Chapter 12

Responsibility
Accounting, Quality
Control, and
Environmental Cost
Management

McGraw-Hill/Irwin

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning
Objective
1

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Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Responsibility Accounting
Responsibility accounting is used to measure
the performance of people and departments
to foster goal congruence.

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Learning
Objective
2

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Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Responsibility Centers
A subunit in an organization whose
manager is held accountable for
specified financial results.

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Responsibility Centers
Cost Center
Segment has
control over
the incurrence
of costs.

The Paint Department

in an automobile plant.

Revenue Center
Segment
is responsible
for the revenue of
a unit.

The Reservations
Department of an airline.
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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.
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Learning
Objective
3

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Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

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.

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Performance Reports
Flexible Budget*
February
Year to Date
Company . . . . . . . . . . . . . . . . . . . . . .
Maui Division . . . . . . . . . . . . . . . . . .
Oahu Division . . . . . . . . . . . . . . . . . .
Total profit . . . . . . . . . . . . . . . . . . . .
Oahu Division
Waimea Beach Resort . . . . . . . . . . .
Diamond Head Lodge. . . . . . . . . . .
Waikiki Sands Hotel . . . . . . . . . . . . .
Total profit . . . . . . . . . . . . . . . . . . . .
Waikiki Sands Hotel
Grounds and Maintenance . . . . . . . .
Housekeeping and Custodial . . . . . .
Recreational Services . . . . . . . . . . . .
Hospitality . . . . . . . . . . . . . . . . . . . .
Food and Beverage . . . . . . . . . . . . .
Total profit . . . . . . . . . . . . . . . . . . . .
Food and Beverage Department
Banquets and Catering . . . . . . . . . . .
Restaurants . . . . . . . . . . . . . . . . . . .
Kitchen. . . . . . . . . . . . . . . . . . . . . . .
Total profit . . . . . . . . . . . . . . . . . . . .
Kitchen
Kitchen staff wages . . . . . . . . . . . . .
Food . . . . . . . . . . . . . . . . . . . . . . . .
Paper products. . . . . . . . . . . . . . . . .
Variable overhead. . . . . . . . . . . . . . .
Fixed overhead. . . . . . . . . . . . . . . . .
Total expense . . . . . . . . . . . . . . . . . .

Actual Results*
February
Year to Date

Variance
February Year to Date

$30,660
$18,400
12,260
$30,660

$64,567
$38,620
25,947
$64,567

$30,716
$18,470
12,246
$30,716

$64,570
$38,630
25,940
$64,570

$56 F
$70 F
14 U
$56 F

$3F
$10 F
7U
$3F

$6,050
2,100
4,110
$12,260

$12,700
4,500
8,747
$25,947

$6,060
2,050
4,136
$12,246

$12,740
4,430
8,770
$25,940

$10 F
50 U
26 F
$14 U

$40 F
70 U
23 F
$7U

($45)
(40)
40
2,800
1,355
$4,110

($90)
(90)
85
6,000
2,842
$8,747

($44)
(41)
41
2,840
1,340
$4,136

($90)
(90)
88
6,030
2,832
$8,770

$1F
1U
1F
40 F
15 F
$26 F

$3F
30 F
10 U
$23 F

$600
1,785
(1,030)
$1,355

$1,260
3,750
(2,168)
$2,842

$605
1,760
(1,025)
$1,340

$1,265
3,740
(2,173)
$2,832

$5F
25 U
5F
$15 U

$5F
10 U
5U
$10 U

($80)
(675)
(120)
(70)
(85)
($1,030)

($168)
(1,420)
(250)
(150)
(180)
($2,168)

($78)
(678)
(115)
(71)
(83)
($1,025)

($169)
(1,421)
(248)
(154)
(181)
($2,173)

$2F
3U
5F
1U
2F
$5F

$1U
1U
2F
4U
1U
$5U

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

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Learning
Objective
4

McGraw-Hill/Irwin

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Cost Allocation
The process of assigning the costs in the cost pool
to the cost objects is called cost allocation or cost
distribution.

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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.

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Activity-Based Responsibility
Accounting
Traditional responsibility-accounting systems tend to
focus on the financial performance measures of cost,
revenue, and profit for subunits of the organization.

Activity-based costing systems associate costs

with the activities that drive those costs. In activitybased responsibility accounting attention is
directed not only to costs incurred but also to the
activity creating the cost.
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Behavioral Effects of
Responsibility Accounting

Controllability

Information
versus
Blame

Motivating
Desired
Behavior
1-15

Learning
Objective
5

McGraw-Hill/Irwin

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Segmented Reporting
A segment is any part or
activity of an organization
about which a manager seeks
cost, revenue, or profit data.
Segmented reporting refers to
the preparation of accounting
reports by segment and for the
organization as a whole.
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Segmented Reporting
Aloha Hotels and
Resorts

Maui Division

Waimea Beach
Resort

Divisions

Oahu Division

Diamond Head
Lodge

Waikiki Sands Hotel

Units
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Segmented Reporting

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Key Features of Segmented

Reporting
Contribution format.
Controllable versus uncontrollable expenses.
Segmented income statement.

1-20

Customer Profitability Analysis

and Activity-Based Costing
Lets see, I need . . .
Special credit terms,
Small order lots,
Special packing,
Great field service,
and JIT delivery.

Customer

We can handle
that - but we need
to quote a price that
reflects the value
of these services.

Company
Sales Rep
1-21

Learning
Objective
6

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Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Total Quality Management

Design
Grade

Conformance
Quality

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Cost of Quality
Quality costs include the follows:
Prevention costs,
Appraisal costs,
Internal failure costs, and
External failure costs.

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Cost of Quality

The opportunity
cost of lost
sales and
decreased
market share
can represent a
significant
hidden cost.
1-25

Learning
Objective
7

McGraw-Hill/Irwin

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Changing Views of Optimal

Product Quality
Costs

Traditional View
Total
quality
costs
Failure costs

Prevention and
appraisal costs

0%

100%

Percentage
of defective
products

Minimum
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Changing Views of Optimal

Product Quality
Costs

Contemporary View

Total
quality
costs

Failure costs

Prevention and
appraisal costs

0%

100%

Percentage
of defective
products

Minimum
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Identifying Quality Control

Problems
150
140
130

Poor reception/
static on line

Pareto Diagram

120
110
100
90
80
70

Too easily
moves out of
transmission
range

60
50
40
30

Power
declines too
rapidly
Faulty casing
(easily broken)

20
10
0

Type of product defect

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ISO 9000 Standards

The International Standards Organization (ISO),
require that a manufacturer have a well-defined
quality control system in place, and that the target
level of product quality be maintained.
Sustain quality of product.
Effective quality control system in place.
Provide purchaser confidence in the product.

1-30

Learning
Objective
8

McGraw-Hill/Irwin

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Environmental Cost Management

Private environmental
costs are assumed by
a company.

Social environmental
costs are assumed by
the public.

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Environmental Cost Management

Visible private environmental
costs are measurable and
clearly identified
environmental issues.
Hidden private
environmental costs are
caused by
environmental issues
but have not been so
identified by the
accounting system.
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Environmental Cost Strategies

End-of-pipe
Process
improvement
Prevention

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End of Chapter 12

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