Brilliant Stone Corporation (BSC) manufactures decorative, sculpted accessories that are sold by interior decorators and home furnishing stores. The following situation concerns two BSC employees: Mika George, head of the company's Billing Department, and Frank Merser, the firm's general manager.George's Billing Department makes heavy use of hourly employees and is evaluated as a cost center. Understanding the need for prompt collection of receivables, George strives to run a first-class operation. George also understands the need to contribute in a big way to BSC's financial performance so she continually strives to minimize Billing Department expenses.Unfortunately, George experienced a heated discussion with Merser several weeks ago, the subject being the shoddy operation that she is

Question

running. Merser complained loudly about the lack of timely billings to customers and the general lack of attention to detail, as many complaints have surfaced about erroneous invoices and customer statements.Required: A. What is meant by the term "responsibility accounting?"B. What measure(s) of performance would companies normally use to evaluate a cost-center manager?C. Does Merser have a valid reason to be upset with George? Given the nature of the Billing Department, did George err in her quest to minimize expenses? Explain.D. Is it likely that the Billing Department could be evaluated as a profit center? Why?

What will be an ideal response?

Answer 1

A. Responsibility accounting refers to the various concepts and tools that are used within an organization to evaluate the performance of people and various sub-units (such as divisions and departments). Managers are appointed to oversee these sub-units and held accountable for items under their control.
B. The manager of a cost center is typically evaluated on the amount of cost incurred. The costs should be under the manager's control, and the service provided by the center should be high.
C. Yes. Although George understands the need to run a first-class operation and contribute to Merser's overall financial performance, she may have taken things a bit too far. A cost-center manager should strive to run an operation that provides high-quality service at the lowest possible cost. This does not necessarily mean cost minimization, which often results in the elimination of key tasks (i.e., the "fine points") needed to achieve quality. It is possible that the department's late billings and errors in invoices and customer statements may have been caused by such eliminations.
D. No. A profit-center manager is evaluated on the basis of revenues generated and costs incurred. The Billing Department does not produce any revenues for BSC-it merely handles customer invoices and statements. Sales of company products are likely the responsibility of a separate Sales Department.