Question

Discuss the importance of Accounting based on responsibility centers. Use at least two examples of the different centers (cost center, profit center, and investment center). (10 points)
Cost-volume-profit (CVP) analysis is focused on five factors that affect profits. Name four (4) of those five factors? (4 points)
Within a relevant range we can assume that total costs, both variable and fixed, behave in a linear manner. Also, suppose that everything produced is sold in its entirety. Based on these assumptions:
What would be the basic formula to calculate the operating income of a manufacturing company? (3 points)
What would be the basic formula for the break-even point in terms of units (break-even-point)? (3 points)
The elements that you must take into consideration in the formula are: units produced and sold, variable costs, fixed costs.

Answer 1

Importance of Accounting based on Responsibility Center:

1. Promotes focus on revenue itself.

2. Promotes effective cost control

3.Promotes performance based review.

4.Focus on reduction on resourse wastage.

5. Handling department efficiently as per the requirement.

6.It promotes efficient investment Accounting Factor to get proper rate of return

7.Promotes coordination between manager and staff.

8. helps to take proper decision relating to capital budgeting.

9.keeps focus on proper revenue and profit generation

10.Encourage to invest in advanced technology.

Examples of Cost Center:

1. Cost in service incurrs relating to transport of goods,Stores etc

2. Production center incurs cost relating to Grinding Shop, Weilding Shop etc

Examples of Profit Center

1.Business incurs different expenses like salaries and rent which has to be calculated in comparison to revenue.

2. More revenue is generated with more cost factor.

Examples of Investment Center

1. department who makes human resource Investment to get proper efficiency

2. Department who makes investment in different project to get proper return

Factor Affecting CVP analysis:

1.Volume Of Production

2.Internal Efficiency

3.Product Mix

4.Method of Production.

Formula for Operating Income:

1. Operating Income = Total Revenue - Direct cost -Indirect cost

2. Operating Income = Gross Profit - Operating Expenses-Depreciation - Amortization

3.Operating Income = Net Earnings + Interest expense+Taxes

Formula for Breakeven Points:

1. Breakeven point = Fixed Cost /(Sales Price per unit-Variable cost per unit)

2. Breakeven point = Fixed Cost/ Contribution per margin

3.Breakeven Point = Fixed Cost/ Gross Profit Margin