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Test Questions Responsibility Accounting

1. Define Responsibility Accounting.

2. What is meant by Responsibility Accounting.

3. What are the principals of Responsibility Accounting.

4. Describe the requirements of effective Responsibility Accounting.

5. What are the advantages of Responsibility Accounting ?

6. Define responsibility centre.

7. What are the various classifications of responsibility centre.

8. What is cost centre ?’

9. What is revenue centre ?

10. What do you understand by profit centre ?

11. What is meant by investment centre ?

12. What is Transfer price ?

 

Problem 1. XYZ Ltd operates a number of divisions located in different regions.  Division X incurred losses in the first half of the current year. Relevant revenue and cost data pertaining to these divisions are as follows.

 

 

Sales revenue

Controllable variable costs

Controllable fixed costs

Attributable segment costs

Common firm-wide cost allocated to division X

Loss

   $

6,50,000

3,50,000

2,00,000

50,000

60,000

(10,000)

 

You are required (i) To prepare a performance evaluation report of division X in the proper format and (ii) Advice the management whether its operation should be continued or shut down.

 

Solution :

(i) Performance Evaluation Report of Division X

Particulars

 

Sales Revenue

Less : Controllable variable costs

 

Controllable contribution margin

Less : controllable fixed costs

 

Controllable segment margin

Less : Attributable segment costs

 

Segment profit contribution

Less : Common firm wide costs

Amount

$.

 

 

6,50,000

3,50,000

 

3,00,000

2,00,000

 

1,00,000

50,000

50,000

60,000

 

10,000

 

(i)                  In the short run, division X justifies its existence as it generates a positive segment profit contribution i.e., 50,000 regardless of its share of firm-wide costs. Of course, in the long run division X must collectively generate sufficient total profit contribution to allow the recovery of all firm-wide costs and the achievement of corporate profit goals.

 

Problem 2. Ragal Angles Ltd deals in three products, Ace, Nice, and Grace and these are sold directly through salesmen in three zones Prime, Extension and Outreach. The responsibility for sales promotion rests with the headquarters and so does the overall control of distribution and sales. Cost of sales as percentage of sales are Ace 85, Nice 80, Grace 75. Details of sales, selling and distribution expenses for the year are as follows.

 

 

 

Zones                          Products                      Sales                Selling and distribution

($.)                 expenses allocated direct

($)

Prime Zone                  Ace                              9,00,000                     63,990

Nice                            9,00,000                      84,465

Grace                           4,50,000                     47,160

 

22,50,000                    1,95,615

 

Extension Zone           Ace                              6,75,000                      46,710

Nice                             4,50,000                     47,700

Grace                           2,25,000                     23,940

 

13,50,000                    1,18,350

 

Outreach Zone                       Ace                              2,25,000                     18,900

Nice                             1,80,000                      15,165

Grace                           4,95,000                     66,375

9,00,000                      1,00,440

Selling and distribution expenses at the headquarters are as follows :

$

Office expenses                       94,500

Advertisement                       1,35,000

Other expenses                       1,21,500

 

Advertisement costs are allocated to zones and product on the basis of sales.  Office expenses and other expenses are apportioned equally to the zones or products   While computing the profit or loss for the zones or the product as the case may be.

 

Prepare a comparative profit and loss statement, presenting zonal performance as distinct from product performance.

 

Solution :             Comparative Profit and Loss Statement

(Evaluating Zonal performance.]

       Particulars                                               Zones

Prime                 Extension                      Outreach

$                          $                                     $

Sales revenue                        22,50,000                 13,50,000                     9,00,000

Less : Cost of sales

Ace (.85)                              7,65,000                   5,73,750                       1,91,250

Nice (.80)                             7,20,000                  3,60,000                        1,44,000

Grace (.75)                           3,37,500                 1,68,750                         3,71,250

Total costs                             18,22,500               11,02,500                      7,06,500

Gross Profit margin

(Sales – Cost of sales)           4,27,500                 2,47,500                         1,93,500

 

Total

$

45,00,000

 

15,30,000

12,24,000

8,77,500

36,31,500

 

8,68,500

 

 

Less : Selling and distribution

expenses

Direct costs [allocated]                     1,95,615         1,18,350        1,00,440      4,14,405

Advertisement Expenses

[Apportioned in sales ratio

225 : 135 : 90]                                   67,500          40,500              27,000         1,35,000

Office expenses

(apportioned equally)                       31,500           31,500              31,500            94,500

other expenses (equally)                40,500             40,500              40,500          1,21,500

Total selling and

distribution Costs                             3,35,115          2,30,850          1,99,440      7,65,405

Net profit or loss

[Gross profit-Total selling,

Distribution cost]                          92,385                     16,650           5,940          1,03,095

 

 

 

Assignment Problem

 

Good Luck Ltd has the following total operating results for the current year :

$

Sales revenue                                                        56,00,000

Less : Variable costs                                              37,20,000

Contribution                                                          18,80,000

Less : Fixed cost                                                   10,00,000

Profit                                                                      8,80,000

 

The following additional information concerning the performance of each of the firm’s

three operating departments has been provided.

 

Department

K                     L                                            M

$                      $                                               $

Sales revenue                       24,00,000        20,00,000                               12,00,000

Variable costs                       16,80,000        12,00,000                                  8,40,000

Direct fixed costs                  3,20,000          2,80,000                                  2,00,000

 

(i)                 Rank the three departments on the basis of their proportionate measure of relative profitability.

 

A proposal to increase advertising expenses by $ 1,23,200 is expected to generate 10% increase in sales in all three departments. Analyse the effect of this proposal on the firm as a whole and on each department. Assume that the cost of advertising will be allocated to divisions according to each division’s percentage to sales and is to be considered as an attributable fixed cost of each department.