QUIZ NO. 1 – DECENTRALIZATION, BALANCED SCORECARD and TRANSFER PRICING

PART 1-MC THEORIES (1.5 POINT EACH)

1. Graduating, Inc., uses an accounting system that charges costs to the manager who has been delegated the authority to make the decisions incurring the costs. For example, if the sales manager accepts a rush order that will result in higher-than-normal manufacturing costs, these additional costs are charged to the sales manager because the authority to accept or decline the rush order was given to the sales manager. This type of accounting system is known as
A. Responsibility accounting.
B. Functional accounting.
C. Reciprocal allocation.
D. Transfer price accounting.

Answer (A) is correct. (CMA, adapted)
REQUIRED: The system in which additional costs are charged to the manager with authority for their incurrence.
DISCUSSION: In a responsibility accounting system, managerial performance should be evaluated only on the basis of those factors directly, regulated (or at least capable of being significantly influenced) by the manager. For this purpose, operations are organized into responsibility centers. Costs are classified as controllable and non-controllable, which implies that some revenues and costs can be changed through effective management, If a manager has authority to incur costs, a responsibility accounting system will charge them to the manager’s responsibility center. However, controllability is not an absolute basis for establishment of responsibility. More than one manager may be able to influence a cost, and responsibility may be assigned on the basis of knowledge about the incurrence of a cost rather than the ability to control it.
Answer (B) is incorrect Functional accounting allocates costs, to functions regardless of responsibility. Answer (C) is incorrect. Reciprocal allocation is a means of allocating service department