role is more about cost control and
customer service than revenue generation. Therefore, assessing it as a profit center might not align with its core
responsibilities and objectives.
8. A cherished customer placed a last-minute rush order for an out-of-stock item with Leroy, Inc.'s marketing
manager. The production manager procured the necessary raw materials, and the manager submitted the required
paperwork to the production departmernt. Regretfully, the paperwork was momentarily misplaced by a purchasing
clerk; by the time it was located, Leroy could not place an order with its usual supplier. We found a new supplier that
provided a very competitive quote. The materials were discovered to be of low quality shortly after they were
delivered, which resulted in a favorable labor efficiency variation, an unfavorable materials quantity variance, and a
favorable materials price variance. As was customary, the production manager's performance report for the most
recent period included these last two deviations.

Required:

a. In light of the utilization of a responsibility accounting system by the organízation, should the production manager
face consequences for subpar work? Briefly discuss, having in mind that a production manager is usually in a very
good position to oversee labor efficiency and material utilization.

In a responsibility accounting system, managers are held accountable for their specific areas of
responsibility. Since the production manager oversees both labor efficiency and material utilization, they should
indeed face consequences for subpar work, especially if the materials procured were of low quality. The production
manager is responsible for ensuring that the materials used meet quality standards and that the production process
runs smoothly. Therefore, if there were issues with the materials resulting in unfavorable variances, the production
manager should be held accountable and may face consequences such as reprimand or additional training to prevent
similar incidents in the future.

b. Is there anything that can be done to make things right? If the answer is "yes," give a concise explanation.

Yes, there are steps that can be taken to make things right. Firstly, the production manager should conduct
a thorough investigation into why the materials turned out to be of low quality and implement measures to prevent
similar issues in the future. Additionally, Leroy, Inc. should work closely with the new supplier to address the quality
concerns and negotiate better terms for future orders. Lastly, the production manager can collaborate with the
marketing manager to ensure that rush orders are communicated promptly and accurately to avoid delays in the
future. By taking proactive steps and learning from this experience, Leroy, Inc. can improve its processes and
maintain customer satisfaction.

1. Describe the lowest internal transfer price that an autonomous division manager of an investment center would
consider accepting for a product that his/her division produces.

The lowest internal transfer price that an autonomous division manager of an investment center would
consider accepting for a product their division produces is the cost incurred by the division to produce that product.
This is because the division manager wants to ensure that their division covers its costs and makes a profit.
Accepting a transfer price lower than the division’s production cost would mean the division incurs a loss, which
would negatively impact its performance and profitability. Therefore, the division manager would aim to negotiate a
transfer price that at least covers the division’s production costs, allowing the division to maintain its financial health
and contribute positively to the overall performance of the investment center.

2. What are the advantages and disadvantages of market value as a transfer price?

Using market value as a transfer price has its pros and cons. On the positive side, it’s fair because it reflects
what the product or service is worth in the current market. This fairness can motivate divisions to work efficiently
since they’re rewarded based on the actual value of what they produce. Also, market value is easy to understand and
agree upon since it’s an external benchmark. However, there are drawbacks too. Market prices can change a lot,
making it hard to set stable transfer prices. Divisions don’t have much control over market prices, so sometimes the
transfer price might not accurately show how much it actually costs to make something. Also, divisions might focus
too much on getting high market prices in the short term, even if it’s not the best long-term strategy.
3. Why is “standard cost” a better measure for a transfer price than “actual cost”?

Using “standard cost” as a transfer price can be a smarter choice than using “actual cost” for a few reasons.
Firstly, standard costs are like expected costs that stay the same for a set period, which makes them easier to predict
and plan for. On the other hand, actual costs can change a lot because of things like changes in raw material prices
or labor rates, which can cause uncertainty. Secondly, standard costs give a stable price for both the selling and
buying divisions, reducing confusion and arguments over prices. Thirdly, standard costs act as a benchmark for
measuring performance and efficiency. This means divisions can compare how well they’re doing against what’s
expected, helping them spot areas to improve. Lastly, standard costs are used in planning and budgeting, making it
easier to allocate resources effectively.

4. Why don’t upper-level managers simply dictate transfer prices to divisional managers, and thereby avoid all the
hassles and expense of the negotiations between them (divisional Managers)?

Upper-level managers often avoid dictating transfer prices to divisional managers for several reasons.
Firstly, involving divisional managers allows for transfer prices that better suit the unique needs and challenges of
each division, ensuring fairness and practicality. Secondly, this approach fosters a sense of ownership and motivation
among divisional managers to achieve agreed-upon transfer prices, promoting collaboration and goal attainment.
Additionally, negotiations enable flexibility and adaptability to changing circumstances, as divisional managers can
provide valuable insights and adjustments. Moreover, the negotiation process serves as a platform for resolving
conflicts and strengthening working relationships within the organization.

5. What are the two general rules that should be followed when computing a transfer price?

When calculating a transfer price, there are two main rules to keep in mind. Firstly, it has to be fair for both
the selling and buying divisions. This means it should reflect the actual cost of making or getting the product,
considering things like market prices and the value each division adds. Secondly, the transfer price should line up
with the organization’s overall goals. It should encourage divisions to make choices that benefit the whole company,
not just themselves.

6. One element of the general transfer-pricing rule is opportunity cost. Briefly define the “opportunity cost” and then
explain how it is computed for (1) companies that have excess Capacity and (2) companies that have no excess
capacity.

Opportunity cost is like what you give up when you choose one option over another. For companies with
excess capacity, the opportunity cost is often calculated based on what they could have earned by using that extra
capacity to produce something else. So, it’s like figuring out how much money they could have made if they used
their resources differently. For companies with no excess capacity, the opportunity cost is a bit different since it’s
more about what they would have to give up if they used their resources for one thing instead of another. It could
include things like lost sales or the cost of outsourcing production to meet demand.

7. Although the general rule for transfer prices is the outlay cost plus opportunity cost, many Companies instead
use negotiated prices to price their goods and services. When are negotiated transfer prices used? Are such
prices consistent or inconsistent with responsibility accounting? Explain.

Negotiated transfer prices are used when companies want to consider more than just costs. They’re used in
situations where divisions have different goals or when there’s no clear market value. These prices can be both
consistent and inconsistent with responsibility accounting. On one hand, they give divisions autonomy and promote
efficiency. On the other hand, if they’re not based on objective criteria, they can lead to inconsistencies and
unfairness. So, while negotiated prices can encourage collaboration, they need to be managed carefully to ensure
fairness and consistency within the organization.

1. Can the performance evaluation measures (for autonomous subunit managers) create goal congruence
problems in transfer pricing situations? Explain.

Yes, performance evaluation measures for autonomous subunit managers can sometimes cause goal
congruence problems in transfer pricing situations. This occurs when the measures used to evaluate managers'
performance don't align with what's best for the company overall. For instance, if managers are judged solely on
maximizing their own subunit's profits, they might set transfer prices that benefit their division but harm other parts of
the company. Furthermore, it's crucial for performance evaluation measures to encourage decisions that benefit the
entire organization, not just individual subunits.

2. Cora Lights manufactures circuit boards for computer-controlled appliances for the home. The sales have been
very volatile, sometimes stressing the plant's capacity, and sometimes depressingly slow. During a recent slow
period, Mike Jones, a production supervisor, complained to Sue Stein, accounting manager, about the flexible
budget.

"I try as hard as I can to meet the budget," he says, "and then I find out that just meeting the budget's not good
enough. Last month, when we sold 8,000 units, I was P10,000 under my budget, and then you all blow me out of the
water with your report that I actually was P5,000 over, because sales were slow. I thought this responsibility
accounting business was supposed to mean we are held accountable just for things we can control. How do we
control sales? At the beginning of the year, you gave us all targets. Mine says that for an average month of 10,000
unit sales, I should spend about P82,000. I spend less, and get an unfavorable budget report. What gives?"

Required: Write a short memo to respond to Mr. Jones.

Subject: Response to Budget Concerns

Dear Mr. Jones,

I understand your frustration regarding the recent discrepancies in the budget reports. Your dedication to
meeting the budget targets is commendable, and I appreciate your concerns about the flexibility of the budget during
volatile sales periods.

It's important to clarify that responsibility accounting does hold individuals accountable for factors within their
control. However, it also considers external factors that may impact performance, such as fluctuating sales volumes.
While you may not directly control sales, your efforts in managing production costs and efficiency are crucial.

Regarding the recent budget report, I acknowledge the challenges posed by slower sales periods. Your
efforts in controlling costs during these times are valued and contribute to the overall performance of the plant.

Moving forward, we can explore ways to refine the budgeting process to better align with the realities of
fluctuating sales. Your input and suggestions for improvement are highly encouraged and welcomed.

Thank you for bringing your concerns to my attention. Let's work together to address these challenges and
ensure a more fair and accurate budgeting process in the future.

Sincerely,

Rianell Andrea M. Asumbrado

Accounting Manager
3. Segmented income statements are used to show revenues, expenses, and income for major parts of an
organization.

Required:

a. Consider a regional chain of department stores that has two or three stores in each of several cities. One way to
segment this business is geographically. Describe another way of segmenting the firm.

Besides geographical segmentation, another way to segment the firm could be by product line. For example,
if the department store chain sells clothing, electronics, and home goods, it could create segments for each product
line to analyze their performance separately.

b. Segmented income statements often distinguish between "fixed expenses controllable by the segment manager"
and "fixed expenses traceable to the segment, but controllable by others." Assume that the Cleveland district has
three retail stores. Give two examples of each type of fixed cost.

In the Cleveland district with three retail stores, examples of fixed expenses controllable by the segment
manager could include store rent, salaries of store managers, or advertising costs specific to each store. On the other
hand, fixed expenses traceable to the segment but controllable by others could include corporate office rent, salaries
of corporate executives, or national advertising campaigns that benefit all stores in the district but are controlled
centrally.

c. Common costs create difficulties when preparing segmented income statement. Define "common costs," give an
example for the regional chain of department stores, and explain in general terms why such costs create a problem.

Common costs are expenses that benefit multiple segments or divisions within an organization. An example
for the regional chain of department stores could be the cost of maintaining the company's website, which benefits all
stores equally. Common costs create problems when preparing segmented income statements because they need to
be allocated among segments, but doing so can be subjective and arbitrary. Additionally, misallocation of common
costs can distort the profitability of individual segments, leading to inaccurate decision-making and performance
evaluation.

4. The performance reports generated by a responsibility accounting system often form a "hierarchy of performance
reports." Explain what is meant by this term.

In responsibility accounting, a "hierarchy of performance reports" refers to different levels of reports showing
how well different parts of the organization are doing. It starts with a big-picture report showing overall company
performance and then gets more detailed for specific divisions or departments. This hierarchy helps managers
understand how their area of responsibility fits into the bigger picture, aiding decision-making and accountability.

5. Return on investment (ROI) is a very popular tool to evaluate performance. The measurement of ROI is
dependent, in part, on whether fixed assets are valued at acquisition cost or net book value. List several advantages
of acquisition cost and net book value as ways to value long-lived assets.

Acquisition cost and net book value offer distinct advantages for valuing long-lived assets. Acquisition cost,
representing the actual amount paid for an asset, provides a clear historical record and is easy to understand. It
remains consistent over time, aiding in financial reporting and decision-making. On the other hand, net book value
reflects the current worth of an asset after accounting for depreciation, offering a more accurate picture of its
economic value. It considers the asset's remaining useful life, making it useful for long-term performance evaluation.
Net book value aligns with accounting standards and provides a better assessment of the asset's ongoing value.
Depending on the purpose and context, both methods offer valuable insights into the valuation of long-lived assets.
6. Return on investment (ROI) and residual income (RI) are popular measures of divisional performance. Like any
measure, there are disadvantages or weaknesses that are an inherent part of these tools. Briefly discuss a major
weakness associated with each tool.

One major weakness of Return on Investment (ROI) is that it may encourage short-term thinking over long-
term growth, as managers prioritize projects with quick returns. For Residual Income (RI), a major weakness is that it
may not be easily comparable across divisions of different sizes or investments, potentially leading to inconsistent
performance evaluation.