Managerial Accounting

RESPONSIBILITY ACCOUNTING, SUPPORT

DEPARTMENT ALLOCATIONS,

AND TRANSFER PRICING

Learning Objectives

After reading and studying this chapter, you should be able to answer the following

questions:

1.

Which factors determine whether a firm should be decentralized or

centralized?

2.

How are decentralization and responsibility accounting related?

3.

What are the four primary types of responsibility centers and what

distinguishes them from each other?

4.

How are revenue variances computed?

5.

Why and how are support department costs allocated to operating

departments?

6.

What types of transfer prices are used in organizations and why are such

prices used?

7.

What difficulties can be encountered by multinational companies using

transfer prices?

Terminology

Administrative Department: an organizational unit that performs management

activities that benefit the entire organization and include top management personnel,

legal, payroll, insurance, and organization headquarters

Advance pricing agreement: a binding contract between a company and one or more

national tax authorities that provides details of how a transfer price is to be set and

establishes that no adjustments or penalties will be made if the agreed-upon

methodology is used

Algebraic method: a method of allocating support department costs that considers all

interrelationships of the departments and reflects these relationships in simultaneous

equations

“Benefits-provided” ranking: a listing of support departments in an order that begins

with the one providing the most service to all other corporate areas and ends with the

support department providing service primarily to the operating areas

Centralization: term used to describe an organization’s approach to decision making in

which top management retains the major portion of decision-making authority

Cost center: a responsibility center in which the manager has the authority only to incur

costs and is specifically evaluated on the basis of how well...