Transfer prices usually are not paid in cash; they are only entries made ill the accounting records to record the “flow” of goods and services among departments within the business.” In essence, the transfer price may be viewed as revenue earned by the segment supplying the products and as a cost (or expense) to the segments receiving them. As…
We have mentioned that contribution margin provides an excellent tool for evaluating “the effects ‘of short-run decisions on profitability. Such decisions typically do not involve changes in a company’s fixed costs. Unlike short-run decisions, long-run decisions often” have fixed cost implications. Thus the responsibility margin is considered a more useful longer-run measure of profitability than the contribution margin because…
An accounting system designed to measure the performance of each center within a business is referred to as a responsibility accounting system. Measuring performance along the lines of management responsibility is an important function. A responsibility accounting system holds individual managers accountable for the performance of the business centers under their control. In addition. such systems provide top management…
Some profit centers also qualify as investment. centers. An Investment center profit center for which management has been given decision-making responsibility for making significant capital invcsuncnis related to the center’s business activities. This chapter’s opening story about Siemens AG explains how the top cxccutive, Heinrich von Pierer, created .16 business units. Those business units are investment centers. At Health corp,…
1. Distinguish among cost centers, profit centers, and investment centers. 2. Evaluate the profitability of an investment center. 3. Explain the need for responsibility center information and describe a responsibility accounting system: 4. Prepare an income statement showing contribution margin and responsibility margin. 5. Distinguish between traceable and common fixed costs. 6. Explain the usefulness of contribution margin and responsibility margin in making short-term and long-term decisions.…
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