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Final Report on Cost Center. 6th

Final Report on Cost Center. 6th

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Published by Milind Ghate

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Categories:Topics, Art & Design
Published by: Milind Ghate on Jun 28, 2010
Copyright:Attribution Non-commercial


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In cost accounting, primary emphasis is on cost and it deals with collection,analysis, relevance, interpretation and presentation for various problems of management. Management accounting utilizes the principles and practices of financial accounting and cost accounting in addition to other managementtechniques for efficient operation of a company. Both have the same objectives of assisting management in it¶s functions of planning, decision making, controllingand techniques like budgetary control, standard costing, marginal costing.
collection, summarization, and reporting of financial information about variousdecision centers (
responsibility centers
throughout an organization; also called
activity accounting or profitability accounting 
. It traces costs, revenues, or profitsto the individual managers who are primarily responsible for making decisionsabout the costs, revenues, or profits in question and taking action about them.
Responsibility accounting is appropriate where top management has delegatedauthority to make decisions. The idea behind responsibility accounting is that eachmanager's performance should be judged by how well he or she manages thoseitems under his or her control.Responsibility accounting is an underlying concept of accounting performancemeasurement systems. The basic idea is that large diversified organizations aredifficult, if not impossible to manage as a single segment, thus they must bedecentralized or separated into manageable parts. These parts, or segments arereferred to as responsibility centers that include:1
revenue centers, 2
cost centers, 3
profit centers and 4
investment centers.This approach allows responsibility to be assigned to the segment managers thathave the greatest amount of influence over the key elements to be managed. Theseelements include revenue for a revenue center (a segment that mainly generatesrevenue with relatively little costs
, costs for a cost center (a segment thatgenerates costs, but no revenue
, a measure of profitability for a profit center (asegment that generates both revenue and costs
and return on investment (ROI
for an investment center (a segment such as a division of a company where themanager controls the acquisition and utilization of assets, as well as revenue andcosts
Advantages and Disadvantages
Responsibility accounting has been an accepted part of traditional accountingcontrol systems for many years because it provides an organization with a number of advantages. Perhaps the most compelling argument for the responsibilityaccounting approach is that it provides a way to manage an organization that wouldotherwise be unmanageable. In addition, assigning responsibility to lower levelmanagers allows higher level managers to pursue other activities such as long term planning and policy making. It also provides a way to motivate lower levelmanagers and workers. Managers and workers in an individualistic system tend to be motivated by measurements that emphasize their individual performances.However, this emphasis on the performance of individuals and individual segmentscreates what some critics refer to as the "stovepipe organization." Others have usedthe term "functional silos" to describe the same idea. Consider 9-6 Exhibit below
.Information flows vertically, rather than horizontally. Individuals in the varioussegments and functional areas are separated and tend to ignore theinterdependencies within the organization. Segment managers and individualworkers within segments tend to compete to optimize their own performancemeasurements rather than working together to optimize the performance of thesystem.

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