Responsibility Accounting

UIAMS, Panjab University

Chandigarh
Session 16
th
September, 2013
Relating to the
responsibilities of
individual managers.
To evaluate
managers on
controllable items.
An accounting system that
provides information . . .
Responsibility Accounting
Decentralization
Is the systematic effort to delegate to
the lowest levels all the authority
except that which can be exercised at
central points.
Decision Making is Pushed Down
Supervisor Supervisor
Middle
Management
Supervisor Supervisor
Middle
Management
Top
Management
Decentralization
often occurs as
organizations
continue to grow.
Decentralization
Decentralization
Promotes better
decision making.
Allows upper-level management to
concentrate on strategic decisions.
Improves
productivity.
Develops
lower-level
managers.
Improves
performance
evaluation.
Advantages
Benefits of decentralization
Reduces workload of the executive
Fast decision making
Facilitates product diversification
Gives opportunity of learning to each
employee
Disadvantages
Conflict
Cost increases because of duplicacy of
work
Disadvantage related to profit centres
Responsibility Accounting
Responsibility accounting is
used to measure the performance
of people and departments to
foster goal congruence.
Responsibility Reports
Responsibility
Reports
Prepared for each
individual who has
control over
revenue or expense
items
Responsibility Reports
Prepare budgets for
each responsibility center.
Prepare timely performance reports
comparing actual amounts with budgeted amounts.
Measure performance of
each responsibility center.
Responsibility Centers
A subunit in an organization whose
manager is held accountable for
specified financial results.
Responsibility Centers
Cost Center
Segment has
control over
the
incurrence of
costs.
The Paint Department
in an automobile plant.
The Reservations
Department of an airline.
Revenue Center
Segment is
responsible for
the revenue of
a unit
Responsibility Centers
Profit Center
Segment has
control over
both costs and
revenues.
Company-owned restaurant
in a fast-food chain.
Investment
Center
Segment has
control over
profits and
invested capital.

A division of a
large corporation
Measuring Managerial
Performance
Return on investment (ROI)
Residual income (RI)
Cost
Center
Cost control
Quantity and quality
of services
Profit
Center
Investment
Center
Evaluation Measures
Profitability
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
Improving R0I
Three ways to improve ROI
Increase
Sales
Reduce
Expenses
Reduce
Investment
ROI - A Major Drawback
As division manager,
I wouldnt invest in
that project because
it would lower my pay!
Gee . . .
I thought we were
supposed to do what
was best for the
company!
Performance Reports
Show the budgeted and actual
amounts, and the variances
between these amounts, of key
financial results appropriate for
the type of responsibility center.
Performance Reports
February 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 F
Oahu 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 U
Kitchen
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 without parentheses denote profit; numbers with parentheses denote ex penses; numbers in thousands.
F denotes fav orable v ariance; U denotes unfav orable v ariance.
Flexible Budget* Actual Results* Variance
Cost Allocation
The process of assigning the
costs in the cost pool to the cost
objects is called cost allocation
or cost distribution.
Cost Allocation Bases
An allocation base is a measure of
activity, physical characteristic, or
economic characteristic that is
associated with the responsibility
centers, which are the cost objects in
the allocation process.
Behavioral Effects of
Responsibility Accounting
Information
versus
Blame
Controllability
Motivating
Desired
Behavior
Segmented Reporting
Segmented reporting refers to
the preparation of accounting
reports by segment and for the
organization as a whole.
A segment is any part or
activity of an organization
about which a manager seeks
cost, revenue, or profit data.
Segmented Reporting
Divisions

Units

Aloha Hotels and
Resorts
Oahu Division
Maui Division
Waikiki Sands Hotel
Diamond Head
Lodge
Waimea Beach
Resort
Segmented Reporting
THANK U!