Cost centers, profit centers, decentralization, transfer prices. Fenster Corporation manufactures windows with wood and metal frames. Fenster has three departments: glass, wood, and metal. The glass department makes the window glass and sends it to either the wood or 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.1. Are the three departments cost centers, revenue centers, or prot centers?2. Are the three departments centralized or decentralized?3. Can a centralized department be a prot center? Why or why not?4. Suppose the upper management of Fenster Corporation decides to let the three departments set their own production schedules, buy and sell products in the external market, and have the wood and metal departments negotiate with the glass department for the glass panes using a transfer price. a. Will this change your answers to requirements 1 and 2? b.How would you recommend upper management evaluate the three departments if this change is made?

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Asked Dec 22, 2019
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Cost centers, profit centers, decentralization, transfer prices. Fenster Corporation manufactures windows with wood and metal frames. Fenster has three departments: glass, wood, and metal. The glass department makes the window glass and sends it to either the wood or 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.

1. Are the three departments cost centers, revenue centers, or prot centers?
2. Are the three departments centralized or decentralized?
3. Can a centralized department be a prot center? Why or why not?
4. Suppose the upper management of Fenster Corporation decides to let the three departments set their own production schedules, buy and sell products in the external market, and have the wood and metal departments negotiate with the glass department for the glass panes using a transfer price. a. Will this change your answers to requirements 1 and 2? b.
How would you recommend upper management evaluate the three departments if this change is made?

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Transfer Price: This is a price which is charged by one sub-unit of an organization to another sub-unit for supplying a product or service in the same organization. Cost center: The cost center is that department in a company which makes a contribution to the profitability of any company by managing the operating costs of the company by increasing the efficiency, customer service or the product value. Profit center: The profit center is that department in a company where profit is accounted and plans to increase the profit is made. The main objective is to determine that how the optimum use of resources can be made to increase the profitability. Decentralization: The decentralization means that the lower levels of an organization are given freedom to take their decisions. This means the responsibility in an organization is shared or is given to the smaller and subsidiary levels.

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The three departments are cost centers. This is so due to following reasons: The glass department sends its output to the wood and metal departments for finishing. This department does not negotiate for internal prices. • The all three department's glass, wood, and metal are only evaluated on output and cost control. So, these three departments are the cost centers.

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