1. Differentiate between a profit center and an investment center.
1. Differentiate between a profit center and an investment center.
2. Weyerhaeuser developed a system that assigns service department expenses to user divisions on the basis of actual services consumed by the division. Here are a number of Weyerhaeuser's activities in its central Financial Services Department:
-
- Payroll
- Accounts payable
Accounts receivable - Database administration—report preparation
For each activity, identify an activity base that could be used to charge user divisions for service.
- What is the major shortcoming of using income from operations as a performance measure for investment centers?
- In a decentralized company in which the divisions are organized as investment centers, how could a division be considered the least profitable even though it earned the largest amount of income from operations?
- How does using the
return on investment facilitate comparability between divisions of decentralized companies? - Why would a firm use a balanced scorecard in evaluating divisional performance?
- What is the objective of transfer pricing?
- When is the negotiated price approach preferred over the market price approach in setting transfer prices?
- When using the negotiated price approach to transfer pricing, within what range should the transfer price be established?
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1.
Responsibility center: A department or unit of a corporation where the management assigns the responsibility of evaluation, control, and management of the resources of the unit to the manager is referred to as responsibility center.
The four types of the responsibility center are as follows:
- Cost center
- Revenue center
- Profit center
- Investment center
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