Responsibility Accounting

Responsibility Accounting is a reporting

System in which a cost is charged to the lowest level of management that has responsibility for it.

An accounting system that collects, summarizes, and reports accounting data relating to the responsibilities of individual managers. An accounting system which tracks and reports costs, expenses, revenues, and operational statistics by area of responsibility or organizational unit.

the system provides information to evaluate each manager on revenue and expense items over which that manager has primary control (authority to influence). some reports contain only those items that are controllable by the responsibility manager. some reports contain both controllable and uncontrollable items in this case, controllable and uncontrollable]e items should be clearly separated.

the identification of controllable items is a fundamental task in responsibility accounting and reporting system which tracks and reports costs, expenses, revenues, and operational statistics by area of responsibility or organizational unit. the system provides information to evaluate each manager on revenue and expense items over which that manager has primary control (authority to influence).

some reports contain only those items that are controllable by the responsibility manager. some reports contain both controllable and uncontrollable items in this case, controllable and uncontrollable]e items should be clearly separated. the identification of controllable items is a fundamental task in responsibility accounting and reporting.

The Work of Management

Planning

Evaluating

Decision Making

Organizing & Directing

Controlling

Centralized and Decentralized Operations

Advantages of Decentralization
It allows managers to focus on acquiring expertise in their areas of responsibility. Decentralizing decision making provides excellent training for managers. Delegation improves employee morale. Decentralization helps managers create good customer relations by responding quickly to customers needs. Managers become more creative in suggesting operating and product improvement.

Disadvantages of Decentralized Operations

Decisions made by one manager may negatively affect the profitability of the entire organization. Assets and operating costs are duplicated (e.g., each division has its own administrative office staff).

Responsibility Centers
Cost Centers
Managers are held accountable for controlling costs.

Profit Centers Managers are held accountable for costs and making decisions that impact revenues favorably.

Responsibility Centers
Investment Centers
Managers are held accountable for costs and revenues and are also held accountable for the efficient use of assets.

Responsibility Accounting for Cost Centers

COST CENTERS IN A UNIVERSITY
UNIVERSITY
College of Engineering College of Arts and Sciences College of Business

COLLEGE Dept. of Marketing

Dept. of Accounting Dept. of Management

Responsibility Accounting for Cost Centers

COST CENTERS IN A UNIVERSITY
DEPARTMENT

Department of Accounting

Cost Centers
Budget Performance Report Supervisor, Department 1Plant A For the Month Ended October 31, 2006 Budget Actual Over Budget Under Budget

Factory wages Materials Supervisory salaries Power and light Depreciation Maintenance Insurance, taxes

$ 58,100 $ 58,000 32,500 34,225 6,400 6,400 5,750 5,690 4,000 4,000 2,000 1,990 975 975 $109,725 $109,725 $111,280 $111,280

$100 $1,725 60 10

$1,725 $1,725

$170 $170

These totals are shown on the Manager, Plant As budget performance report (Slide 13).

Cost Centers
Budget Performance Report Manager, Plant A For the Month Ended October 31, 2006 Budget Actual Over Budget Under Budget

Administration Department 1 Department 2 Department 3

$ 17,500 109,725
190,500 149,750 $467,475

$ 17,350 111,280 111,280 192,600 149,100 $470,330

$150
$1,555 2,100

$3,655

650 $800

From the SupervisorDepartment 1, Plant A budget performance report (Slide 12).

Cost Centers
Budget Performance Report Manager, Plant A For the Month Ended October 31, 2006 Budget Actual Over Budget Under Budget

Administration Department 1 Department 2 Department 3

$ 17,500 109,725 190,500 149,750 $467,475 $467,475

$ 17,350 111,280 192,600 149,100 $470,330 $470,330

$150

$1,555 2,100
$3,655 $3,655 650 $800 $800

This is shown on the Vice-Presidents budget production report (Slide 15).

Cost Centers
Budget Performance Report Vice-President, Production For the Month Ended October 31, 2006 Over Budget Actual Budget

Under Budget

Administration Plant A Plant B

$ 19,500 467,475 395,225 $882,200

$ 19,700 470,330 394,300 $884,330

$ 200 2,855 $3,055 $925 $925

Note that Over Budget is a net figure.

Cost Centers
Budget Performance Report Vice-President, Production For the Month Ended October 31, 2006 Over Budget Actual Budget

Under Budget

Administration Plant A Plant B

$ 19,500 467,475 395,225 $882,200

$ 19,700 470,330 394,300 $884,330

$ 200 2,855 $3,055 $925 $925

Each of the line items above is supported by a cost center report.

Responsibility Accounting for Profit Centers

In a profit center, the unit manager has the responsibility and the authority to make decisions that affect both costs and revenues.

Profit centers may be divisions, departments, or products.

Profit Centers
NEG, a diversified entertainment company, has two profit centers: the Theme Park Division and the Movie Production Division.
Theme Park Movie Production Division Division $6,000,000 $2,500,000 2,495,000 405,000

Revenues Operating expenses

Profit Centers
Charging Service Department Costs to Production Divisions
Purchasing Department: $400,000 (Activity base: number of purchase requisitions)
Theme Park Division Movie Production Division: Total 25,000 purchase requisitions 15,000 purchase requisitions 40,000

= $10 per purchase requisition 40,000 purchase requisitions

$400,000

Profit Centers
Charging Service Department Costs to Production Divisions
Payroll Accounting: $255,000 (Activity base: number of payroll checks)
Theme Park Division Movie Production Division: Total 12,000 payroll checks 3,000 payroll checks 15,000

$255,000 15,000 payroll checks

= $17 per payroll check

Profit Centers
Charging Service Department Costs to Production Divisions
Legal Department: $250,000 (Activity base: number of payroll checks)
Theme Park Division 100 billed hours Movie Production Division: 900 billed hours Total 1,000

$250,000 1,000 hours

= $250 per hour

Profit Centers
Nova Entertainment Group Service Department Charges to NEG Divisions For the Year Ended December 31, 2006 Theme Park Division Movie Production Division

Service Department

Purchasing

$250,000

$150,000

25,000 purchase 15,000 purchase requisitions x requisitions $10 x $10 per purchaseper purchase requisition requisition

Profit Centers
Nova Entertainment Group Service Department Charges to NEG Divisions For the Year Ended December 31, 2006 Theme Park Division Movie Production Division

Service Department

Purchasing Payroll accounting

$250,000 204,000

$150,000 51,000

12,000 payroll 3,000 payroll checks x $17 checks per x $17 per payroll check payroll check

Profit Centers
Nova Entertainment Group Service Department Charges to NEG Divisions For the Year Ended December 31, 2006 Theme Park Division Movie Production Division

Service Department

Purchasing Payroll accounting Legal

$250,000 204,000 25,000

$150,000 51,000 225,000

100 hours x $250 900 hours x $250 per hour per hour

Profit Centers
Nova Entertainment Group Service Department Charges to NEG Divisions For the Year Ended December 31, 2006 Theme Park Division Movie Production Division

Service Department

Purchasing Payroll accounting Legal Total service department charges

$250,000 204,000 25,000 $479,000

$150,000 51,000 225,000 $426,000

Nova Entertainment Group Divisional Income Statements For the Year Ended December 31, 2006
Theme Park Division Movie Production Division

Revenues Operating expenses Income from operations

$6,000,000 2,495,000 $3,505,000

$2,500,000 405,000 $2,095,000

Income from operations before service department charges.

Nova Entertainment Group Divisional Income Statements For the Year Ended December 31, 2006
Theme Park Division Movie Production Division

Revenues $6,000,000 Operating expenses 2,495,000 Income from operations $3,505,000 Less service dept. charges: Purchasing $ 250,000 Payroll accounting 204,000 Legal 25,000 Total service department charges $ 479,000 Income from operations $3,026,000

$2,500,000 405,000 $2,095,000 $ 150,000 51,000 225,000 $ 426,000 $1,669,000

Responsibility Accounting for Investment Centers

In an investment center, the unit manager has the responsibility and the authority to make decisions that affect not only costs and revenues but also the assets invested in the center.

Investment Centers
Datalink Inc. Divisional Income Statements For the Year Ended December 31, 2006 Northern Division Central Division Southern Division

Revenues Operating expenses Income from operations before service dept. charges Service department charges Income from operations Invested assets Rate of return on investment

$560,000 336,000 $224,000 154,000 $ 70,000

$672,000 470,400 $201,600 117,600 $ 84,000

$750,000 562,500 $187,500 112,500 $ 75,000

$350,000 $700,000 $500,000 20% 12% 15% 20% 15%

Rate of Return on Investment (ROI)

Revenues

Rate of Return on Investment (ROI)

Profit Profit Margin

Investment Turnover

Rate of Return on Investment (ROI)

The profit margin indicates the rate of profit on each sales dollar.

The investment turnover indicates the rate of sales on each dollar of invested assets.

Investment Turnover

Profit Margin

Rate of Return on Investment (ROI)

Income from operation Sales ROI = x Sales Invested assets ROI = $ 70,000 $560,000 x $560,000 $350,000

ROI = 12.5% x 1.6 = 20%

Rate of Return on Investment (ROI)

Income from operation Sales ROI = x Sales Invested assets

Profit Margin

Inventory Turnover

Profit Margin Income from operations Revenues (Sales) Profit margin Investment Turnover Revenues (Sales) Invested assets Investment turnover

Northern Division

Central Division

Southern Division

$ 70,000 $560,000 12.5%

$ 84,000 $672,000 12.5%

$ 75,000 $750,000 10.0%

$560,000 $350,000 1.6 $ 70,000 $350,000 20%

$672,000 $700,000 .96 $ 84,000 $700,000 12%

$750,000 $500,000 1.5 $ 75,000 $500,000 15%

Return on Investment (ROI) Income from operations Invested assets

Rate of return on investment

Income from Operations

Minimum Acceptable Rate of Return on Assets

Residual Income

Baldwin Company Divisional Income Statements For the Year Ended December 31, 2006 Northern Division Central Division Southern Division

Income from operations Minimum acceptable income from operations as a percent of invested assets: $350,000 x 10% $700,000 x 10%

$70,000 $84,000 $75,000

35,000 70,000

$500,000 x 10% Residual income

50,000 $35,000 $14,000 $25,000

The balance scorecard is a set of financial and nonfinancial measures that reflect multiple performance dimensions of a business.

Innovation and Learning

R&D investment R&D pipeline Skills and training Time to market

Customer
Satisfaction Loyalty Perception

Financial
ROI Residual income Profit Cost Sales

Efficiency Quality Time

Internal Process

Transfer Pricing

Transfer Pricing
When divisions transfer products or render services to each other, a transfer pricing is used to charge for the products or services

Benefits of Transfer Pricing

1. Divisions can be evaluated as profit or investment centers. 2. Divisions are forced to control costs and operate competitively. 3. If divisions are permitted to buy component parts wherever they can find the best price (either internally or externally), transfer pricing will allow a company to maximize its profits.

Commonly Used Transfer Prices

1. Market price approach sets the price at which the product transferred could be sold to outside buyers. 2. Negotiated price approach allows decentralized managers to agree (negotiate) among themselves. 3. Cost price approach (variable or full) uses a variety of cost concepts for setting the transfer price.

Commonly Used Transfer Prices

Variable Cost per Unit $10

Full Cost per Unit $13

Market Price per Unit $20

Negotiated Price

Transfer PricingNegotiated Price Approach

Assumptions 1. Division M produces a product with a variable cost of $10 per unit. Division M has unused capacity. 2. Division N purchases 20,000 units of the same product at $20 per unit from an outside source. If the division managers agree on a price of $15 per unit, how much will each divisions income increase?

Chapter 22

The End