What is fundamental principle of responsibility accounting
Course:- Accounting Basics
Reference No.:- EM131146668

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Indicate whether each of the following statements is true or false.

  1. Items that a manager has direct control over are included in responsibility accounting reports for that management level.
  2. An appropriate goal of an expense center is the long-run minimization of expenses.
  3. The salary of a segment manager would be considered a direct cost as well as an uncontrollable cost to that segment.
  4. Segmental net income is the most appropriate figure to use when evaluating the performance of a segment.
  5. When calculating RI for a segment, the income and investment definitions are income controlled by a manager, and assets directly used by and identified with the segment.


Select the best answer for each of the following questions.

The investment base used when determining the ROI calculation could be which of the following?
a. Current replacement cost.
b. Original cost.
c. Original cost less accumulated depreciation.
d. Any of the above.

Which of the following actions would increase ROI?
a. Reduce operating expenses with no effect on sales or assets.
b. Increase investment in assets, with no change in income.
c. Increase sales with no change in income or assets.
d. None of the above.

Calculate ROI using the expanded form (margin times turnover) from the following data:

         Sales                                                  $1,000,000

         Investment                                          500,000

         Income                                                 50,000

a. 20 per cent.
b. 10 per cent.
c. 15 per cent.
d. None of the above.
In evaluating the performance of a segment or manager, comparisons should be made with:
a. Other segments and managers within the company and in other companies.
b. Past performance of the segment manager.
c. The current budget.
d. All of the above.

Calculate the ROI and RI for each of the following segments and determine if a segment should be dropped based on RI.

                                     Segment 1 Segment 2 Segment 3

Income                           $ 180,000   $ 1,000,000  $ 500,000










Desired minimum ROI















a.  9 per cent, 20 per cent, 20 per cent USD 0, USD 500,000, USD 200,000 Consider dropping Segment 1.

b. 20 per cent, 20 per cent, 20 per cent USD 200,000, USD 500,000, USD 200,000

Do not drop any segment.

c.  9 per cent, 20 per cent, 25 per cent USD (20,000), USD 500,000, USD 300,000

Consider dropping Segment 1.

d. 20 per cent, 20 per cent, 25 per cent USD 200,000, USD 500,000, USD 300,000

Do not drop any segment.


  •  What is the fundamental principle of responsibility accounting?
  •  List five important factors that should be considered in designing reports for a responsibility accounting system.
  •  How soon should accounting reports be prepared after the end of the performance
  •  measurement period? Explain. Name and describe three types of responsibility centers. 
  •  Describe a segment of a business enterprise    
  •  What is best treated as an expense center.
  •  List four indirect expenses that may be allocated to such an expense center.
  •  Compare and contrast an expense center and an investment center.
  •  What purpose is served by setting transfer prices?
  •  What is the advantage of using investment centers as a basis for performance evaluation?
  •  Which categories of items must a segment manager have control over for the investment center concept to be applicable? What  is the connection between the extent of decentralization and the investment center concept?
  •  Give some of the advantages of decentralization.
  •  Differentiate between a direct cost and an indirect cost of a segment. What happens to these categories if the segment to which  they are related is eliminated?
  •  Is it possible for a cost to be direct to one cost object and indirect to another cost object? Explain.
  •  Describe some of the methods by which indirect expenses are allocated to a segment.
  •  Give the general formula for return on investment (ROI). What are its two components?
  •  Give the three sets of definitions for income and investment that can be used in ROI
  •  calculations, and explain when each set is applicable.
  •  Give the various valuation bases that can be used for plant assets in investment center calculations. Discuss some of the  advantages and disadvantages of these methods.
  •  In what way is the use of the residual income (RI) concept superior to the use of ROI?
  •  How is residual income (RI) determined?
  •  If the RI for segment manager A is USD 50,000 while the RI for segment manager B is USD 100,000, does this necessarily mean  that B is a better manager than A? Explain.
  •  Real world question Refer to the annual report of a publicly traded company.
  •  Which of the company's geographic regions performed better? Explain.
  •  (Based on Appendix) Briefly discuss the two methods of allocating service department costs.

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