Responsibility Accounting

and Transfer Pricing

Chapter 22

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights

The Need for Information
About Responsibility Center
Performance
The
The accounting
accounting system
system provides
provides information
information
about
about resources
resources used
used and
and outputs
outputs achieved.
achieved.

This information is used to:

 Plan and allocate resources.
 Control operations.
 Evaluate the performance
of center managers.

22-2
Cost Centers, Profit
Centers, and Investments
Centers
Evaluation Measures
Cost control
Cost
Quantity and quality
Center
of services

Profit
Profitability
Center

Investment Return on assets (ROA)

Center Residual income (RI)
22-3
 Responsibility Accounting
Systems
An accounting system that
provides information . . .

Relating to the To evaluate

responsibilities of managers on
individual managers. controllable items.

22-4
 Responsibility Accounting
Systems

 Prepare budgets for  Measure performance of

each responsibility center. each responsibility center.

 Prepare timely performance reports

comparing actual amounts with budgeted amounts. 22-5
Responsibility Accounting
Systems
Amount of detail varies according
to level in organization.

A department manager A store manager receives

receives detailed summarized information
reports. from each department.

22-6
Assigning Revenue and
Costs to Responsibility
Centers
Revenue is easily and
automatically assigned to
specific departments using point
of sale entries from cash
registers.

Service
Department

22-7
Assigning Revenue and
Costs to Responsibility
Centers
Two guidelines should be followed in
allocating costs to the various parts
of a business . . .
According to cost behavior patterns:
 Fixed or variable.
According to whether the costs
are directly traceable to the
centers involved.

22-8
Traceable Fixed Costs
Traceable fixed costs would disappear
over time if the center itself disappeared.

No computer No computer
division means . . . division manager.

22-9
Common Fixed Costs
Common fixed costs arise because of
overall operation of the company and
are not due to the existence of a
particular center.
No computer We still have a
division means . . . company president.

22-10
 Arguments Against
Allocating Common Fixed
Costs
Common fixed costs would not change
even if a business center were
eliminated.
Common fixed costs are not under the
direct control of the center’s
managers.
Allocation of common fixed costs may
imply changes in profitability that are
unrelated to the center’s performance.
22-11
Transfer Prices
The amount charged when one division
sells goods or services to another division.

Batteries

Battery Division Auto Division

22-12
Transfer Prices

The transfer price affects the profit measure

for both buying and selling divisions.
A higher transfer
price for batteries
means . . .

Batteries

Battery Division . . . greater Auto Division

profits for the
Battery Division.
22-13
Transfer Prices

The transfer price affects the profit measure

for both buying and selling divisions.
A higher transfer
price for batteries
means . . .

Batteries

Battery Division . . . lower Auto Division

profits for the
Auto Division.
22-14
Transfer Prices

Many companies use the

external market value
of goods transferred
as the transfer price.

Transfer prices have no direct effect upon

the company’s overall net income.

22-15
Transfer Prices
When the external
market value of goods
transferred is unavailable . . .

Negotiated Cost-plus
transfer transfer
price price

Transfer prices have no direct effect

upon the company’s overall net income.
22-16
End of Chapter 22

22-17