1. Explain (briefly) the distinction between a cost, profit and investment cente

ID: 2408556 • Letter: 1

Question

1. Explain (briefly) the distinction between a cost, profit and investment center in a business, and provide an example.

2. Explain why a company uses static and flexible budgets.

4. Using any 2 data points from #3, what observation can you draw about this company?

3. Complete the following chart. Compute variances for the items shown in the following list and indicate whether each variance is favorable (F) or unfavorable (UF). Budget Actual Variance F or UF Item Slling and Administrativ Expenses Sales Revenue Materials Price Cost of Goods Sold Materials Purchases Materials Usage Sales Price Labor Rate Production Volume Labor Usage Researclh Expense 29,000 27,000 $310,000 $2.00 per lb. $125,000 $250,000 6,000 lbs S550 each $325,000 $2.10 per lb. $100,000 $265,000 5,800 lbsi $500 each S8.10 per hour $7.95 per hou 950 unitts $96,000 $22,000 900 units $97,000 $25,000 and Developmen

Explanation / Answer

Investment center

It is adepartment within an organization that takes the responsibilityfor the costs incurred

It contributestoa organization’sprofitabilityindirectlyby reducingcosts

It contributestoa organization’sprofitability directlyandaimsatmaximization of profit

To evaluatethe company’sperformance

A cost center does not take in any income, but must spend money to fulfill an important function. In other words, a cost center only adds to costs.

attempts to achieve higher returns from internal service functions

It is responsible for investments made in operating assets. It provides serviceto the profit center

Human resource department, IT department, accounting department.

Sales department

Discount division, sales division.

Ans:

Flexible budget:

A flexible budget is a series of budgets prepared for various levels of activities, revenues and expenses. Flexible budgets get modified during the year for actual sales levels, changes in cost of production and virtually any other change in business operating conditions.

Reasons behind using it

Static budget:

The budget which does not change with the change in volume. The budget remains fixed for the entire period, even if sales volume changes.

Reasons behind using it:

Item

Budget

Actual

Variance

F or UF

Selling and administrative expenses

$29000

$27000

$2000

Sales revenue

$310000

$325000

$15000

Materials price

$2.00 per. Lb.

$2.10 per. Lb.

$.10 per lb.

Cost of goods sold

$125000

$100000

$25000

Material purchases

$250000

$265000

$15000

Sales price

$550 each

$500each

$50

Labour rate

$8.10 Per hour

$7.95 per hour

$.15 per hour

Production volume

950 units

900 units

$50

Labor usage

$96000

$97000

$1000

Research and development expense

$22000