Question

Required: Considering the Conduct of Cost Accountants, how would you respond to Ruth's request?

1. What is responsibility accounting? Compare and contrast financial-based responsibility accounting with activity-based responsibility accounting.

2. Why should predetermined overhead rates be used instead of actual rate? Justify your views with logical arguments.

Answer 1

Answer-1. An accounting system that collects, summarizes, and reports accounting data relating to the responsibilities of managers is called responsibility accounting.

Financial-Based Responsibility Accounting	Activity-Based Responsibility Accounting
A financial-based responsibility accounting system expresses performance measures in financial terms and assigns responsibility to organizational units.	An activity-based responsibility accounting system uses both financial and nonfinancial measures of performance and assigns responsibility to processes.
When most firms were operating in relatively stable environments, this responsibility accounting system was developed	It is developed for those firms operating in continous improvement environments.
Responsibility is defined: Individual in Charge Operating Effeciency Organizational Unit Financial Outcomes	Responsibility is defined: Team Value Chain Process Financial
Performance measures are established: Unit Budgets Static Standards Standard Costing Currently attainable standards	Performance measures are established: Optimal Process Oriented Dynamic Value-Added
Performance is measured: Financial Efficiency Actual vs Standard Controllable Costs Financial Measures	Performance is measured: Time Reductions Cost Reductions Quality Improvement Trend Measures
Individuals are rewarded based on financial performance: Promotions Profit Sharing Bonuses Salary Increases	Individuals are rewarded based on financial performance: Promotions Gain Sharing Bonuses Salary Increases

Answer-2. Predetermined overhead rates should be used instead of actual rate because:

• A business typically doesn't suffer overhead costs all around the year. For instance, heating costs are more noteworthy during winter months. Still, assigning extra overhead cost to a job created in the winter contrasted with one created in the mid year(summer) may fill no helpful need.
• Overhead costs like factory building depreciation are fixed expenses. In the event that the volume of goods manufactured shifts from month to month, the actual rate changes from month to month, despite the fact that the total cost is consistent from month to month. The predetermined rate, then again, is consistent from month to month.
• Predetermined rates help in estimating job costs sooner. Businesses can allocate overhead costs to manufacturing when they allot direct materials and direct labor costs, utilizing a predetermined rate. Without a predetermined rate, businesses don't have the idea about the costs of manufacturing until the month's end or considerably later when bills show up. Mostly, the electric bill for July will likely not show up until August. In the event that they have utilized actual overhead, the business would not have decided the costs of its July work until August. It is one step ahead to have a decent approximate of costs while accomplishing the work in place of hanging tight quite a while for just a bit more precise numbers.