Kelly Petroleum Company has a large oil and natural gas project in Oklahoma. The project has been organized into two production centers (petroleum production and natural gas production ) and one service center (maintenance).

Maintenance Center Activities and Scheduling: Don Pepper, maintenance center manager, has organized his maintenance workers into work crews that serve the two production centers. The maintenance crews perform preventive maintenance and repair equipment both in the field and in the central maintenance shop.

Pepper is responsible for scheduling all maintenance work in the field and at the central shop. Preventive maintenance is performed according to a set schedule established by Pepper and approved by the production center managers. Breakdowns are given immediate priority in scheduling so that downtime is minimized. Thus, preventive maintenance occasionally must be postponed, but every attempt is made to reschedule it within three weeks.

Preventive maintenance work is the responsibility of Pepper. However, if a significant problem is discovered during preventive maintenance, the appropriate production center supervisor authorizes and supervises the repair after checking with Pepper.
When a breakdown in the field occurs, the production centers contact Pepper to initiate the repairs. The repair work is supervised by the production center supervisor. Machinery and equipment sometimes need to be replaced while the original equipment is repaired in the central shop. This procedure is followed only when the time to make the repair in the field would result in an extended interruption of operations. Replacement of equipment is recommended by the maintenance work crew supervisor and approved by a production center supervisor.
Routine preventive maintenance and breakdowns of automotive and mobile equipment used in the field are completed in the central shop. All repairs and maintenance activities taking place in the central shop are under the direction of Pepper.
Maintenance Center Accounting Activities: Pepper has records identifying the work crews assigned to each job in the field, the number of hours spent on the job, and the parts and supplies used on the job. In addition, records for the central shop (jobs, labor hours, parts and supplies) have been maintained. However, this detailed maintenance information is not incorporated into Kelly's accounting system.
Pepper develops the annual budget for the maintenance center by planning the preventive maintenance that will be needed during the year, estimating the number and seriousness of breakdowns, and estimating the shop activities. He then bases the labor, part, and supply costs on this plans and estimates and develops the budget amounts by line item. Because the timing of the breakdowns is impossible to plan, Pepper divides the annual budget by 12 to derive the monthly budget.
All costs incurred by the work crews in the field and in the central shop are accumulated monthly and then allocated to the two production cost centers based upon the field hours worked in each production center. This method of cost allocation has been used on Pepper's recommendation because he believed that it was easy to implement and understand. Furthermore, he believed that a better allocation system was impossible to incorporate into the monthly report due to the wide range of salaries paid to maintenance workers and the fast turnover of materials and parts.
The November cost report for the maintenance center that is provided by the accounting department is shown below.

Production Center Manager's Concerns: Both production center managers have been upset with the method of cost allocation. Furthermore, they believe the report is virtually useless as a cost control device. Actual costs always seem to deviate from the monthly budget and the proportion charged to each production center varies significantly from month-to-month. Maintenance costs have increased substantially since 20X6, and the production managers believe that they have no way to judge whether such an increase is reasonable.
The two production managers, Pepper, and representatives of corporate accounting have met to discuss these concerns. They concluded that a responsibility accounting system could be developed to replace the current system. In their opinion, a responsibility accounting system would alleviate the production managers' concerns and accurately reflect the activity of the maintenance center.
Required:

(a) Explain the purposes of a responsibility accounting system, and discuss how such a system could resolve the concerns of the production center managers of Kelly Petroleum Company.

(b) Describe the behavioral advantages generally attributed to responsibility accounting systems that the management of Kelly Petroleum Company should expect if the system were effectively introduced for the maintenance center.

(c) Describe a report format for the maintenance center that would be based upon an effective responsibility accounting system, and explain which, if any, of the maintenance center's costs should be charged to the two production centers.

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Oklahoma Project Maintenance Center Cost Report For the Month of November 20X9 (in thousands of dollars) Petroleum Natural Budget Actual Production Gas Shop hours.. 2,000 1,800 Field hours. 8.000 10,000 6,000 4.000 Labor: Electrical.. Mechnical $ 25.0 $ 24.0 $ 14.4 $ 9.6 30.0 35.0 21.0 14.0 Instrumentation 18.0 22.5 13.5 9.0 Automotive 3.5 2.8 1.7 1.1 Heavy equipment 9.6 12.3 7.4 4.9 Equipment operation 28.8 35.4 21.2 14.2. General 15.4 15.9 9.6 6.3 Parts. 60.0 86.2 51.7 34.5 Supplies.......... 15.3 12.2 7.3 4.9 Lubricants and fuels. 3.4 3.0 1.8 1.2 Tools............. 2.5 3.2 1.9 1.3 Accounting and data processing... 1.5 1.5 .9 Total. $213.0 $254.0 $152.4 $101.6