Question & Answer: A cost center incurs costs and generates revenues and cost center managers are evaluated on the profitability of their centers. The form…..

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A cost center incurs costs and generates revenues and cost center managers are evaluated on the profitability of their centers. The formula for computing return on investment is controllable margin divided by average operating assets. Budget reports provide the feedback needed by management to see whether actual operations are on course. A standard is a unit amount, whereas a budget is a total amount. Standard costs may be incorporated into the accounts in the general ledger Normal standards should be rigorous but attainable. Once set, normal standards should not be changed during the year. The overhead controllable variance relates primarily to fixed overhead costs. There could be instances where the production department is responsible for a direct materials price variance. The starting point for determining the causes of an unfavorable materials price variance is the purchasing department. Variance analysis facilitates the principle of “management by exception”. In concept, standards and budgets are essentially the same. The use of an inexperienced worker instead of an experienced employee can res in favorable labor price variance but probably an unfavorable quantity variance.