A-AS Level (CIE) Business Studies Paper-2: Specimen Questions with Answers 32 - 32 of 52

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Case Study-9

Alpha Limited manufactures air-conditioners of different sizes and types. For manufacturing air conditioners, most of the components are purchased from vendors; only some critical machinery work is undertaken by the company before the various components are used for assembly. The company has manual inventory control system. This system is not able to provide timely information to procure various components. In order to overcome this problem, the company wanted to install computerized inventory control system. For this purpose, the company hired an information system analyst. He studied the present inventory control system so that he could design job standardized forms in which relevant information about purchasing and usage of various components should be given for production department and accounting department. However, he was surprised to find that each department had a different view of what should go in the forms.

Question 32 (4 of 5 Based on Passage)


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Short Answer▾

How responsibility accounting differs from other branches of accounting in respect to control process?


The concept of responsibility center is important in the operation of responsibility accounting. A responsibility center is an organizational unit such as division, department, or section, headed by a responsible person where responsibility is fixed on its head for the target fixed in respect of that organizational unit. There are three types of responsibility centers:

  • Cost centers
  • profit centers
  • investment centers.

In the cost centers the control system measures only the costs incurred by responsibility centers no attempt is made to measure the value of their outputs. Thus, most departments and staff departments are cost centers. In profit centers, the targets are fixed in terms of profit which is measured by the amount of input and output. In the investment center. managers are held responsible for the effective use of assets as well as for revenue and cost. Thus, it is the head of a responsibility center is responsible for the activities to be performed at ultimate extension of responsibility that center. Further, he is made responsible for the controllable costs. The costs incurred in a responsibility center are those associated with accomplishing its functions.

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