19.17 * Cost centres, profit centres, decentralisation, transfer prices OBJECTIV
ID: 1132175 • Letter: 1
Question
19.17 * Cost centres, profit centres, decentralisation, transfer prices OBJECTIVESL,Z Clearview Ltd manufactures windows with wood and metal frames. Clearview has three departments: Glass, Wood and Metal. The Glass Department makes the window glass and sends it to either the Wood or the Metal Department where the glass is framed. The window is then sold. Upper management sets the production schedules for the three departments and evaluates them on output quantity, cost variances and product quality REQUIRED 1. Are the three departments cost centres, revenue centres or profit centres? 2. Are the three departments centralised or decentralised? 3. Can a centralised department be a profit centre? Why or why not? 4. Suppose that the upper management of Clearview Ltd decides to let the three departments set their own production schedules, buy and sell products in the external market, and have Wood and Metal negotiate with Glass for the glass panes using a transfer price. a. Will this change your answers to requirements 1 and 2? b. How would you recommend that upper management evaluate the three departments if this change is made?Explanation / Answer
Ans.
1) The three departments are cost centers because in Clearview company Glass department makes window glasses which it sends to other departments within the company. The company is incurring costs to produce windows and does not generate revenue by providing it to other departments within the company.
2) The three departments are centralised because upper management sets the production schedule for the three departments and evaluates them on output quantity , cost variances and product quality.
3) A centralized department can be a profit center as department will be given a freedom for making decision and evaluate its performance . Such as Glass department can be a profit center if upper management sets price of glass and then send glass to other departments.
4) a. Now all three deartments will set there own production schedules , have there own costs , revenues and profits , buy and sell in the external markets as a result now these departmens are profit centres. Each departments orders its own materials, shedules it and negotiates the sale of its finished products. Thus all departments are decentralised .
b.Upper management can evaluate these departments according to profits of each department because now these departments are profit centres making there own decisions independently.
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