Download - Resposibility Accounting
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Responsibility Accounting
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18-*CentralizedOrganizationsDecentralizedOrganizationsDecisions are handed down form the top echelon of management and subordinates carry them out
Decisions are made at divisional and departmental levels
Centralization Vs. Decentralization
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18-*CostsBenefits And Costs Of A Decentralized OrganizationBenefitsManagers = SpecialistsDecision Making Autonomy = Managerial TrainingDecision Making Authority = Greater MotivationDelegating = Time ReliefEmpowering Employees = Knowledge & ExpertiseDelegating = Timely Responses to Opportunities & Problems
?CostsManagers narrow focus is not consistent with organizations overall goalsNarrow Focus = Tendency to ignore the consequences of actions on other unitsSome tasks or services may be duplicated unnecessarily
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18-*Most organizations are divided into smaller units, divisions, segments, business units, work centers, or departments Every on in an organization should work to achieve the goal of the organization.
BEHAVIORAL CONGRUENCEPerformance evaluation and incentivesystems are designed to encourageemployees to behave as if their goals are congruent with organizational goalsDecentralized Organizations And Responsibility AccountingShe seems like a team player, but Im not sure.
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18-*Goal CongruenceBehavioral CongruenceResponsibility AccountingVarious concepts and tools used to measure the performance of people and the departments in order to foster goal or behavioral congruenceDecentralized Organizations And Responsibility Accounting
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18-*A RESPONSIBILITY CENTER is any part of an organization whose manager has control over cost, revenue, or investment funds.1- COST CENTRE2- REVENUE CENTRE3- PROFIT CENTRE4- INVESTMENT CENTRE
Responsibility Centres
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18-*Types of Responsibility Centers
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18-*Responsibility Centers Cost Center Manager has control over the incurrence of costs.The Paint Departmentin an automobile plant.
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18-*Responsibility Centers Profit Center Manager has control over both costs and revenues.Company-owned restaurant in a fast-food chain.
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18-*Measuring Management PerformanceCoststandardsContributionincomestatement- Rate of return on investment Residual income EVAEvaluation Tool
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18-*Responsibility Accounting for Cost Centers
The evaluation of a managers performance for cost centers is based on his or her ability to meet budgeted goals for controllable costs. Responsibility reports for cost centers compare actual controllable costs with flexible budget data. Assume that the Finishing Department manager is able to control the following costs only.$ 500 U1,000 F 100 U Supervision 4,000 4,000 -0- $400 FTop managementmay want anexplanationof these variance.
FOX MANUFACTURING COMPANY
Finishing Department
Responsibility Report
For the Month Ended January 31, 2005
Controllable cost
Budget
Actual
Variance
Indirect material
$13,500
$14,000
Indirect labor
18,000
17,000
Utilities
4,500
4,600
$40,000
$39,600
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18-*Responsibility Accounting for Profit CentersProfit center the operating revenues and variable expenses are controllable by the manager of the profit center. Necessary to distinguish between direct and indirect fixed costs.Direct fixed costs or traceable costs costs that relate specifically to a responsibility center and are incurred for the sole benefit of the center. Indirect fixed costs pertain to a company's overall operating activitiesincurred for the benefit of more than one profit centermost indirect costs are not controllable by the profit center manager.
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18-*Responsibility Report for a Profit CenterControllable fixed costsControllable margin $360,000 $324,000 $36,000 U Note that this report does not show noncontrollable fixed costs. This manager was below budgeted expectations by approximately 10% ($36,000/ $360,000).
MANTLE MANUFACTURING COMPANY
Marine Division
Responsibility Report
For the Year Ended December 31, 2005
Difference
Budget
Actual
Favorable F
Unfavorable U
Sales
$1,200,000
$1,150,000
$50,000 U
Variable Costs
Costs of goods sold
500,000
490,000
10,000 F
Selling and administrative
160,000
156,000
4,000 F
Total
660,000
646,000
14,000 F
Contribution margin
540,000
504,000
36,000 U
Cost of goods sold
100,000
100,000
-0-
Selling and administrative
80,000
80,000
-0-
Total
180,000
180,000
-0-
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18-*Responsibility Accounting for Investment Centers
Investment center the manager can control or significantly influence the investment funds available for use.Return on investment (ROI). Basis for evaluating the performance of a manger of an investment center considered superior to any other performance measurement shows the effectiveness of the manager in utilizing the assets at his or her disposal
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18-*Return On Investment As A Performance Measure
Sheet1
Mail Order DivisionKoala Camp Gear DivisionRetail Division
Sales revenue$350,000,000$405,000,000$960,000,000
Income14,000,00045,000,00048,000,000
Invested capital70,000,000300,000,000480,000,000
Sheet1
Income Invested capital= Return on Investment (ROI)
Mail-order division$14,000,000 $70,000,000= 20%
Koala Camp Gear division$45,000,000 $300,000,000= 15%
Retail division$48,000,000 $480,000,000= 10%
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18-*Responsibility Report for Investment Center Other fixed costs 60,000 60,000 -0- Controllable margin $300,000 264,000 $36,000 U
Since an investmentcenter is an independententity for operatingpurposes,all fixed costs are controllable by the investment centermanager. Assumein this example that the managercan control $60,000of fixed costs thatwere not controllable whenthe division was a profit center.
MANTLE MANUFACTURING COMPANY
Marine Division
Responsibility Report
For the Year Ended December 31, 2002
Difference
Budget
Actual
Favorable F
Unfavorable U
Sales
$1,200,000
$1,150,000
$50,000 U
Variable Costs
Costs of goods sold
500,000
490,000
10,000 F
Selling and administrative
160,000
156,000
4,000 F
Total
660,000
646,000
14,000 F
Contribution margin
540,000
504,000
36,000 U
Controllable Fixed Costs
Cost of goods sold
100,000
100,000
-0-
Selling and administrative
80,000
80,000
-0-
Total
240,000
240,000
-0-
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18-*Capital TurnoverFocuses on the number of sales dollars generated by each dollar of invested capitalSales MarginMeasures the percentage of each sales dollar that remains as profit after all expenses are coveredFactors Underlying ROI
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18-*In Summary ROI can be improved by:increasing Salesreducing expensesreducing assets
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18-*Koala Camp Gear Divisions Residual Income Without/With New CIM EquipmentInvestment in new equipment raises residual income by $500,000Residual Income As A Performance Measure
Sheet1
Without Investment in New CIM EquipmentWith Investment in New CIM Equipment
Divisional profit$45,000,000$50,500,000
Less imputed interest charge: Invested capital$300,000,000$350,000,000
X imputed interest ratex .10x .10
Imputed interest charge30,000,00035,000,000
RI$15,000,000$15,500,000
**Goal congruence is the responsibility of top manager who should ensure that those down level managers have common goals.In most business settings, personal goals are different from organization goals. *How can an organizations cost management system promote goal. Or at least behavioural, congruence? Responsibility Accounting refers to the various concepts and tools used to measure
*****Traditionally, the most common investment-centre performance measure is return on investment (ROI).Note that ROI calculation for each division considers both divisional income and the capital invested in division. Why is this important? Suppose that each division were evaluated only on the basis of its divisional profit. The retail division reported a higher divisional profit than Mail-order division. Does this mean that the former performed better than the latter? The answer is no ; although the retail divisions profit exceeded the mail-order divisions profit, the former used much more invested capital to earn its profit. The latters assets are almost 7 times of the assets of the mail-order division.**Considering the relative size of each division we would expect that the retail division to earn a higher profit than the mail-order division. The important question is not how much profit each division earned but how effective each division used its capital to earn profit. Writing the formula in this way highlights factors that determine a divisions return on investment.*Residual income is expressed in dollar amount and not percentage. It consider the profit that remains after subtracting an imputed interest charges. The imputed interest charges is the minimum required rate of return on invested capital, which is the rate of return on investments of similar risk that is being forgone by the organizations. Why does residual income facilitate goal congruence while ROI does not?This is because RI incorporated an important piece of data that is excluded from the ROI formula. This is the minimum required rate of return on invested capital.