Part 3 C – 1 V3.0 THE IIA’S CIA LEARNING SYSTEM TM Section Topics 1.Cost concepts 2.Capital...

Part 3 C – 1V3.0

THE IIA’S CIA LEARNING SYSTEMTM

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Section Topics

1. Cost concepts

2. Capital budgeting

3. Operating budget

4. Transfer pricing

5. Cost-volume-profit analysis

6. Relevant cost

7. Costing systems

8. Responsibility accounting

Part 3, Section C

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Purpose of Managerial Accounting

To support management activities

Decision making

Planning

Continuous improvement

Evaluating

Controlling

Part 3, Section C, Introduction

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Cost Concepts:Fill in the blanks

Concept/Term Description

Any resource that must be given up to obtain some objective; can be money paid for a good or service, a new liability, or giving up an asset.

Any object that can have a cost applied to it and can be used to determine how much a particular thing or activity costs; includes products, services, customers, projects, departments, and activities.

Any factor that has a cause-and-effect relationship with costs, such as a rise in sales volume that affects a rise in sales commissions.

The historical cost paid for goods and services.

Cost

Cost driver

Actual costs

Cost object

Part 3, Section C, Topic 1

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Cost Concepts:Fill in the blanks

Concept/Term Description

Any costs that can be easily and accurately traced to an object (usually direct labor and direct materials).

Any costs that are related to a cost object but cannot be easily traced to the product (such as overhead).

The difference in costs between any two alternatives.

The potential benefits given up when one alternative is selected over another.

Any costs that have already been incurred and that cannot be changed by any decision made now or in the future.

Direct costs

Differential costs

Opportunity costs

Indirect costs

Sunk costs


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Product vs. Period Costs

Product Costs

Also called inventoriable or manufacturing costs. When products are sold, product costs become cost of goods sold. Product costs include:

• Direct materials.

• Direct labor.

• Manufacturing overhead.

Categorized as prime or conversion costs.

Also called operating expenses and nonmanufacturing costs. These items are expensed in the period in which they occur. Period costs include:

• Marketing or selling costs such asadvertising, shipping, and storagecosts in shipping warehouses.

• Administrative costs, including allexecutive, organizational, andclerical costs of the organization(such as PR and secretarial costs).

Period Costs


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Cost Behavior

Variable Costs Mixed CostsFixed Costs

Costs that rise and fall as afirm’s output level rises andfalls.• Manufacturing: direct labor,

raw materials, utilities, waste disposal

• Merchandising: cost of goods sold, sales commissions, billing costs

• Service (hospital): supplies, drugs, meals

Portions of total costs thatremain constant regardlessof changes in activitylevels over a relevantrange. Examples of fixedcosts: • Rent, depreciation• Insurance, property taxes• Supervisory and

administrative salaries

Costs that are a combination of fixed and variable costs.

The time horizon often determines cost behavior as costs can change in the long and short term.

All three cost patterns are found in most organizations.


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Which of the following is NOT true of absorption costing?

A. It is required for external reporting.

B. It deducts fixed manufacturing costs.

C. It defers fixed manufacturing costs.

D. It uses a gross margin format.

Answer: B. It defers fixed costs in ending inventory to future periods.

Discussion Question


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Classification of Costs Under Absorptionand Variable Costing

Absorption Costing Variable Costing

Product costs • Direct materials

• Direct labor

• Variable overhead

• Fixed overhead

• Direct materials

• Direct labor

• Variable overhead

Period costs • Selling expenses

• Administrative expenses

• Fixed overhead

• Selling expenses

• Administrative expenses


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Master Budget

A summary of an organization’s plans that sets specific targets for sales, production, distribution, and financing activities.

Master Budget Components

Operating Budget

Capital Budget

Financial Budget


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Capital Budgeting Process

Identify, understand, and define projects

and boundaries.

Select projects and analyze

revenues, costs, and cash flows.

Monitor and review projects and modify as

necessary.


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Investment Evaluation Analysis

Typical capital budgeting decisions include:

Cost reduction. (Should new equipment be purchased to reduce costs?)

Expansion. (Should a new plant or warehouse be acquired to increase capacity and sales?)

Equipment selection. (Which machine would be the most cost-effective to buy?)

Lease or buy. (Should new equipment be leased or purchased?)

Equipment replacement. (Should old equipment be replaced now or later?)


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• Compares present value of a project’s cash inflows to present value of a project’s cash outflows.

• The difference, the net present value, determines whether the project is an acceptable investment.

Discounting Models:Net Present Value (NPV) Method

Where: i = interest raten = number of periods

n

1 1PVa = 1

i 1 + i


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• Most widely used capital investment technique. IRR is the rate of return or “yield” promised by a project over its lifetime.

• Find discount rate that equates present value of project’s cash outflows with present value of project’s cash inflows. IRR is the discount rate that causes the net present value of a project to be equal to zero.

• Computed IRR is compared to firm’s required rate of return. Greater or equal IRR means project may be acceptable.

Discounting Models:Internal Rate of Return (IRR) Method

Investment US $XXXX = = x.xxxx

Annuity US $XXXX


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Which of the following is true of the NPV decision model in relation to the IRR?

A. It is more complicated.

B. It makes more realistic assumptions.

C. It favors larger investments.

D. It is less accurate.

Answer: B. NPV makes more realistic assumptions about the rate of return that can be earned on cash flows from a project.

Discussion Question


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• Focuses on the payback period, the time required for an organization to recover its original investment.

• Some organizations set a maximum payback period for all projects and reject any that exceed that level. This provides a rough measure of risk and provides information about controlling risks of obsolescence and uncertainty of cash flows.

Nondiscounting Models: Payback Method

(if cash flows are equal amount each period)

Original InvestmentPayback Period =

Annual Cash Flow


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• Also called simple rate of return. Unlike other methods, it measures the return on a project in terms of net operating income instead of cash flow.

• Estimated revenues generated by a project are deducted from the projected operating expenses; this figure is then related to the initial investment.

Nondiscounting Models:Accounting Rate of Return (ARR) Method

Increase in Expected Average Annual Operating IncomeARR =

Initial Required Investment


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• ARR method does not consider a project’s profitability; however, it can ensure that new investments don’t adversely affect financial accounting ratios.

• Critical deficiency is that both methods ignore the time value of money.

• Used less frequently than discounting models; however, still commonly used as screening measures.

• Payback method can help identify proposals managers should consider further.

Payback and ARR Compared


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• Residual income calculation to help determine whether the money an organization makes is more than the money it takes to make it.

• Value is created if after-tax operating income is greater than cost of capital.

• Key point is emphasis on after-tax operating profit and the actual cost of capital.

Economic Value Added (EVA)

EVA = After-Tax Operating Income – (Actual Percentage Cost of Capital x Average Capital Employed)


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Capital Budgeting Models: Fill in the blanks

Method Strengths Weaknesses

Considers time value of money and uses realistic discount rate for reinvestment.

Not useful for comparing projects requiring different amounts of investment.

Considers time value of money and easy to compare projects with different amounts.

Complex to compute, and reinvestment rate of return might be unrealistic.

Simple, measures liquidity, and allows for risk tolerance.

Ignores time value of money and cash flows beyond payback period.

Data readily available, consistent with other financial measures.

Ignores time value of money, uses accounting numbers rather than cash flow.

Emphasizes after-tax operating profit.

Not able to compare investments among different-sized divisions.

NPV

IRR

Payback

ARR

EVA


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• Are the basis for evaluating a manager’s performance.

• Assign responsibilities to managers, authorize budget amounts, and set performance expectations.

• Help coordinate activities of several parts of an organization.

• Fine-tune an organization’s strategic plan.

• Typically cover a one-year period and state revenues and expense planning.

• Identify resources (and sources) to support organization’s daily activities.

Operating Budgets


• Are tools for short-term planning and control.

• Are used in conjunction to develop overall operating budget.

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Sales BudgetBasis for all other budgets. Defines capacity needed throughout organization, including production, selling, and administrative costs.

Steel, Inc., Sales Budget

Q1 Q2 Q3 Q4 Year 6

Steel girders 256 266 282 294 1,098

Price per girder (USD)

$5,000 $5,000 $5,500 $5,500

Rebar, short tons

70 78 88 96 332

Price per ton (rebar) (USD)

$4,000 $4,000 $4,400 $4,400

Total sales(USD)

$1,560,000 $1,642,000 $1,938,200 $2,039,400 $7,179,600


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Production BudgetPlan for acquiring resources, meeting sales goals, and maintaining a specific level of inventory.

Steel, Inc., Production Budget

Q1 Q2 Q3 Q4 Year 6(G = girders, R = rebar) G R G R G R G R G R

Budgeted sales 256 70 266 78 282 88 294 96 1,098 332

Plus ending inventory

26 7 27 8 28 9 29 10 29 10

Units needed 282 77 293 86 310 97 323 106 1,127 342

Minus beginning inventory

20 9 26 7 27 8 28 9 20 9

Budgeted production

262 68 267 79 283 89 295 97 1,107 333


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Direct Materials BudgetDetermines required materials and quality of materials used to meet production. Often broken down into usage and purchase budgets.

Steel, Inc., Purchase BudgetDirect Materials (DM)

Q1 Q2 Q3 Q4 Year 6(R = rebar) R R R R R

Total DM needed 68 79 89 97 333

Plus target ending inventory 5 6 5 7 7

Total DM required 73 85 94 104 340

Minus DM beginning inventory 4 5 6 5 4

DM purchases 69 80 88 99 336

Purchase price (USD) $1,000 $1,000 $1,000 $1,000

Total cost for DM purchases (USD)

69K 80k 88K 99K 336K


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Direct Labor BudgetSteel, Inc., Direct Labor Budget

Q1 Q2 Q3 Q4 Year 6(G = girders;

R = rebar)G R G R G R G R G R

Budgeted production

262 68 267 79 283 89 295 97 1,107 333

DLH per unit 20 40 20 40 20 40 20 40

DLH needed 5,240 2,720 5,340 3,160 5,660 3,560 5,900 3,800 22,140 13,320

Hourly wage 20 20 20 20 20 20 20 20

Total wages 104.8k 54.4k 106.8k 63.2k 113.2k 71.2k 118k 77.6k 442.8k 266.4k

Total labor $159,200 $170,000 $184,400 $195,600 $709, 200

(All figures in USD)


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Overhead BudgetAll production costs other than direct materials and direct labor. Includes fixed and variable costs such as rent, insurance, utilities, etc.

Steel, Inc., Overhead Budget

Rate/DLH

Q1 Q2 Q3 Q4 Year 6

Total DLH 7,960 8,500 9,220 9,780 35,460

Total variable overhead

$38.50 $306,460 $327,250 $354,970 $376.530 $1,365,210

Total fixed overhead

$53,190 $53,190 $53,190 $53,190 $212,760

Total overhead $359,650 $380,440 $408,160 $429,720 $1,577,970



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Cost of Goods Sold BudgetTotal and per unit production cost budgeted for a period.

Steel, Inc., Cost of Goods Sold Budget

Q1 Q2 Q3 Q4 Year 6

Direct materials $854,000 $880,000 $938,000 $1,036,000 $3,708,000

Direct labor $159,200 $170,000 $184,400 $195,600 $709,200

Overhead $359,650 $380,440 $408,160 $429,720 $1,577,970

COGS manufactured

$1,372,850 $1,430,440 $1,530,560 $1,661,320 $5,995,170

+ Beginning inventory

$113, 460 $131,800 $139,310 $152,420 $113,460

COGS available $1,486,310 $1,562,240 $1,669,870 $1,813,740 $6,108,630

− Ending inventory

$131,800 $139,310 $152,420 $160,130 $160,130

COGS $1,354,510 $1,422,930 $1,517,450 $1,653,610 $5,948,500(All figures in USD)


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Selling and Administrative Expenses Budget

Nonmanufacturing expenses and sales expenses make up this budget.

Steel, Inc., Selling and Administrative Expenses Budget

Q1 Q2 Q3 Q4 Year 6

Variable selling expenses

$35,000 $36,000 $40,000 $43,000 $154,000

Fixed selling expenses

$64,000 $64,000 $64,000 $64,000 $256,000

Administrative expenses

$46,000 $46,000 $46,000 $46,000 $184,000

Total selling and administrative expenses

$145,000 $146,000 $150,000 $153,000 $594,000



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Alternative Budget Approaches

Project budgeting

Activity-based

budgeting

Zero-based

budgeting

Kaizen budgeting


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ABB vs. Traditional Budgeting

Activity-based Budgeting Traditional Budgeting

• Emphasizes value-added activities and activity costs

• Encourages teamwork, continuous improvement, customer satisfaction

• Eliminates wasteful activities and encourages cost reduction

• Identifies value-added vs. non-value-added activities

• Coordinates and synchronizes activities of entire organization

• Emphasizes input resources and functional areas

• Encourages increasing management performance

• Relies on past budgets without taking into account cost-effectiveness

• Minimizes variances and maximizes individual responsibility unit performances


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Zero-based Budgeting

• Creates lean, efficient organization.

• Forces constant cost justification.

• Encourages annual reviews.

• Managers exhaust resources unnecessarily.

• Can encourage waste through budget slack.

• Annual reviews are expensive.

• Omitting prior budgets can lead to ignoring lessons learned from prior years.

Pros Cons


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Reinforcing Activity 3-8Part 3, Section C, Topic 3

Operating Budget


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Transfer pricing is a system for pricing products or services transferred from one responsibility center to another.

Decentralized Organization

Responsibility Unit A

ResponsibilityUnit B

Unit A “sells” a product to Unit B.

Unit B “pays” a transfer price to Unit A.

Transfer Pricing


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• Control– Used to provide incentives and performance measures– Ensures that costs are assigned to correct responsibility

center

• Decentralized planning decisions– Purchasing decisions are consistent with organization’s

goals– Considers effect on selling and buying units’ incentives

• International issues– Minimize tax liability, expropriation risks, taxes, and tariffs– Incorporate alternative performance measures if necessary– Comply with all national laws and regulations

Transfer Pricing Issues


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The overriding reason for using transfer pricing is to

A. motivate managers to make decisionsconsistent with organizational goals.

B. hold managers responsible for problems.

C. generate tax savings.

D. improve economic performance.

Answer: A. Transfer pricing also affects B, C, and D, but the primary reason for using it is A.

Discussion Question


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• Market price: A true arm’s-length model that sets the internal transfer price at the going market price.

• Full cost (absorption): Starts with seller’s variable cost for an item and then allocates fixed costs to the prices.

• Variable cost: Sets transfer prices at the unit’s variable cost, or the actual cost to produce the good or service less all fixed costs.

• Negotiated price: Sets the transfer price through negotiation between buyer and seller.

Transfer Pricing Models


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Transfer Pricing Models:Fill in the blanks

Model Advantages Disadvantages

• Helps preserve unit autonomy• Incentive for selling unit• Arm’s-length standard

• Intermediate products have no market price

• Must be adjusted for cost savings

• Easy to implement• Intuitive, easily understood• Preferred by tax authorities

• Overstates opportunity cost if excess capacity exists

• Irrelevance of fixed cost in decisions

• Causes buyer to act as desired

• Unfair to seller if seller is a profit or investment business unit

• Practical when conflict exists • Arbitration procedure reduces autonomy

• Potential tax problems

Market price

Full cost

Variable cost

Negotiated price


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Which of the following in NOT a key factor in transfer pricing?

A. The seller’s variable cost vs. market price

B. If selling unit is operating at full capacity

C. If there’s an outside supplier

D. Organization’s market share

Answer: D. Other factors are more important.

Discussion Question


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• Helps managers understand interrelationships among cost, volume, and profit by focusing on interactions among:

CVP Analysis

— Prices of products. — Volume or level of activity.— Per unit variable costs.

— Total fixed costs.— Mix of products sold.

• Decision-making applications include:— Setting prices.— Product introductions.— Replacing equipment.

— Make or buy decisions.— “What-if” analyses.


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Tracks how costs, revenues, and profits change in a predictable way as the volume of activity changes.

Profit = Revenues – Total Costs

or

Revenues = Fixed Costs + Variable Costs + Profit

CVP Model


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Break-even Analysis

• Determinant of CVP analysis used to assess how “what-if” decision alternatives will affect operating income.

• Break-even point is output level at which total revenues and total costs are equal.

At break-even, operating income is zero.0

Above break-even, operating income levels are profitable.

Below break-even, there is a loss.

+

–


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Break-even Analysis—Equation Method

Revenues – Variable Costs – Fixed Costs = Operating Income

or

USP × Q – UVC × Q – FC + OI

Where:

• USP is the unit selling price.

• Q is the quantity sold.

• UVC is the unit variable costs.

• FC is the fixed costs.

• OI is the operating income.


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Break-even Analysis—Contribution Margin Method

Algebraic adaptation of the equation method

USP × Q UVC × Q FC = OI

USP UVC × Q = FC + OI

UCM × Q = FC + OI

FC + OIQ =

UCM

Where:

• USP is the unit selling price.

• Q is the quantity sold.

• UVC is the unit variable costs.

• FC is the fixed costs.

• OI is the operating income.

• UCM is the unit contribution margin (USP − UVC).


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Break-even Analysis—Graph Method

CVP graph (or break-even chart) shows interrelationships among cost, volume, and profit graphically.

Units Sold

Dollars

Total revenues

Loss

Fixed costs

Operating income

Variable costsTotal costs

Profit


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Relevant vs. Irrelevant Costs

• Are yet to be incurred (future costs).

• Differ for each option.

• Are avoidable.

• Are focused on short-term decisions.

• Have already been incurred.

• Have already been committed.

• Will be the same regardless of alternative chosen.

• Can be ignored.

Irrelevant Costs:Relevant Costs:


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Which of the following BEST describes a relevant cost?

A. A cost that is the same for both choices

B. A cost that has already been incurred

C. A cost yet to be incurred

D. A cost that is unavoidable

Answer: C. Costs that have already been incurred (sunk costs) are irrelevant.

Discussion Question


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Relevant Cost Analysis Applications

Make or buy

decisions

Special order

decisions

Sell or process further

decisions

Keep or drop

decisions


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Relevant Cost Analysis:Fill in the blanks

Decision Considerations Conclusion

Compare relevant cost of making product internally vs. buying product externally.

If relevant cost is less than purchase price, make product internally.

Evaluate profitability based on relevant and opportunity costs and capacity.

Accept order if there is excess capacity and unit costs are less than price offered.

Analyze relevant costs; ignore joint costs as they are irrelevant.

Process further if incremental revenue exceeds incremental processing costs incurred.

Identify avoidable costs and determine contribution margin.

Drop product if avoidable fixed costs saved are greater than contribution margin amount lost.

Make or buy

Special order

Keep or drop

Sell or process further


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Product Costing Systems

Product costing is the process of accumulating, classifying, and assigning direct materials, direct labor, and factory overhead costs to products and services.

Types of Product Costing Systems:

Cost measurement (allocation) systems

Cost accumulation systems


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Actual CostingRecords actual costs incurred for direct materials, direct labor, and overhead (by allocating actual amounts).

Steel, Inc., Period Costs

P1 P2 P3

Direct materials

256 266 282

Direct labor

$5,000 $5,000 $5,500

Overhead 70 258 175

Total costs

$5,326 $5,524 $5,957

Limitations of actual costing:

• Cannot provide accurate unit cost information on a timely basis.

• Difficult to assign overhead items to unit cost without direct relationship.

• Can distort period costs due to irregular overhead items.


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Normal CostingMost widely used costing method; applies actual costs for direct materials and direct labor to a job, process, or other cost center and uses a predetermined rate to assign overhead to cost centers.

Steel, Inc., Period Costs

P1 P2

Direct materials 256 266

Direct labor $5,000 $5,000

Overhead (pre-determined rate)

150 150

Total costs $5,406 $5,416

Advantages of normal costing:

• Actual overhead costs are not readily available.

• Helps keep product costs current by allowing for immediate cost calculation using standard overhead rate.

• Helps smooth out or “normalize” factory overhead rate fluctuations.


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Which of the following is a disadvantage of a standard costing system?

A. It does not improve planning and control.

B. Unreasonable standards might be set.

C. It can complicate product costing.

D. It is not easily adapted to new data.

Answer: B. Standards might be authoritarian, inflexible, or secretive.

Discussion Question


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Cost Assignment in Measurement Systems:Fill in the blanks

System Direct Materials Direct Labor Overhead

Actual cost Actual cost Actual cost

Actual cost Actual cost Budgeted overhead cost using predetermined rate

Standard cost Standard cost Standard cost

Actual Costing

Normal Costing

Standard Costing


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Job Costing (Job-Order Costing)

Assigns costs to a specific job (a distinct unit, batch, or lot of a product or service).

• Used where many different products are produced each period and each unique job uses a different amount of resources.

Costs assigned to each product • Can accommodate multiple

costing methods, such as actual, normal, and standard costing.


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Process Costing

Accumulates costs by process or department and assigns them to a large number of nearly identical products.

• Appropriate for highly automated, repetitive processes where cost of one unit is identical to another.

• Common among manufacturers mass-producing similar goods.

• Total assigned costs are divided by total number of units produced.

Costs assigned to many identical products


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Key Differences BetweenJob Costing and Process Costing

Job Costing Process Costing• Used with a wide variety of distinct

products or services.

• Total job costs are actual direct materials and direct labor and predetermined overhead rates.

• Costs accumulate by individual job and are tracked separately.

• Unit cost is computed by dividing total job costs by units produced.

• Used with similar or identical products with continuous flow.

• Costs are assigned uniformly to all units passing through a department during a specific period.

• Costs accumulate by process or department.

• Unit cost is computed by dividing total process costs of the period by the units produced.


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• How is unit cost for a product or service computed given that some units produced in a period are complete and some are incomplete?

• Should costs and work of beginning WIP be counted with current period’s work and costs or be treated separately?

Process Costing—WIP InventoriesAccounting for work-in-process (WIP) inventories is a major concern in process costing, particularly in manufacturing.

Primary issues

Units started and completed in current

period (Period 2)

Units started in prior period, completed in this period

(Period 1 WIP)

Period 2 WIP inventories


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Equivalent Units (EUs)

Amount of work done on partially completed units expressed in terms of how many complete units could have been created with the same amount of work in the same period.

Equivalent Units = Number of Partially Completed Units % Completion

Units started in prior period, completed in this period

(Period 1 WIP)

Period 2 WIP inventories

and/or


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Methods to Calculate Equivalent Units

Weighted Average MethodCosts and work carried over from the prior period are counted as if they belong to the current period.

Equivalent Units = Units Transferred to Next Department or Finished Goods + Equivalent Units in Ending Work-in-Process Inventory

Equivalent units =

(Computed for current accounting period)

Units transferred to department or finished goods

Department’s ending WIP

inventories (EUs)

+


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Methods to Calculate Equivalent Units

FIFO MethodCalculates unit cost using only costs incurred and work performed during current accounting period.

Equivalent Units = Equivalent Units to Complete Beginning Inventory + Units Started and Completed During the Period + Equivalent Units in

Ending Work-in-Process Inventory

EUs to complete beginning inventory

Department’s ending WIP

inventories (EUs)+

Equivalent units =

(Computed for current accounting period)

Units started and

completed+


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Key Differences Between Weighted Average and FIFO Methods

Weighted Average FIFO• Blends work and costs from prior

period with those in current period.

• Easier to use, simpler calculations.

• Suited for stable inventories and manufacturing costs.

• Less accurate in computing unit costs for current period output and for units in beginning work in process.

• EUs and unit costs relate only to work done in the current period.

• Separates prior and current periods.

• Produces more current unit cost if prices change in manufacturing inputs.

• More closely linked to continuous improvement efforts and gives greater control over costs and performance evaluation.


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ABC Traditional• Uses activity- and volume-based cost

drivers.

• Assigns overhead to activities and then to products or services.

• Focuses on processes and costing issues that cross departments.

• Nonmanufacturing and manufacturing costs may be assigned to products.

• Uses up to three volume-based cost drivers.

• Assigns overhead to departments and then to products or services.

• Focuses on processes and costing improvement issues within departments.

• Only manufacturing costs are assigned to products.

Differences Between ABC and Traditional Costing


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Steps to Implementing an ABC System

Step 1. Identify activities and resource costs.

Step 3. Assign activity costs to cost objects.

Step 2. Assign resource costs to activities.


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• Reduces distortions caused by traditional allocation methods

• Gives managers access to relevant costs

• Measures activity-driving costs, easier to assess how overall cost and value are affected

• Results in greater unit costs for low-volume products

• Requires many hours to implement and use

• Does not relate all overhead costs to a particular cost driver

• Generates much data that may lead to confusion

• Reports do not conform to GAAP, may not be used for external reporting

Benefits and Limitations of ABC


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Reinforcing Activity 3-9Part 3, Section C, Topic 7

Cost Concepts and Costing Systems


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Managers of different responsibility centers are held responsible only for those revenues or costs they can actually control.

Decentralized Organization

Profit/revenue Center

Cost CenterInvestment

CenterProfit/Revenue

Center

Responsibility Accounting


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Centers ResponsibilitiesCost (data processing, HR, accounting, customer service)

• Fewest responsibilities; must control costs through efficient use of resources.

• Rewarded for minimizing costs without sacrificing quality.

• Compensation tied to favorable cost variances.

Profit/revenue (restaurants, retail shops)

• Responsible for generating revenues, controlling costs, and cost and pricing of products.

• Decides types, quality, and marketing of products.

• Performance based on profit, quality, customer satisfaction.

Investment (profit centers focused on internal or external investment)

• Responsible for long- and short-term investments, costs, and revenues.

• Can request more funds to increase capacity.

• Evaluated on successful investments, strategy.

Responsibility Centers and Manager Responsibilities


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Questions?

End of Section C

Part 3, Section C

Part 3 C – 1 V3.0 THE IIA’S CIA LEARNING SYSTEM TM Section Topics 1.Cost concepts 2.Capital...

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Transcript of Part 3 C – 1 V3.0 THE IIA’S CIA LEARNING SYSTEM TM Section Topics 1.Cost concepts 2.Capital...