Question

18. Responsibility Centers. Petroleum Products, Inc., operates primarily in the United States and has several segments: 1. Accounting and finance: responsible for recording financial information and preparing financial reports. 2. Human resources: responsible for hiring employees and maintaining personnel records 3. Retail stores: responsible for sales prices and all costs within each store. 4. Advertising: responsible for promotional materials 5. Production: responsible for manufacturing company products. 6. International operations: acts as an independent segment responsible for all facets of the business outside of the United States. Required: For each of the preceding segments, identify whether it is a cost center, profit center, or investment center. Explain your answer. 18. Responsibility Centers 4

Answer 1

Cost centers: A center for which a standard amount of cost is predetermined and used for control. Its main focus is on cost reduction and cost control.

Profit Centers: A center whose performance is measured in terms of income earned and cost incurred. Its main focus is on profit earning.

Investment Centers: A center responsible for earning profits and also for asset utilization. Its main focus is on earning revenue on Investments.

Responsibility Centers:

1. Accounting and finance is a cost center as it has a predetermined standard cost and company uses it for control.is department does not generate any revenue and only analysis performance of the company.

2. Human Resource is responsible for hiring employees and maintaining personal records. This department can be considered as profit center or Investment center as it contributes to the company in profit by hiring people which are an asset to the company.

3. Retail stores are Profit centers as there main focus is on profit earnings. The performance of retail stores are measured in terms of income earned and cost incurred.

4. Advertising are cost centers as standard amount of cost is determined and allocated to products.

5. Production department is clearly a cost center as it is responsible for producing goods , converting raw material into final product.

6. International Operations is an Investment center as it is responsible for its own profits and utilization of investment.