Question

Explain how the choice of the responsibility centre type​ (cost, revenue,​ profit, or​ investment) affects budgeting.

A.

The type of responsibility centre affects financial planning models. These models affect the behaviour of managers who aim to achieve a high profit and increase revenues.

B.

The type of responsibility centre determines the strategic plans for the organization. The organization tailors​ it's long-range and​ short-range plans based on the goal of each responsibility centre.

C.

The choice of a responsibility centre type guides the variables to be included in the budgeting exercise.

D.

None of the above

Answer 1

Solution:

The correct answer is option (A)

The responsibility centre is primarily aimed at creating responsibility towards the managers on the functioning of the entity with an view to maximize the returns. ie., it creates efficiency in the managers business.

In order to maximize the returns, they can go for cost control techniques which has a major effect in budgeting.

Hence, The type of responsibility centre affects financial planning models. These models affect the behaviour of managers who aim to achieve a high profit and increase revenues.