SHAIK.

SURESH (20085)
SUSHMITA (20087)
UTPAL MANE (20088)

Relating to the
responsibilities of
individual managers.
To evaluate
managers on
controllable items.
An accounting system that
provides information . . .
WHAT IS RESPONSIBILITY
ACCOUNTING ?
Decision Making is Pushed Down
Supervisor Supervisor
Middle
Management
Supervisor Supervisor
Middle
Management
Top
Management
DECENTRALIZATION
ADVANTAGES OF DECENTRALIZATION
Promotes better
decision making.
Allows upper-level management to
concentrate on strategic decisions.
Improves
productivity.
Develops
lower-level
managers.
Improves
performance
evaluation.
Advantages
DISADVANTAGES OF DECENTRALIZATION
O Upper level management loses some control.

O Lack of goal setting.

O Duplication of effort.
Responsibility Reports
Responsibility
Reports
Prepared for each
individual who has
control over
revenue or expense
items
RESPONSIBILITY
REPORTS
O Prepare budgets for
each responsibility center.
OPrepare timely performance reports
comparing actual amounts with budgeted amounts.
O Measure performance of
each responsibility center.
A responsibility center is the point in an organization where the
control over revenue or expense is located, e.g. division,
department or a single machine.



Examples:
A specific store in a chain of grocery stores.
A work-station in a production line manufacturing automobile
batteries
The payroll data processing center within a firm.

+It is like a small business, and its manager is asked to run
that small business and preserve the interests of the larger
organization.


+Goals for the center should be specific and measurable, and
should promote the long terms interests of the organization
and should be compatible with other responsibility center
activities.

Example: A courier service (DHL)

OCourier operations dispatch trucks to pick up or deliver
shipments from local terminals.
OIt could be sent to one or more central terminals and
then sorted and redirected.
OSuccess of this service would depend on:
Service commitment to customers (on time, without damage)
and controlling costs
OLet us suppose that each terminal is treated as a
responsibility center.
OHow should the company measure the performance of
each terminal, its mangers, and its employees?
OTo focus on efficiency: It could measure no. of parcels picked
up, sorted or delivered, per route, per employee, per vehicle, per
hour or per shift.

OTo focus on customer service: It could measure each groups
contribution to customers proportion of the time the terminal met
its deadlines, when terminals are required to sort shipments, what
the sorting error rate was.

OIt could also measure customer service : no. of complaints
operations group receives, average time taken by the operation
group to respond to complaints, and no. of complaints of poor, or
impolite service.
Measuring the performance of the
courier-terminal responsibility center
TYPES OF RESPONSIBILITY
CENTERS
Responsibility
Centers
Cost
Center
Profit
Center
Investment
Center
O Responsibility centers whose employees control costs,
but do not control their revenues or investment level.

O A cost center is evaluated by means of performance
reports (i.e., comparison of actual with standard).

Examples: Production department in a
manufacturing unit,
a dry cleaning business



Input Output Process
Control only this
Prod. 1 Prod. 2 Prod. 3 Prod. 4 Total
Units made 245,000 385,000 636,000 1,250,000
Units per batch 500 2,500 1,500 5,000
No. of batches 490 154 424 250
Cost per unit $ 5.40 $3.20 $4.25 $1.45
Cost per batch $325.00 $680.00 $400.00 $135.00
Unit-related costs
(245,000x$5.40)
$1,323,000 $1,232,000 $2,703,000 $1,812,500 $7,070,500
Batch-related costs
(490x$325)
159,250 104,720 169,600 33,750 467,320
Prod.-sustaining
costs
125,000 168,000 256,000 355,000 904,000
Facility costs 1,450,000
Total cost center
costs
$9,891,820
MORTON CARPETS BUDGETED COST
Prod. 1 Prod. 2 Prod. 3 Prod. 4 Total
Units made
2,945,000
345,000 675,000 950,000
Units per batch 600 2,300 1,800 6,000
No. of batches 492 150 375 159
Cost per unit $ 5.43 $3.18 $4.33 $1.40
Cost per batch $335.00 $670.00 $387 $144.00
Unit-related costs $1061,850 $1,097,100 $2,922,750 $1,330,000 $6,951,700
Batch-related costs 164,820 100,500 145,125 22,896 433,341
Prod.-sustaining
costs
133,000 163,000 259,000 362,000 917,,000
Facility costs 1,650,000
Total cost center
costs
$9,952,041
Budget Actual Vari ance
Unrel ated costs
Product 1 1,323,000.00 1,601,850.00 278,850.00
Product 2 1,232,000.00 1,097,100.00 -134,900.00
Product 3 2,703,000.00 2,922,750.00 219,750.00
Product 4 1,812,500.00 1,330,000.00 -482,500.00
Total 7,070,500.00 6,951,700.00 -118,800.00
Batch rel ated costs
Product 1 159,250.00 164,820.00 5,570.00
Product 2 104,720.00 100,500.00 -4,220.00
Product 3 169,600.00 145,125.00 -24,475.00
Product 4 33,750.00 22,896.00 -10,854.00
Total 467,320.00 433,341.00 -33,979.00
Prod. sus. Costs
Product 1 125,000.00 133,000.00 8,000.00
Product 2 168,000.00 163,000.00 -5,000.00
Product 3 256,000.00 259,000.00 3,000.00
Product 4 355,000.00 362,000.00 7,000.00
Total 904,000.00 917,000.00 13,000.00
Fac. Sus. Costs 1,450,000.00 1,650,000.00 200,000.00
Total 9,891,820.00 9,952,041.00 60,221.00
Vari ance Anal ysi s
OEngineered: Those costs that can be reasonably
associated with a cost center direct labor, direct
materials, telephone/electricity consumed, office
supplies.

ODiscretionary: Where a direct relationship between a
cost unit and expenses cannot be reasonably made;
Management allocates them on a discretionary basis
(e.g. depreciation expenses for machines utilized).

O Motivation of staff who feel committed to the cost centre

OImproved monitoring of cost and expenditure

OImproved management information on profit ability

OImproved monitoring of investment returns



OIn practice, it may be difficult to allocate costs to a
particular division / centre
OCost centres may add to pressures and stress on staff
OSenior managers may be unable to recognise whether
a cost centre is running effectively / ineffectively

PROFIT CENTERS
+Responsibility of
generating revenue and
controlling costs.
+Profit center evaluation
techniques include:
Comparison of current year
income with a target or budget.
Relative performance
evaluation compares the center
with other similar profit
centers.
CONT
O If performance is poor, it may reflect poor conditions
that no one in the organization could control as well as
poor local conditions.
O For this reason, organizations should not evaluate
performance only based on costs and profits, but
O Perform detailed evaluations that include quality,
material use, labor use, and service measures that the
local unit can control.
Profit Centers
NEG, a diversified entertainment company,
has two profit centers: the Theme Park
Division and the Movie Production Division.
Theme Park
Division
Movie Production
Division
Revenues $6,000,000 $2,500,000
Operating expenses 2,495,000 405,000
Charging Service Department Costs
to Production Divisions
Purchasing Department: $400,000
(Activity base: number of purchase requisitions)
Theme Park Division 25,000 purchase requisitions
Movie Production Division: 15,000 purchase requisitions
Total 40,000
$400,000
40,000 purchase requisitions
$10 per purchase
requisition
=
Profit Centers
Charging Service Department Costs
to Production Divisions
Payroll Accounting: $255,000
(Activity base: number of payroll checks)
$255,000
15,000 payroll checks
= $17 per payroll check
Theme Park Division 12,000 payroll checks
Movie Production Division: 3,000 payroll checks
Total 15,000
Profit Centers
Charging Service Department Costs
to Production Divisions
Legal Department: $250,000
(Activity base: number of payroll checks)
$250,000
1,000 hours
= $250 per hour
Theme Park Division 100 billed hours
Movie Production Division: 900 billed hours
Total 1,000
Profit Centers
Nova Entertainment Group
Service Department Charges to NEG Divisions
For the Year Ended December 31, 2006
Theme Movie
Park Production
Service Department Division Division
Profit Centers
Purchasing $250,000 $150,000
25,000 purchase
requisitions x $10
per purchase
requisition
15,000 purchase
requisitions x $10
per purchase
requisition
Purchasing $250,000 $150,000
Payroll accounting 204,000 51,000
12,000 payroll
checks x $17 per
payroll check
3,000 payroll
checks x $17 per
payroll check
Nova Entertainment Group
Service Department Charges to NEG Divisions
For the Year Ended December 31, 2006
Theme Movie
Park Production
Service Department Division Division
Profit Centers
Purchasing $250,000 $150,000
Payroll accounting 204,000 51,000
Legal 25,000 225,000
Nova Entertainment Group
Service Department Charges to NEG Divisions
For the Year Ended December 31, 2006
Theme Movie
Park Production
Service Department Division Division
Profit Centers
100 hours x $250
per hour
900 hours x $250
per hour
Purchasing $250,000 $150,000
Payroll accounting 204,000 51,000
Legal 25,000 225,000
Total service department charges $479,000 $426,000
Nova Entertainment Group
Service Department Charges to NEG Divisions
For the Year Ended December 31, 2006
Theme Movie
Park Production
Service Department Division Division
Profit Centers
Nova Entertainment Group
Divisional Income Statements
For the Year Ended December 31, 2006
Theme Park Division Movie Production Division
Income from operations before
service department charges.
Revenues $6,000,000 $2,500,000
Operating expenses 2,495,000 405,000
Income from operations $3,505,000 $2,095,000

Nova Entertainment Group
Divisional Income Statements
For the Year Ended December 31, 2006
Theme Park Division Movie Production Division
Revenues $6,000,000 $2,500,000
Operating expenses 2,495,000 405,000
Income from operations $3,505,000 $2,095,000

Less service dept. charges:
Purchasing $ 250,000 $ 150,000
Payroll accounting 204,000 51,000
Legal 25,000 225,000
Total service department
charges $ 479,000 $ 426,000
Income from operations $3,026,000 $1,669,000
PROFIT CENTRE ADVANTAGES
O Improves quality of decision
O Improves speed of decision
O Ensures better and safer delegation of authority
O Ensures better motivation and evokes commitment
O Enhance profit consciousness with every expense
mode


O Loss of overall control of company

O Profit centre could be working towards different or
non- company agendas


USES OF COST AND PROFIT CENTRES
O They allow the business to compare performance between departments
/ across products / brands ,etc.
O This allows the business to make decisions about underperforming
areas
O If a profit centre is identified as doing well businesses may want to
focus on the reasons behind this
CONT.
O They allow a more focused study of a firms finances
O Benchmarking can take place
O Responsibility for a profit / cost centre will motivate
the individual responsible
O By placing responsibility with the person involved in
the activity the finances may be run more efficiently
than would be the case if a more remote, senior
manager controlled it.

WHY OPERATE COST AND PROFIT CENTRES
O Financial reasons they allow to manage and control money. They
allow the business to identify which areas are most profitable
O Organisational reasons helps with the organisation of departments
and resources
O Motivational reasons motivates managers and workers
WHAT IS AN INVESTMENTS
CENTER?
Investment Center
A segment whose manager
has control over costs,
revenues, and investments in
operating assets.
Investment Center
A Systems Perspective
Input Output Process
Control these
Investment Center
EVALUATION OF INVESTMENT
CENTER:
An investment center is
evaluated by means of the
Return on Investment (ROI) or
the Residual Income (RI) it is
able to generate.
RETURN ON
INVESTMENT :
Return on investment is the ratio of income to the investment
used to generate the income.
ROI =
Net Income
Investment
ROI =
Net Income
Investment
ROI =
Net Income
Sales

Sales
Investment
Margin Turnover
RETURN ON
INVESTMENT
RETURN ON
INVESTMENT
Cola Company reports the following:

Net Income $ 30,000
Sales $ 500,000
Investment $ 200,000
Lets calculate ROI.
ROI = 6% 2.5 = 15%
RETURN ON
INVESTMENT
ROI =
Net Income
Sales

Sales
Investment
ROI =
$30,000
$500,000

$500,000
$200,000
IMPROVING R0I
Three ways to improve ROI
Increase
Sales
g Reduce
Expenses
@ Reduce
Investment
IMPROVING R0I
Cola Companys manager was able to increase sales to
$600,000 which increased net income to $42,000.
There was no change in investment.
Lets calculate the new ROI.
Cola Company increased ROI from 15% to 21%.
ROI = 7% 3 = 21%
ROI =
Net Income
Sales

Sales
Investment
ROI =
$42,000
$600,000

$600,000
$200,000
IMPROVING R0I
ROI - A MAJOR
DRAWBACK
As division manager at Cola Company,
your compensation package includes
a salary plus bonus based on your divisions
ROI -- the higher your ROI, the bigger your bonus.
The company requires an ROI of 20% on all new
investments -- your division has been producing an
ROI of 30%.
You have an opportunity to invest in a new project
that will produce an ROI of 25%.
As division manager would you
invest in this project?
ROI - A MAJOR DRAWBACK
As division manager,
I wouldnt invest in
that project because
it would lower my pay!
I thought we were
supposed to do what
was best for the
company!
THANK YOU ONE & ALL