What mistake is the CFO making in the described scenario?

• A. Allocating too many budgets to the profit center
• B. Including headquarters costs in the profit center performance measure that cannot be controlled by the center
• C. Ignoring revenue variances
• D. Focusing only on cost variances

Answer: (B)

Responsibility accounting requires performance measures to reflect only what a unit can influence. If a profit center’s performance includes costs that come from headquarters and cannot be controlled or easily influenced by that center, the measure becomes unfair and misleading. The center is being evaluated on expenses it doesn't control, which distorts incentives and can lead to suboptimal decisions because accountability is assigned for things outside the center’s span of influence.

Including headquarters costs in the profit center performance measure that cannot be controlled by the center best describes this mistake. The other issues—allocating too many budgets to the profit center, ignoring revenue variances, or focusing only on cost variances—are different kinds of measurement flaws but do not capture the specific misalignment of responsibility and controllability described here.