Question

Elmhurst Corporation is considering changes to its responsibility accounting system. Which of the following statements is/are correct for a responsibility accounting system.
i. In a cost center, managers are responsible for controlling costs but not revenue.
ii. The idea behind responsibility accounting is that a manager should be held responsible for those items that the manager can control to a significant extent.
iii. To be effective, a good responsibility accounting system must help managers to plan and to control.
iv. Costs that are allocated to a responsibility center are normally controllable by the responsibility center manager.
1. I and II only are correct.
2. II and III only are correct.
3. I, II, and III are correct.
4. I, II and IV are correct.

Answer 1

Answer:

The correct answer is:

I, II, and III are correct (3.)

Explanation:

A Responsibility Accounting System (RAS) is an accounting program that is used to estimate how well departments are managing expenses and controlling costs with the most minimal day-to-day involvement of the executive or the central department. This system puts the departmental manager in charge of the day-to-day control and allocation of expenses and costs. This does not mean the total control of costs by the departmental managers, but controllable costs. Hence, from the lists in the question, the correct attributes associated with RAS are:

i.  In a cost center, managers are responsible for controlling costs but not revenue: revenue control is an exclusive reserve of the executive or central department.

ii. The idea behind responsibility accounting is that a manager should be held responsible for those items that the manager can control to a significant extent

iii. To be effective, a good responsibility accounting system must help managers to plan and to control: this emphasises that the RAS doesn't spell complete independence from the executive.

statement iv. (Costs that are allocated to a responsibility center are normally controllable by the responsibility center manager.) is incorrect because costs assigned to a responsibility center is not controlled by the responsibility center manager, but by the departmental manager.