Question

Janice Black, manager of the Produce Department at Spanky's Grocery, has a monthly responsibility margin of $4,000. The store manager has decided to allocate storewide common costs to each department. After the allocation, Ms. Black's responsibility margin is -$1,200 per month. Identify the disadvantages of allocating common costs to responsibility centers. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect. Any boxes left with a question mark will be automatically graded as incorrect.) O Allocation of common fixed costs results in changes to profits that are not related to the operation of the responsibility center. O Common fixed costs are not under the control of responsibility managers. Common fixed costs are under the control of responsibility managers. Because common fixed costs do not change when a business center is eliminated, inclusion in the business center responsibility margin could distort decision making. Because common fixed costs change when a business center is eliminated, inclusion in the business center responsibility margin could distort decision making.

Answer 1

Common Fixed Costs are overheads used by all resposibilty centers commonly. These costs are allocated to each responsibility center on a predetermined basis of allocation. Basically, common fixed costs are not under control of the responsibility manager. So he can not reduce or avoid these costs. The basis for allocating those common fixed costs are also difficult to ascertain or define. Based on the information provided above, Option 2 is the correct answer.