9-1

Responsibility
Accounting
Prepared by
Douglas Cloud
Pepperdine University
 9-2

Objectives
 Define goal congruence and explain its
relationship to control and performance
evaluation.
 Identify the types of responsibility centers
and explain the differences among them.
 Determine the positive and negative aspects
of specific criteria used for evaluating the
performance of responsibility centers.

Continued
 9-3

Objectives
 Calculate contribution margin variances and
explain their significance.
 Describe the pros and cons of including cost
allocation in performance reports.
 Describe some approaches to allocating costs
to responsibility centers.
 Explain how cost allocations can create
ethical problems.
 9-4

A major objective of
management control is
to encourage goal
congruence, which
means that as people
work to achieve their
own goals, they also
work to accomplish the
company’s goals.
 9-5

Responsibility Centers
A responsibility center is an activity, such
as a department, that a manager controls.
Types of Responsibility Centers
Cost centers
Revenue centers
Profit centers
Investment centers
 9-6

Responsibility Centers
A cost center is a segment whose manager is
responsible for costs, but not revenues. A
cost center can be relatively small.
Examples:
A manufacturing cell
The office of the chief executive
The legal department
 9-7

Responsibility Centers
A revenue center is a segment whose
manager is responsible for earning
revenues, but not for the costs of generating
revenues.
Examples:
Hospitals
Marketing departments
 9-8

Responsibility Centers
• A profit center is a segment whose manager
is responsible for revenues as well as costs.
• An investment center is a segment whose
manager is responsible not only for
revenues and costs, but also for the
investment required to generate profits.
 9-9

Transfer Price

A transfer price is the price that one center

charges another center within the company.
 9-10

Performance Evaluation Criteria

Selecting criteria to measure and evaluate
performance is important because the criteria
influence managers’ actions. The most common
deficiencies in performance measures are:
– using a single measure that emphasizes only
one objective of the organization; and
– using measures that either misrepresent or fail
to reflect the organization’s objectives or the
employee’s responsibilities.
 9-11

The Balanced Scorecard

An approach known as the
balanced scorecard has become
popular recently. This approach
extends performance evaluation
from merely looking at financial
results to formally incorporating
measures that look at customer
satisfaction, internal business
processes, and the learning and
growth potential of the
organization.
 9-12

The Balanced Scorecard

The balanced scorecard asks four basic
questions:
1. How do customers see us? (the customer
perspective)
2. What must we excel at? (the internal business
process perspective)
3. Can we continue to improve and create value?
(the learning and growth perspective)
4. How do we look to stockholders? (the
financial perspective)
 9-13

Responsibility Reports for Cost Centers

Current Month Year to Date
Over Over
Budget (Under) Budget (Under)
Report to Supervisor of Work
Station 106—Drill Press

Materials $ 3,200 $(80 ) $ 12,760 $ 110

Direct labor 14,200 170 87,300 880
Supervision 1,100 (50 ) 4,140 (78 )
Power, supplies, miscellaneous 910 24 3,420 92
Totals $19,410 $ 64 $107,620 $1,004
Report to Supervisor of
Fabrication Department
 9-14

Responsibility Reports for Cost Centers

Current Month Year to Date
Over Over
Budget (Under) Budget (Under)
Report to Supervisor of
Fabrication Department

Station 106—Drill Press $19,410 $ 64 $107,620 $1,004

Station 107—Grinding 17,832 122 98,430 (213 )
Station 108—Cutting 23,456 876 112,456 1,227
Total work stations $60,698 $1,062 $318,506 $2,018

Continued
 9-15

Responsibility Reports for Cost Centers

Current Month Year to Date
Over Over
Budget (Under) Budget (Under)
Report to Supervisor of
Fabrication Department

Departmental costs (common

to work stations):
General supervision $12,634 $ 0 $ 71,234 $ 0
Cleaning 6,125 324 32,415 762
Other 1,890 (67 ) 10,029 (108 )
Total $81,347 $1,319 $432,184 $2,672
Report to Manager of
Factory
 9-16

Responsibility Reports for Cost Centers

Report to Manager of Factory
Fabrication department
Milling department
Assembly department
Casting department
Total departments
Current Month Year to Date
Over Over
Budget (Under) Budget (Under)
$ 81,347 $1,319 $ 432,184 $2,672
91,234 (2,034 ) 405,190 (4,231 )
107,478 854 441,240 1,346
78,245 (433 ) 367,110 689
$358,304 $ (294 )$1,645,724 $ 476

Continued
 9-17

Responsibility Reports for Cost Centers

Current Month Year to Date
Over Over
Budget (Under) Budget (Under)
General factory costs
(common to departments):
Engineering $ 14,235 $261 $ 81,340 $842
Heat and light 8,435 178 48,221 890
Building depreciation 3,400 0 20,400 0
General administration 23,110 340 126,289 776
Total factory costs $407,848 $ 485 $1,919,974 $2,984
 9-18

Responsibility Reports for Profit Centers (000s)

Current Month Year to Date
Over Over
Budget (Under) Budget (Under)
Report to Product Manager—
Appliances, European Region
Sales $122.0 $ 1.5 $387.0 $ 3.2
Variable costs:
Production $ 47.5 $ 2.8 $150.7 $ 5.9
Selling and administrative 12.2 1.8 38.7 1.9
Total variable costs $ 59.7 $ 4.6 $189.4 $ 7.8
Contribution margin $ 62.3 $ (3.1 ) $197.6 $(4.6 )
Direct fixed costs 36.0 $ (1.2 ) 98.5 (3.1 )
Product margin $ 26.3 $ (1.9 ) $ 99.1 $ (1.5 )

To report to manage—European Region

 9-19

Responsibility Reports for Profit Centers (000s)

Current Month Year to Date
Over Over
Report to Manager— Budget (Under) Budget (Under)
European Region
Profit margins:
Appliances $26.3 $(1.9 ) $ 99.1 $(1.5 )
Industrial equipment 37.4 3.2 134.5 7.3
Tools 18.3 1.1 59.1 (2.0 )
Total product margins $82.0 $ 2.4 $292.7 $ 3.8
Regional expenses (common
to all product lines) 18.5 0.8 61.2 (1.3 )
Regional margin $63.5 $ 1.6 $231.5 $ 5.1
Report to Executive Vice President
 9-20

Responsibility Reports for Profit Centers (000s)

Current Month Year to Date
Over Over
Report to Executive Vice Budget (Under) Budget (Under)
President
Regional margins:
European $ 63.5 $ 1.6 $ 231.5 $ 5.1
Asian 78.1 (4.3 ) 289.4 (8.2 )
North American 211.8 (3.2 ) 612.4 (9.6 )
Total regional margins $353.4 $ (5.9 ) $1,133.3 $(12.7 )
Corporate expenses (common
to all regions) 87.1 1.4 268.5 3.1
Regional margin $266.3 $ (7.3 ) $ 864.8 $(15.8 )
 9-21

Analyzing Contribution
Margin Variance
Profit depends on several factors, including
selling prices, sales volumes, and costs.
Budgeted and actual profits rarely coincide
because prices, volume, and costs can (and
do) vary from expectations. To plan and to
evaluate previous decisions, managers need to
know the sources of variances.
 9-22

Contribution Margin Variance

Example
Horton Company expected to sell 20,000 units at $20
with unit variable costs of $12. Horton actually sold
21,000 units at $19.
Budgeted Actual Difference
Sales $400,000 $399,000 $(1,000)
Variable costs 240,000 25,000 (12,000)
Contribution margin $160,000 $147,000 $(13,000)
 9-23

Sales Volume Variance

The sales volume variance is the difference between

(1) the contribution margin the company would have
earned selling the budgeted number of units at the
budgeted unit contribution margin and (2) the
contribution margin it would have earned selling the
actual number of units at the budgeted unit
contribution margin.
Sales = budgeted contribution x (actual unit – budgeted unit)
volume variance margin per unit sales sales
$8,000 = $8 x (21,000 – 20,000)
 9-24

Sales Price Variance

The sales price variance is the difference
between (1) actual total contribution margin
and (2) total contribution margin that would
have been earned at the actual volume and
budgeted unit contribution margin.
Sale price variance = units sold x (actual price – budgeted
price)
= 21,000 x ($19 - $20) = $21,000 F
 9-25

Cost Allocations on
Responsibility Reports
Operating departments in manufacturers
work directly on products. Operating
departments in a retail company serve
customers directly.
Service departments (service centers) provide
services to operating departments and to one
another. Examples: human resources,
accounting, and building security.
 9-26

Arguments Against Allocating

Indirect Fixed Costs
1. Because indirect fixed costs are not controllable by
the users, allocating them violates the principles of
controllability.
2. Including allocated costs on performance reports
could lead to poor decisions because managers will
treat the costs as differential.
 9-27

Allocation Methods and Effects:

Allocating Actual Costs Based
on Actual Use
This method is flawed in two respects.
– It allocates actual costs rather than budgeted
costs. Allocating actual costs passes the
inefficiencies (or efficiencies) of one
department to the next.
– It allocates fixed costs based on use.
 9-28

Allocation Example
Raleigh Company has one service department, Maintenance, and two operating
departments, Fabrication and Assembly. Data for the departments follow:
Operating Hours of Maintenance Service Used
Department: Budgeted Actual
Fabrication 20,000 20,000
Assembly 20,000 10,000
Total 40,000 30,000
Maintenance Department Costs for Year:
Budgeted Actual
Variable (budgeted, $5.00; actual, $5.10) $200,000 $153,000
Fixed 75,000 79,500
Totals $275,000 $232,500
 9-29

Allocation Example
Actual per-hour cost $232,500
of providing the service = 30,000 hours = $7.75/hr.

Allocations would be:

Fabrication (20,000 x $7.75) $155,000
Assembly (10,000 x $7.75) 77,500
Total maintenance costs allocated $232,500
 9-30

Methods to Allocate Service

Department Costs (Appendix)
 Direct method
 Step method
 Reciprocal method
 9-31

Chapter 9

The End
9-32