PPT 14 -1

ADVANCED MANAGEMENT
ACCOUNTING
PPT 14 -2
Responsibility Accounting
PPT 14 -3
Learning Objectives
Define responsibility accounting
and describe the four types of
responsibility centers

PPT 14 -4
Responsibility Accounting
Responsibility accounting is a system that measures the
results of each responsibility center and compares those
results with some measure of expected or budgeted
outcome.
There are four major types of responsibility
centers:
Cost center
Revenue center
Profit center
I nvestment center
PPT 14 -5
Responsibility Accounting
Responsibility
Center
Cost
Center
Profit
Center
Investment
Center
Cost, profit,
and investment
centers are all
known as
responsibility
centers.
10-5
PPT 14 -6
Cost Center
A segment whose manager has
control over costs, but not over
revenues or investment funds.
10-6
PPT 14 -7
Profit Center
A segment whose
manager has control
over both costs and
revenues,
but no control over
investment funds.
Revenues
Sales
Interest
Other
Costs
Mfg. costs
Commissions
Salaries
Other
10-7
PPT 14 -8
Investment Center
A segment
whose manager
has control over
costs, revenues,
and investments
in operating
assets.
Corporate Headquarters
10-8
PPT 14 -9
Responsibility Centers
Salty Snacks
Product Manger
Bottling Plant
Manager
Warehouse
Manager
Distribution
Manager
Beverages
Product Manager
Confections
Product Manager
Operations
Vice President
Finance
Chief FInancial Officer
Legal
General Counsel
Personnel
Vice President
Superior Foods Corporation
Corporate Headquarters
President and CEO
Cost
Centers
Investment
Centers
Superior Foods Corporation provides an example of the
various kinds of responsibility centers that exist in an
organization.
10-9
PPT 14 -10
Responsibility Centers
Salty Snacks
Product Manger
Bottling Plant
Manager
Warehouse
Manager
Distribution
Manager
Beverages
Product Manager
Confections
Product Manager
Operations
Vice President
Finance
Chief FInancial Officer
Legal
General Counsel
Personnel
Vice President
Superior Foods Corporation
Corporate Headquarters
President and CEO
Superior Foods Corporation provides an example of the
various kinds of responsibility centers that exist in an
organization.
Profit
Centers
10-10
PPT 14 -11
Responsibility Centers
Salty Snacks
Product Manger
Bottling Plant
Manager
Warehouse
Manager
Distribution
Manager
Beverages
Product Manager
Confections
Product Manager
Operations
Vice President
Finance
Chief FInancial Officer
Legal
General Counsel
Personnel
Vice President
Superior Foods Corporation
Corporate Headquarters
President and CEO
Cost
Centers
Superior Foods Corporation provides an example of the
various kinds of responsibility centers that exist in an
organization.
10-11
PPT 14 -12
Management Hubs
Profit Centers.
Subunit that has responsibility for
generating revenue as well as for controlling
costs.
Cost Centers.
Subunit that has responsibility for
controlling costs but does not sell product.
i.e. service departments.
PPT 14 -13
Profit Center
Organize business into subunits, profit
center & cost centers.
Track variable costs to profit centers.
Control escalators
Allocate asset use to subunits.
Evaluate on contribution margin and
amount of capital invested.
PPT 14 -14
Word List
Cost Behavior
Variable Costs.
Variable Costs per
unit are constant.
Fixed Costs.
Fixed costs per unit
vary with
production level.
Mixed Costs.
Semi-variable costs
change in total with
changes in
production level,
but not
proportionately.

PPT 14 -15
Terms to Recognize
Cost volume profit
analysis
Profit = Sales (S)
Variable Costs (VC)
Fixed Costs (FC)
Contribution Margin
Sales -- Variable Costs
Contribution Margin
Ratio
(Sales Variable
Costs) Sales

PPT 14 -16
Cost-Volume-Profit Diagnostics
PPT 14 -17
Breakevent Point
Sales (in dollars) = Fixed Costs / Contribution
margin ratio
Sales (units) = Fixed Costs / Contribution
margin per unit
PPT 14 -18
Cost or
Revenue
($)
Quantity Produced
Break-Even Diagram
PPT 14 -19
Cost or
Revenue
($)
Fixed Cost
B
r
e
a
k

E
v
e
n

Q
u
a
n
t
i
t
y

Quantity Produced
Fixed Cost
Variable
Costs
Profit / Loss
Corridor
Break-Even Diagram
B
r
e
a
k

E
v
e
n

Q
u
a
n
t
i
t
y

PPT 14 -20
Cost or
Revenue
($)
B
r
e
a
k

E
v
e
n

Q
u
a
n
t
i
t
y

Quantity Produced
Fixed Cost
Variable
Costs
Profit / Loss
Corridor
Break-Even Diagram
Increased Fixed Costs
B
r
e
a
k

E
v
e
n

Q
u
a
n
t
i
t
y

PPT 14 -21
Vocabulary
Differential costs and
revenue
The additional cost
or revenue incurred
when one alternative
is chosen over
another.
Sunk cost.
Costs that are
already incurred &
not reversible.
Opportunity Costs.
The benefit given
up by selecting one
alternative over
another. i.e. Interest
on stored grain.

PPT 14 -22
Responsibility Accounting Model
The responsibility accounting model is defined
by four essential elements:
assigning responsibility
establishing performance measures or
benchmarks
evaluating performance
assigning rewards
PPT 14 -23
Types of Responsibility Accounting
Management accounting offers the following
three types of responsibility accounting
systems.
Functional-based
Activity-based
Strategic-based
PPT 14 -24
Functional-Based
Responsibility Accounting System
A functional-based responsibility accounting
system assigns responsibility to organizational
units and expresses performance measures in
financial terms.
I t is the responsibility accounting system
that was developed when most firms were
operating in relatively stable
environments.
PPT 14 -25
Responsibility
is Defined
Organizational
Unit
Financial
Outcomes
Individual
in Charge
Operating
Efficiency
Performance Measures
are Established
Standard
Costing
Currently
Attainable
Standards
Unit
Budgets
Static
Standards
Elements of a Functional-Based
Responsibility Accounting System
PPT 14 -26
Performance
is Measured
Controllable
Costs
Financial
Measures
Financial
Efficiency
Actual versus
Standard
Individuals are Rewarded
Based on
Financial Performance
Bonuses
Salary
Increases
Promotions
Profit
Sharing
Elements of a Functional-Based
Responsibility Accounting System
PPT 14 -27
Activity-Based
Responsibility Accounting System
An activity-based responsibility accounting
system assigns responsibility to processes and
uses both financial and nonfinancial measures
of performance.
I t is the responsibility accounting system
developed for those firms operating in
continuous improvement environments.
PPT 14 -28
Responsibility
is Defined
Process
Financial
Team
Value
Chain
Performance Measures
are Established
Dynamic
Value-
Added
Optimal
Process-
Oriented
Elements of an Activity-Based
Responsibility Accounting System
PPT 14 -29
Performance
is Measured
Quality
Improvement
Trend
Measures
Time
Reductions
Cost
Reductions
Individuals are Rewarded
Based on Multidimensional
Performance
Bonuses
Salary
Increases
Promotions
Gain-
sharing
Elements of an Activity-Based
Responsibility Accounting System
PPT 14 -30
Strategic-Based
Responsibility Accounting System
A strategic-based responsibility accounting system
(Balanced Scorecard) translates the mission and
strategy of an organization into operational
objectives and measures for four different
perspectives:
The financial perspective
The customer perspective
The process perspective
The infrastructure (learning and growth)
perspective
PPT 14 -31
Strategy
Strategy specifies how an organization matches its
own capabilities with the opportunities in the
marketplace to accomplish its objectives
A thorough understanding of the industry is critical
to implementing a successful strategy
PPT 14 -32
Responsibility
is Defined
Customer
Infrastructure
Financial
Process
Performance Measures
are Established
Balanced
Measures
Link to
Strategy
Communicate
Strategy
Alignment of
Objectives
Elements of a Strategic-Based
Responsibility Accounting System
PPT 14 -33
Performance
is Measured
Customer
Measures
Infrastructure
Measures
Financial
Measures
Process
Measures
Individuals are Rewarded
Based on Multidimensional
Performance
Bonuses
Salary
Increases
Promotions
Gain-
sharing
Elements of a Strategic-Based
Responsibility Accounting System
PPT 14 -34
End of Week