EXERCISES Cost Centers vs. Profit Centers: Analysis of Operations, Manager Behavior LO: 2 Type: RC, NAnswer: A.

Cost centers and profit centers are different types of responsibility units within an organization. With a cost center, a manager is held accountable for the amount of cost incurred; in contrast, with a profit center, managers are evaluated on the amount of profit generated, namely, revenues minus expenses. B. The number of service requests is likely to drop because users will now be charged for services provided. In cases where services are free, users sometimes use and abuse the privilege. .C. The profit center form of organization will probably result in a more service-oriented maintenance group .The profit-center manager would be willing to perform services as long as capacity is available andrevenues exceed expenses. Naturally, the added profitis viewed favorably, and the quality of services mayactually increase. On the other hand, if organized as a cost center, providing additional service will likely result in higher costs, which could be viewed unfavorably in performance evaluations. Responsibility Accounting: Controllability and Centers Answer:A.Responsibility accounting refers to the variousconcepts and tools that are used within an organization to evaluate the performance of people and various sub-units (such as divisions and departments). Managersare appointed to oversee these sub-units and heldaccountable for items under their control. B.The manager of a cost center is typically evaluated onthe amount of cost incurred. The costs should beunder the manager's control, and the service provided by the center should be high. C.Yes. Although Philbun understands the need to run afirst-class operation and contribute to Branson'soverall financial performance, she may have taken things a bit too far. A cost-center manager shouldstrive to run an operation that provides high-qualityservice at the lowest possible cost. This does notnecessarily mean cost minimization, which oftenresults in the elimination of key tasks (i.e., the "fine points") needed to achieve quality. It is possible thatthe department's late billings and errors in invoicesand customer statements may have been caused bysuch eliminations.D.No. A profit-center manager is evaluated on the basisof revenues generated and costs incurred. The BillingDepartment does not produce any revenues for Bransonit merely handles customer invoices andstatements. Sales of company products are likely theresponsibility of a separate Sales Department. Fixing responsibility Answer:A.No. Although the variances appear on the productionmanager's performance report and are often under hisor her control, an adjustment is needed in this case.The problem appears to be the fault of the purchasingclerk who misplaced the paperwork. Another explanation may be that the fault lies with themarketing department for accepting a rush order and possibly putting a strain on the entire manufacturingsystem. B.Yes. These variances should be discussed todetermine who's to blame and then cross-chargedagainst that individual's department.