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Horngren'S Financial And Managerial Accounting
Found in: Page 1355

Short Answer

What is a responsibility center?


The responsibility center refers to the section or unit of an organization responsible for specific tasks assigned to the same.

See the step by step solution

Step by Step Solution

Step 1: Meaning of Organization

The term organization refers to the association of individuals and other bodies who agree to perform particular activities for the accomplishment of common goals specified by the management.

Step 2: Meaning of Responsibility Center

The term responsibility center refers to a unit of an entity or organization responsible for all the events, tasks, and activities associated with such a particular unit. Each responsibility center carries its separate tasks and goals.

Most popular questions for Business-studies Textbooks

The Trolley Toy Company manufactures toy building block sets for children. Trolley is planning for 2019 by developing a master budget by quarters. Trolley’s balance sheet for December 31, 2018, follows:

Balance Sheet
December 31, 2018

Current assets:



Accounts receivables


Raw material inventory


Finished goods inventory


Total current assets


Property, Plant and Equipment



Less: Accumulated depreciation



Total assets



Current liabilities

Account payable


Stockholders equity

Common stock, no par


Retained earnings


Total stockholders equity


Total liabilities and stockholders equity


Other budget data for Trolley Toy Company:

a. Budgeted sales are 1,400 sets for the first quarter and expected to increase by 150 sets per quarter. Cash sales are expected to be 30% of total sales, with the remaining 70% of sales on account. Sets are budgeted to sell for $90 per set.

b. Finished Goods Inventory on December 31, 2018, consists of 200 sets at $27 each.

c. Desired ending Finished Goods Inventory is 40% of the next quarter’s sales; first quarter sales for 2020 are expected to be 2,000 sets. FIFO inventory costing method is used.

d. Raw Materials Inventory on December 31, 2018, consists of 600 pounds. Direct materials requirement is 3 pounds per set. The cost is $2 per pound.

e. Desired ending Raw Materials Inventory is 10% of the next quarter’s direct materials needed for production; desired ending inventory for December 31, 2019, is 600 pounds; indirect materials are insignificant and not considered for budgeting purposes.

f. Each set requires 0.30 hours of direct labor; direct labor costs average $12 per hour.

g. Variable manufacturing overhead is $3.60 per set.

h. Fixed manufacturing overhead includes $7,000 per quarter in depreciation and $2,585 per quarter for other costs, such as utilities, insurance, and property taxes.

i. Fixed selling and administrative expenses include $11,000 per quarter for salaries; $1,500 per quarter for rent; $1,350 per quarter for insurance; and $1,500 per quarter for depreciation.

j. Variable selling and administrative expenses include supplies at 2% of sales.

k. Capital expenditures include $45,000 for new manufacturing equipment, to be purchased and paid for in the first quarter.

l. Cash receipts for sales on account are 40% in the quarter of the sale and 60% in the quarter following the sale; Accounts Receivable balance on December 31, 2018, is expected to be received in the first quarter of 2019; uncollectible accounts are considered insignificant and not considered for budgeting purposes.

m. Direct materials purchases are paid 90% in the quarter purchased and 10% in the following quarter; Accounts Payable balance on December 31, 2018, is expected to be paid in the first quarter of 2019.

n. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.

o. Income tax expense is projected at $3,500 per quarter and is paid in the quarter incurred.

p. Trolley desires to maintain a minimum cash balance of $55,000 and borrows from the local bank as needed in increments of $1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of $1,000; interest is 10% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.


1. Prepare Trolley’s operating budget and cash budget for 2019 by quarter. Required schedules and budgets include: sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, cost of goods sold budget, selling and administrative expense budget, schedule of cash receipts, schedule of cash payments, and cash budget. Manufacturing overhead costs are allocated based on direct labor hours.

2. Prepare Trolley’s annual financial budget for 2019, including budgeted income statement and budgeted balance sheet.

3. Trolley sold 7,000 sets in 2019, and its actual operating income was as follows:

Income Statement
For the Year Ended December 31, 2019

Net sales revenue


Cost of goods sold:






Gross profit


Selling and administrative expenses:






Operating income


Other income and (expenses):

Interest expenses


Income before income tax


Income tax expenses


Net income


Prepare a flexible budget performance report through operating income for 2019. Show product costs separately from selling and administrative costs. To simplify the calculations due to sets in beginning inventory having a different cost than those produced and sold in 2019, assume the following product costs:




Static budget




Flexible budget




4. What was the effect on Trolley’s operating income of selling 500 sets more than the static budget level of sales?

5. What is Trolley’s static budget variance for operating income?

6. Explain why the flexible budget performance report provides more useful information to Trolley’s managers than the static budget performance report. What insights can Trolley’s managers draw from this performance report?

7. During 2019, Trolley recorded the following cost data:

Standard Cost Information



Direct materials

3 pounds per set

$2.00 per pound

Direct labor

0.30 hours per set

$12.00 per hour

Variable manufacturing overhead

0.30 hours per set

$12.00 per hour

Fixed manufacturing overhead Static budget amount: $38,340

0.30 hours per set

$21.00 per hour

Actual Cost Information

Direct materials

(20,700 pounds @ $2.50 per pound)

$ 51,750

Direct labor

(2,060 hours @ $12.40 per hour)


Variable manufacturing overhead

(2,060 hours @ $11.60 per hour)


Fixed manufacturing overhead


Compute the cost and efficiency variances for direct materials and direct labor.

8. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances.

9. Prepare the standard cost income statement for 2019.

10. Calculate Trolley’s ROI for 2019. To calculate average total assets, use the December 31, 2018, balance sheet for the beginning balance and the budgeted balance sheet for December 31, 2019, for the ending balance. Round all of your answers to four decimal places.

11. Calculate Trolley’s profit margin ratio for 2019. Interpret your results.

12. Calculate Trolley’s asset turnover ratio for 2019. Interpret your results.

13. Use the expanded ROI formula to confirm your results from Requirement 10. Interpret your results.

14. Trolley’s management has specified a 30% target rate of return. Calculate Trolley’s RI for 2019. Interpret your results.

The Harris Company is decentralized, and divisions are considered investment centers. Harris has one division that manufactures oak dining room chairs with upholstered seat cushions. The Chair Division cuts, assembles, and finishes the oak chairs and then purchases and attaches the seat cushions. The Chair Division currently purchases the cushions for $22 from an outside vendor. The Cushion Division manufactures upholstered seat cushions that are sold to customers outside the company. The Chair Division currently sells 800 chairs per quarter, and the Cushion Division is operating at capacity, which is 800 cushions per quarter. The two divisions report the following information:

Chair Division Cushion Division

Sales Price per Chair $ 85 Sales Price per Cushion $ 32

Variable Cost (other than cushion) 42 Variable Cost per Cushion 13

Variable Cost (cushion) 22

Contribution Margin per Chair $ 21 Contribution Margin per Cushion $ 19


1. Determine the total contribution margin for Harris Company for the quarter.

2. Assume the Chair Division purchases the 800 cushions needed from the Cushion Division at its current sales price. What is the total contribution margin for each division and the company?

3. Assume the Chair Division purchases the 800 cushions needed from the Cushion Division at its current variable cost. What is the total contribution margin for each division and the company?

4. Review your answers for Requirements 1, 2, and 3. What is the best option for Harris Company?

5. Assume the Cushion Division has capacity of 1,600 cushions per quarter and can continue to supply its outside customers with 800 cushions per quarter and also supply the Chair Division with 800 cushions per quarter. What transfer price should Harris Company set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter.


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