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RESPONSIBILITY ACCOUNTING AND TRANSFER PRICING
Chapter
22
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Responsibility Centers
Large complex businesses are divided into
responsibility centers enabling
managers to have a smaller effective span of control.
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The accounting system provides information about resources used and outputs achieved.
The Need for Information About Responsibility Center Performance
This information is used to:Plan and allocate resources.Control operations.Evaluate the performance
of center managers.
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22-4Cost Centers, Profit Centers, and Investments Centers
Cost Center A business section that has control over
the incurrence of costs, but no control
over revenues or investment funds.
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22-5Cost Centers, Profit Centers, and Investments Centers
Profit Center A part of the business
that has control over both costs and
revenues, but no control over
investment funds.
RevenuesSalesInterestOther
CostsMfg. costsCommissionsSalariesOther
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22-6Cost Centers, Profit Centers, and Investments Centers
Investment Center A profit center where management also makes capital
investment decisions. Corporate Headquarters
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CostCenter
Cost controlQuantity and qualityof services
ProfitCenter
InvestmentCenter
Return on assets (ROA) Residual income (RI)
Evaluation Measures
Profitability
Cost Centers, Profit Centers, and Investments Centers
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An accounting system thatprovides information . . .
Responsibility Accounting Systems
Relating to theresponsibilities of
individual managers.
To evaluatemanagers on
controllable items.
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Prepare budgets for each responsibility center.
Prepare timely performance reportscomparing actual amounts with budgeted amounts.
Measure performance ofeach responsibility center.
Responsibility Accounting Systems
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Successful implementation of responsibility accounting may use organization charts with
clear lines of authority and clearly defined levels of responsibility.
Vice Presidentof F inance
Departm ent M anager
Store M anager
Vice Presidentof O perations
Vice Presidentof M arketing
President
B oard of D irectors
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Amount of detail varies according to level in organization.
A department manager receives detailed
reports.
A store manager receives summarized information from each department.
Responsibility Accounting Systems
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The vice president of operations receives summarized information
from each store.
Management by exception: Upper-level management
does not receive operating detail unless problems arise.
Amount of detail varies according to level in organization.
Responsibility Accounting Systems
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Responsibility Accounting Systems
To be of maximum benefit, responsibility reports should . . .Be timely.Be issued regularly.Be understandable.Compare budgeted
and actual amounts.
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22-14Assigning Revenue and Costs to Business Centers
Revenue is easily and automatically assigned to specific departments using
point of sale entries from cash registers.
ServiceDepartment
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22-15Assigning Revenue and Costs to Business 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.
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Profit Center Reporting
Webber, Inc. has two divisions.
Com puter Division Television Division
W ebber, Inc.
Let’s look more closely at the Television Division’s income statement.
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Income StatementContribution Margin Format
Television DivisionSales 300,000$Variable COGS 120,000$Other variable costs 30,000 Total variable costs 150,000$Contribution margin 150,000$Traceable fixed costs 90,000 Responsibility margin 60,000$
Cost of goodssold consists of
variablemanufacturing
costs.
Profit Center Reporting
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Income StatementContribution Margin Format
Television DivisionSales 300,000$Variable COGS 120,000$Other variable costs 30,000 Total variable costs 150,000$Contribution margin 150,000$Traceable fixed costs 90,000 Responsibility margin 60,000$
Fixed andvariable costsare listed in
separatesections.
Profit Center Reporting
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Income StatementContribution Margin Format
Television DivisionSales 300,000$Variable COGS 120,000$Other variable costs 30,000 Total variable costs 150,000$Contribution margin 150,000$Traceable fixed costs 90,000 Responsibility margin 60,000$
Responsibility marginis the Television
Division’s contributionto overall operations.
Profit Center Reporting
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No computer No computer division means . . .division means . . .
No computerNo computerdivision manager.division manager.
Traceable Fixed Costs
Traceable fixed costs Traceable fixed costs would disappear over time if the center itself disappeared.
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Common fixed costs Common fixed costs arise because of arise because of overall operation of the company and are not overall operation of the company and are not due to the existence of a particular center.due to the existence of a particular center.
We still have aWe still have acompany president.company president.
Common Fixed Costs
No computer No computer division means . . .division means . . .
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Let’s see how the TelevisionDivision fits into Webber, Inc.
Profit Center Reporting
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Income StatementCompany Television Computer
Sales 500,000$ 300,000$ 200,000$ Variable costs (230,000) (150,000) (80,000) CM 270,000$ 150,000$ 120,000$ Traceable FC (170,000) (90,000) (80,000) Responsibility margin 100,000$ 60,000$ 40,000$ Common costs (25,000) Net income 75,000$
Common costs arise because of overall Common costs arise because of overall operating activities and are not due to the operating activities and are not due to the
existence of a particular division.existence of a particular division.
Profit Center Reporting
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Let’s see how this works!Let’s see how this works!
Traceable Costs Can Become Common Costs
Fixed costs that are traceable on one level can become common if the
business is divided into smaller smaller parts.
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Income StatementTelevision
Division Color HDTVSales 300,000$ 200,000$ 100,000$ Variable costs (150,000) (95,000) (55,000) CM 150,000$ 105,000$ 45,000$ Traceable FC (80,000) (45,000) (35,000) Responsibility margin 70,000$ 60,000$ 10,000$ Common costs 10,000 Net income 60,000$
Profit Center Reporting
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Income StatementTelevision
Division Color HDTVSales 300,000$ 200,000$ 100,000$ Variable costs (150,000) (95,000) (55,000) CM 150,000$ 105,000$ 45,000$ Traceable FC (80,000) (45,000) (35,000) Responsibility margin 70,000$ 60,000$ 10,000$ Common costs 10,000 Net income 60,000$
45,000$ To Color35,000 To HDTV10,000 Common90,000$ TV Division
$90,000 cost directly tracedto the Television Division.
Profit Center Reporting
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TimeTime
Prof
itsPr
ofits
Responsibility Margin
Responsibility margin is the best gauge best gauge of the long-run profitability of a business center.
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Home Appliance CompanyIncome Statement
Laundry Division Washers Dryers
Sales 300,000$ 200,000$ 100,000$ Variable costs (150,000) (95,000) (55,000) CM 150,000$ 105,000$ 45,000$ Traceable FC (95,000) (45,000) (50,000) Responsibility margin 55,000$ 60,000$ (5,000)$ Common costs (10,000) Net income 45,000$
The Dryer Division is unprofitable becausethe responsibility margin is negative.
When is a BusinessCenter Unprofitable?
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The key issue is controllability.
Evaluating BusinessCenter Managers
Managers should be evaluated on the portion of responsibility margin they control.
Common fixed costs can not be traced to theDryer Division or the Washer Division, so theyare excluded from the responsibility margin.
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22-30Arguments 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.
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The amount charged when one division sells goods or services to another division.
Battery Division Auto Division
Batteries
Transfer Prices
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A higher transferprice for batteries
means . . .
. . . greaterprofits for the
Battery Division.Auto Division
Transfer Prices
The transfer price affects the profit measure for both buying and selling divisions.
Battery Division
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. . . lowerprofits for theAuto Division.
Auto Division
A higher transferprice for batteries
means . . .
Transfer Prices
The transfer price affects the profit measure for both buying and selling divisions.
Battery Division
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Many companies use the external market value of goods transferredas the transfer price.
Transfer Prices
Transfer prices have no direct effect uponthe company’s overall net income.
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Transfer prices have no direct effect uponthe company’s overall net income.
When the external market value of goods
transferred is unavailable . . .
Transfer Prices
Negotiatedtransfer
price
Cost-plustransfer
price
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Product Quality PersonnelNumber of defective parts Number of sick days takenNumber of customer returns Employee turnoverNumber of customer complaints Number of grievances filed
Marketing Efficiency and CapacityNumber of new customers Cycle time (manufacturing)Number of sales calls initiated Occupancy rates (hotels)Market share Passenger miles (airlines)Number of product stockouts Patient days (hospitals)
Transactions processed (banks)
Nonfinancial Performance Measures
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22-37Overview of Traditional and Variable Costing
Direct Materials
Direct Labor
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Variable Selling and Administrative Expenses
Fixed Selling and Administrative Expenses
TraditionalCosting
VariableCosting
ProductCosts
PeriodCosts
ProductCosts
PeriodCosts
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Unit Cost Computations
Dana, Inc. produces a single product with the following information available:
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Unit Cost Computations
Unit product cost is determined as follows:
Selling and administrative expenses arealways treated as period expenses and
deducted from revenue.
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Traditional CostingSales (20,000 × $30) 600,000$ Less cost of goods sold: Beginning inventory -$ Add COGM (25,000 × $16) 400,000 Goods available for sale 400,000 Ending inventory (5,000 × $16) 80,000 320,000 Gross margin 280,000 Less selling & admin. exp. Variable FixedNet operating income
Income Comparison of Traditional and Variable Costing
Dana had no beginning inventory, produced 25,000 units and sold 20,000 units this year.
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Traditional CostingSales (20,000 × $30) 600,000$ Less cost of goods sold: Beginning inventory -$ Add COGM (25,000 × $16) 400,000 Goods available for sale 400,000 Ending inventory (5,000 × $16) 80,000 320,000 Gross margin 280,000 Less selling & admin. exp. Variable (20,000 × $3) 60,000$ Fixed 100,000 160,000 Net operating income 120,000$
Income Comparison of Traditional and Variable Costing
Dana had no beginning inventory, produced 25,000 units and sold 20,000 units this year.
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Variable CostingSales (20,000 × $30) 600,000$ Less variable expenses: Beginning inventory -$ Add COGM (25,000 × $10) 250,000 Goods available for sale 250,000 Less ending inventory (5,000 × $10) 50,000 Variable cost of goods sold 200,000 Variable selling & administrative expenses (20,000 × $3) 60,000 260,000 Contribution margin 340,000 Less fixed expenses: Manufacturing overhead 150,000$ Selling & administrative expenses 100,000 250,000 Net operating income 90,000$
Income Comparison of Traditional and Variable Costing
Now let’s look at variable costing by Dana, Inc.Variable
costsonly.
All fixedmanufacturing
overhead isexpensed.
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22-43Income Comparison of Absorption and Variable Costing
Let’s compare the methods.
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Reconciliation
Variable costing net operating income 90,000$ Add: Fixed mfg. overhead costs deferred in inventory (5,000 units × $6 per unit) 30,000 Traditional costing net opearting income 120,000$
Fixed mfg. overhead $150,000 Units produced 25,000 units= = $6.00 per unit
We can reconcile the difference betweenabsorption and variable income as follows:
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End of Chapter 22