Responsibility reports for cost centers:
(a) distinguish between fixed and variable costs.
(b) use static budget data.
(c) include both controllable and noncontrollable costs.
(d) include only controllable costs.
The correct answer and explanation is :
The correct answer is (d) include only controllable costs.
Explanation:
Responsibility reports are used in managerial accounting to evaluate the performance of different cost centers or departments within an organization. They assess the costs and expenses relative to the budgeted figures, and help managers track how well their departments are managing resources.
Let’s break down the key points of the correct answer:
- Controllable Costs:
Responsibility reports focus on controllable costs because they are costs that a manager or department has the authority to influence or change. These costs include things like labor, materials, and supplies, where the department head can make decisions about how much to spend or how efficiently resources are used. Including only controllable costs allows managers to be evaluated based on their ability to control the areas within their direct responsibility. For example, a manager may not have control over company-wide fixed costs like rent or interest on debt, but they can control operational costs like wages and materials. - Fixed vs. Variable Costs:
Fixed costs (such as rent, insurance, or salaried labor) do not change with production or activity levels, whereas variable costs (such as raw materials or hourly labor) fluctuate based on the level of output. In a responsibility report, the goal is not to simply distinguish between fixed and variable costs but to focus on costs that can be controlled. Fixed costs, especially those that are non-controllable, are typically excluded from performance evaluations in these reports. - Static Budget Data:
Static budgets use projected or planned figures, and responsibility reports usually compare actual performance against this budget. However, the static nature of the budget doesn’t necessarily determine whether the report includes controllable costs, as the focus is on evaluating managers’ actions. - Noncontrollable Costs:
Noncontrollable costs (such as corporate-wide costs or external factors like inflation) are not relevant in responsibility reports because managers have no influence over them. Including such costs could misrepresent a manager’s performance.
Thus, by including only controllable costs, responsibility reports more accurately reflect how well a department or manager is performing in their specific area of responsibility.