Question

SkyAir, a large multi-national airline has many responsibility centres.

A. The South American division, which is responsible for operations in South America and has the authority to purchase new aircraft and add/cut routes.

B. The Pilot Training group, which is responsible for training new SkyAir pilots.

C. The reservations group, which is responsible for making SkyAir reservations

D. The maintenance division, which is responsible for SkyAir aircraft maintenance. As well, from time-to-time will also do maintenance for other airlines, but this represents less than 2% of revenues.

E. The fuel group, which is responsible for SkyAir fueling aircraft.

Required: Briefly identify how should each of these be evaluated:

(Following Cost Accounting Methods)

Answer 1

A responsibility center is a segment of the company for which a manager is responsible. This allows the company to gather quantitative information regarding the segment in order to assess the performance of the manager.

cost center performance evaluation is based on a comparison of budgeted controllable costs with actual controllable costs.Examples of cost centers include human resource departments and production departments

Profit center performance evaluation should be based on a comparison of a budgeted controllable income statement with an actual controllable income statement.

Investment centers are sometimes viewed as special cases of profit centers. The performance of a cost center manager is evaluated based on the controllable costs whereas the performance of a profit center manager is evaluated based on controllable income.Managers in an investment center are responsible for asset management and profit maximization. These managers have the ability to approve the construction of new factories, stores, and the purchase of major equipment.

Revenue Center – While revenue is a major factor for most businesses, revenue centers are actually the smallest portion of responsibility centers. Typically, revenue centers are sales territories and sales departments.

The South American division, which is responsible for operations in South America and has the authority to purchase new aircraft and add/cut routes.- Investment center

The Pilot Training group, which is responsible for training new SkyAir pilots. - cost center

The reservations group, which is responsible for making SkyAir reservations - revenue center

The maintenance division, which is responsible for SkyAir aircraft maintenance. As well, from time-to-time will also do maintenance for other airlines, but this represents less than 2% of revenues. - profit center

The fuel group, which is responsible for SkyAir fueling aircraft. - cost center