When financial results are used to evaluate managers on their performance for rewards such as bonuses, the only costs charged to each manager for purposes of the evaluation should be costs each manager can control. Other costs may be allocated to each manager's responsibility center in the accounting system, but they should be excluded from the amounts used in the managers' evaluations. The best allocation basis and one that will permit the allocated costs to be validly used in manager evaluation is one in which the managers are able to control the incurrence of costs by their department. An allocation based on the actual usage of the item being allocated is an appropriate method of allocation for responsibility accounting purposes because that is something the manager can control. In this case, variable computer operational costs charged to each segment based on actual hours used is a charge the manager can control by controlling the usage. Managers of individual segments cannot control the overall incurrence of the computer operational costs, but they can control their usage of the computer services and thus they can control how much of the cost is allocated to their segments. Therefore, these variable computer costs can be included in the responsibility accounting report. The other answer choices all represent costs that segment managers are not able to control.
Costs included on segment performance reports should be costs that the segment manager can control. Managers of individual segments cannot control the incurrence of fixed computer costs incurred by the computer department, as those are overhead costs for the entire company and the decisions about the costs are made elsewhere. Furthermore, this allocation is not made on the basis of usage of the computer department by each segment. Therefore, this allocation of costs would not be appropriate to include on segment performance reports.
Costs included on segment performance reports should be costs that the segment manager can control. Managers of individual segments cannot control the incurrence of corporate administrative costs, as those are overhead costs for the entire company and the decisions about the costs are made elsewhere. Furthermore, the allocation of the costs on the basis of segment revenues could make the managers feel they are being charged more, or "punished," for doing well. A manager might even cut back on sales efforts, which would have a negative effect on the company, in an effort to cut the amount of common costs being allocated to his or her division. It might be impossible to allocate corporate administrative costs on any basis that the individual managers can control. Thus for analysis purposes, corporate administrative costs could be allocated in this way within the internal accounting system. However, these allocated costs would not be appropriate to include on a segment performance report used for manager evaluation.
The "personnel costs" referred to here are human resource department administrative costs that are being allocated to each segment on the basis of how many employees each segment has. This is an allocation of overhead. Costs included on segment performance reports should be costs that the segment manager can control. Managers of individual segments cannot control the incurrence of human resource department administrative costs, as those are overhead costs for the entire company and the decisions about the costs are made elsewhere. Therefore, this allocation of costs would not be appropriate to include on segment performance reports.
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