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Responsibility Accounting

UIAMS, Panjab University

Chandigarh

Session 16thSeptember, 2013

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Relating to theresponsibilities of

individual managers.

To evaluatemanagers on

controllable items.

An accounting system thatprovides information . . .

Responsibility Accounting

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DecentralizationIs the systematic effort to delegate tothe lowest levels all the authorityexcept that which can be exercised at

central points.

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Decision Making is Pushed Down

Supervisor Supervisor

Middle

Management

Supervisor Supervisor

Middle

Management

Top

Management

Decentralizationoften occurs asorganizations

continue to grow.

Decentralization

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DecentralizationPromotes betterdecision making.

Allows upper-level management toconcentrate on strategic decisions.

Improvesproductivity.

Developslower-levelmanagers.

Improvesperformanceevaluation.

Advantages

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Benefits of decentralization

Reduces workload of the executive

Fast decision making

Facilitates product diversification

Gives opportunity of learning to eachemployee

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Disadvantages

Conflict

Cost increases because of duplicacy of

workDisadvantage related to profit centres

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Responsibility Accounting

Responsibility accounting is

used to measure the performanceof people and departments tofoster goal congruence.

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Responsibility Reports

Responsibility

ReportsPrepared for eachindividual who hascontrol over

revenue or expenseitems

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Responsibility Reports

Prepare budgets foreach responsibility center.

Prepare timely performance reportscomparing actual amounts with budgeted amounts.

Measure performance ofeach responsibility center.

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Responsibility Centers

A subunit in an organization whose

manager is held accountable forspecified financial results.

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Responsibility Centers

Cost CenterSegment hascontrol overtheincurrence ofcosts.

The Paint Departmentin an automobile plant.

The ReservationsDepartment of an airline.

Revenue Center

Segment isresponsible for

the revenue ofa unit

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Responsibility Centers

Profit CenterSegment hascontrol overboth costs andrevenues.

Company-owned restaurant

in a fast-food chain.

InvestmentCenter

Segment hascontrol overprofits andinvested capital.

A division of a

large corporation

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Measuring ManagerialPerformance

Return on investment (ROI)Residual income (RI)

CostCenter

Cost controlQuantity and quality

of services

ProfitCenter

InvestmentCenter

Evaluation Measures

Profitability

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Return on Investment

Return on investment is the ratio ofincome to the investment used togenerate the income.

ROI =

Net Income

Investment

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ROI =Net IncomeInvestment

ROI = Net IncomeSales

SalesInvestment

Margin Turnover

Return on Investment

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Improving R0I

Three ways to improve ROI

Increase

Sales

ReduceExpenses

Reduce

Investment

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ROI - A Major Drawback

As division manager,I wouldnt invest in

that project becauseit would lower my pay!

Gee . . .I thought we weresupposed to do what

was best for the

company!

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Performance Reports

Show the budgeted and actual

amounts, and the variancesbetween these amounts, of keyfinancial results appropriate forthe type of responsibility center.

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Performance ReportsFebruary Year to Date February Year to Date February Year to Date

Company . . . . . . . . . . . . . . . . . . . . . . $30,660 $64,567 $30,716 $64,570 $56 F $ 3 F

Maui Division . . . . . . . . . . . . . . . . . . $18,400 $38,620 $18,470 $38,630 $70 F $10 FOahu Division . . . . . . . . . . . . . . . . . . 12,260 25,947 12,246 25,940 14 U 7 U

Total profit . . . . . . . . . . . . . . . . . . . . $30,660 $64,567 $30,716 $64,570 $56 F $ 3 F

Oahu Division

Waimea Beach Resort . . . . . . . . . . . $6,050 $12,700 $6,060 $12,740 $10 F $40 F

Diamond Head Lodge. . . . . . . . . . . 2,100 4,500 2,050 4,430 50 U 70 U

Waikiki Sands Hotel . . . . . . . . . . . . . 4,110 8,747 4,136 8,770 26 F 23 F

Total profit . . . . . . . . . . . . . . . . . . . . $12,260 $25,947 $12,246 $25,940 $14 U $ 7 U

Waikiki Sands Hotel

Grounds and Maintenance . . . . . . . . ($45) ($90) ($44) ($90) $ 1 F Housekeeping and Custodial . . . . . . (40) (90) (41) (90) 1 U

Recreational Services . . . . . . . . . . . . 40 85 41 88 1 F $ 3 F

Hospitality . . . . . . . . . . . . . . . . . . . . 2,800 6,000 2,840 6,030 40 F 30 F

Food and Beverage . . . . . . . . . . . . . 1,355 2,842 1,340 2,832 15 F 10 U

Total profit . . . . . . . . . . . . . . . . . . . . $4,110 $8,747 $4,136 $8,770 $26 F $23 F

Food and Beverage Department

Banquets and Catering . . . . . . . . . . . $600 $1,260 $605 $1,265 $ 5 F $ 5 F

Restaurants . . . . . . . . . . . . . . . . . . . 1,785 3,750 1,760 3,740 25 U 10 U

Kitchen. . . . . . . . . . . . . . . . . . . . . . . (1,030) (2,168) (1,025) (2,173) 5 F 5 U

Total profit . . . . . . . . . . . . . . . . . . . . $1,355 $2,842 $1,340 $2,832 $15 U $10 UKitchen

Kitchen staff wages . . . . . . . . . . . . . ($80) ($168) ($78) ($169) $ 2 F $ 1 U

Food . . . . . . . . . . . . . . . . . . . . . . . . (675) (1,420) (678) (1,421) 3 U 1 U

Paper products. . . . . . . . . . . . . . . . . (120) (250) (115) (248) 5 F 2 F

Variable overhead. . . . . . . . . . . . . . . (70) (150) (71) (154) 1 U 4 U

Fixed overhead. . . . . . . . . . . . . . . . . (85) (180) (83) (181) 2 F 1 U

Total expense . . . . . . . . . . . . . . . . . . ($1,030) ($2,168) ($1,025) ($2,173) $ 5 F $ 5 U

*Numbers w ithout parentheses denote profit; numbers w ith parentheses denote ex penses; numbers in thousands.F denotes favorable v ariance; U denotes unfavorable v ariance.

Flexible Budget* Actual Results* Variance

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Cost Allocation

The process of assigning the

costs in the cost pool to the costobjects is called cost allocationor cost distribution.

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Cost Allocation Bases

An allocation base is a measure ofactivity, physical characteristic, oreconomic characteristic that isassociated with the responsibilitycenters, which are the cost objects in

the allocation process.

B h i l Eff t f

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Behavioral Effects ofResponsibility Accounting

InformationversusBlame

Controllability

MotivatingDesiredBehavior

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Segmented Reporting

Segmented reporting refers to

the preparation of accountingreports by segment and for theorganization as a whole.

A segment is any part oractivity of an organizationabout which a manager seeks

cost, revenue, or profit data.

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Segmented ReportingDivisions

Units

Aloha Hotels andResorts

Oahu DivisionMaui Division

Waikiki Sands HotelDiamond Head

Lodge

Waimea Beach

Resort

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Segmented Reporting

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THANK U!