Responsibility Accounting

- Accounting for results at the level responsible for such results

- Responsibility Accounting (to create) Performance Evaluation Measures(A tool for)
Motivation(to want to attain)Goal Congruence

 Xyz is headed by a top

management
 Each segment is head by a
subordinate manager, who are
responsible for their performance

Centralized Structure

- Organizational structure in which decision making is made strictly at the top management level
- Difficult to be dynamic and responsive to outside threats
- Top management is responsible for everything
- Their focus is on short term operations

Decentralized Structure

- Authority is delegated throughout the organization

- Given to subordinate managers
- Top management’s focus can now focus on the long term
- Subordinate managers will be incharge of the day to day operations
- More responsive to opportunities and threats
- Conflicts in the segments may arise due to differences and personal interest

Sub-optimization

- The practice of focusing efforts on 1 component of a whole and improving that 1 component
and ignoring the impact on other components and a whole
- What is good for 1 segment may not be good to another

Goal Congruence

- A situation where the goals of each part of the organization are aligned with the overall goals
set by top management
- Segments goals should be consistent with goals of top management
Responsibility Centers

1) Cost Center
- Manager is accountable only for costs
- Accounting and human resource departments
- Not expected to generate revenues

2) Revenue Center
- Accountable for revenues only
- Agencies of airline or Insurance companies
- Performance is measured based on sales

3) Profit Center
- Accountable for both costs and revenue
- Branch of a fast-food chain

4) Investment Center
- Accountable for costs, revenue and proper utilization of the assets of his segment
- Different types of businesses of 1 company

Evaluation for Profit Center

1) Variance Analysis
- A comparison between actual and expected results
- According to management by exception principle, we must investigate only significant variances
- Can be used for all responsibility centers

2) Segmented Income Statement

- Used to evaluate a part or a specific segment of a company
- Can be used for profit and investment centers
 Other Financial Measures to help in investment center
 Return on Investment
 Residual Income
 Economic Value Added (variation of residual income)
A) Contribution Margin Approach
 To classify costs, variable vs. fixed
B) Variable Costing
 To treat fixed manufacturing overhead as a period expense rather than as a part of
COGS
Return on Investment

- Income or loss generated relative to the amount of resources invested

- Good when it comes to looking to the size of profits relative to the size of the investment
= Income/Assets Invested
= Operating Income/Average Assets
= Assets Turnover * Profit Margin (DU Pont Equation), useful when explaining to non-
accounting
= Sales Revenue/Investment*Income/Sales Revenue

Residual Income

- Amount of income generated in excess of the minimum income for the investment
- More of an absolute value than a ratio
= Income – Minimum Income
= Income – (Assets*Minimum rate of return)

Summary of ROI and RI

- If the ROI of an investment is less than the expected ROI of the division but greater than the
minimum rate of return, the investment will be considered desirable for top management.
- Accepting the project will
 Decrease the division’s ROI then division manager will reject the investment
 Increase the division’s residual income then division manager will accept the
investment
- Goal Congruence is attained if RI is the evaluation basis

Economic Value Added

- A variation of RI from the point of view of the capital providers of the entity
= Operating profit after tax – (Assets – operating liabilities) * WACC

Balance Scorecard

- Strategic management tool that evaluates performance relating to 4 perspectives:

 Financial
o Variance
o Segment margin
o Return on Investment
 Customer
 Internal Business
 Learning and Growth
- We use non-financial measures because financial measures can cause shortsighted (myopic)
behavior.
 A) Financial measures
- Tend to be a LAG indicators if its says something about what had happened
 Return of Investment, because it will measure ROI , the performance in the year that
has already happened
B) Non-Financial Measures
- Tend to be LEAD indicators, if it says something about what is yet to happen

Internal Business Perspective

- Concerned with the processes that generate and bring the customer value proposition
- It emphasizes on all the activities required for the company to excel at creating the value
expected by the customers both productively and efficiently
 Velocity
 Speed of production
 How many units can be produced in a period of time
 Productivity
o The ratio of output to input in manufacturing an item

Transfer Pricing

- Price charged of two segments in 1 company

- It will have no impact on the overall profit of the organization
- It is a revenue of 1 segment and a cost of another, the effects of which can ultimately be
eliminated
A) Important because
 It affects the performance evaluation of the segments
 Affects the segment manager’s behavior
B) What transfer price shall we set?
1) First priority: Market price (since this is the most objective)
2) Second Priority: Set a Range
 Maximum Price
 so the buyer will not lose, cost when buyer purchases from outside supplier
 Minimum price =
 so the seller would not lose, Incremental cost + Opportunity cost
 Illustrations

SEGMENTED INCOME STATEMENT (This one is good for profit center)

Revenue 3,000,000
Variable Cost - 1,000,000
Contribution Margin 2,000,000
Fixed Cost, Controllable and Traceable - 800,000
(Those that are controllable by general manager)
Segment Controllable Margin 1,200,000 (to evaluate person)
Fixed Cost, Not Controllable But Traceable to segment 1,100,000
Segment Margin 100,000 ( to evaluate the segment)
Allocation fo common costs - 200,000 (800,000*25%)
Operationg profit or loss - 100,000
Problem: KNC Department of MBN Inc. has shown the following assets
for the year ended 31 December 2018 and 2019

2019 2018
Assets 2,000,000 2,800,000

Income Statement (December 31, 2019)

Sales Revenue 900k
COGS (100k)
GP 800k
OPEX (200K)
OpInc 600k
Int Exp (100k)
Profit before tax 500k

ROI
Operating Income/Average Assets = 0.25
600,000 2,400,000

Sample Case: CMN Inc, a subsidiary of Universal Corporation has shown the
following information: (use Du pont equation)

 Asset Turnover 5x
 Profit Margin 2%

5*2% = 10%
Problem: You are a manager of Justin Corp with average invested capital of
2,000,000. You boast 1 product division’s ROI of 20%, which is higher than the
company’s required rate of return of only 12%. It is believed that any investment
with a return of 12% must be engaged in. The company evaluates its subordinate
managers using ROI.

A new Project requiring 500,000 of investment is available and can give the
division an additional ROI of 15% and gives the company an additional income of
75,000 (500,000*15%)

Answer:
 As a subordinate manager, we would want to increase the ROI since that is
our evaluation basis. IF we do nothing else, we still have ROI of 20%. Since
investment is 2,000,000. We need Income of 400,000 to get ROI of 20%

(400,000/2,000,000) = 20%

 If we take new project

= 19%
400,000+75000
2,000,000+500,000
- Top management desires this, But we don’t since it would lower our ROI

 Residual Income (Basis) if we do not take the project

Income – (Assets*Minimum rate of return)
= 400,000-(2,000,000*12%)
= 160,000

 Residual Income if we take the project

= 400,000+75,000-((2,000,000+500,000)*12%)
=175,000 we would want to take the new project if residual income is our basis of
evaluation
Problem: Standard Corporation, a subsidiary of Marthony Holdings has
shown the following information for 2019 and 2018:

Imputed Interest Rate is 12%

2019 2018
Income 120,000 200,000
Assets 700,000 800,000

 Answer Income – (Assets*Minimum rate of return)

Residual Income
120,000-(750,000*12%)
120,000-90,000 30,000.00

Problem: R corporation has the following data:

Earnings before Interest and Tax 8,000.00
Total assets 40,000.00
Current Liabilities 4,000.00
Income Tax rate 30%
Weighted average cost of capital 10%

Answer
EVA = Operating profit after tax-(Total Assets - operating liabilities) *WACC
= 8000(1-.3)-((40,000-4000)*10%)
= 5600-(36,000*10%)
= 2000
Problem: Myles finance manager has decided to use delivery
performance measures for performance evaluation. She requested the
production manager to submit data that will be used for the evaluation.
The production manager submitted the following data, typical of the
time involved to complete orders:

Days
Waiting time from orders being placed to start of production 6
Waiting Time from start of production to completion 2
Process Time 7
Move Time 4
Inspection Time 1

 Answer
Delivery Cycle Time is 20 days
Manufacturing Cycle time is 14 days (excluding waiting time to be
placed into production), only 7 days is spent on actual processing

 Delivery Cycle Efficiency = 7/20 = 35%

 Manufacturing Cycle Efficiency = 7/14 = 50%
Problem: Bacolod Corporation has 7 segments that run as independent profit centers.
At the present time, the Forging segment produces T-1000, a popular part used in
robotics. Data about the part is given.

Market Price 84
Variable Distribution costs from outside sales 9
Variable Manufacturing cost 36
Fixed Manufacturing cost 18

Bacolod’s Fitting Segment wants to purchase 4500 parts either from Forging or a
comparable part in the marketplace that sells for 72 pesos.

The Fitting segment’s management feels that if forging segment’s part is used, a price
discount is justified, since they both belong to the same corporation

 Assuming Forging has an excess capacity to produce 5000 parts of T-1000

 Maximum Price is 72
 Minimum Price = 36+0 (opportunity or distribution cost) = 36
 If there is a transfer price, it must be within the range of 36 to 72
 Therefore this is advantageous for the company because costs would be
lessened since it will be less than 72

 Assuming no excess capacity

 Opportunity cost will be incurred since it will give to other segment instead of
customer, we sacrifice 4500 units
 Maximum Price is 72
 Minimum Price is 36 + (84-9-36) opportunity cost = 75
 There is no number that is higher than 75and lower than 72
 This is a sign that they should not do transfer pricing for the benefit of the
corporation

 Assuming Forging has an excess capacity to produce 1500 parts of T-1000

 We only need to sacrifice 3000
 Maximum Price is 72
 Minimum Price is 36 + ((84-9-36)x3000/4500) = 62
 Still beneficial for the company if they do transfer pricing
Problem: ABC Corporation has 2 segments, A and B, both of which are profit
centers. A Charges B 105 pesos per unit transferred. Other data pertaining to
segment A follow:

Variable cost per unit 90 Annual Sales to B 5000 units

Fixed Cost 30,000 Sales to outsiders 50,000 units
 A intends to raise its transfer price to 150 per unit. B can buy units at 120
pesos each from an outsider but doing so would keep A’s facilities now
committed to producing units for B idle.
 A cannot increase its sales to outsiders.
 B’s performance will not be affected in any case.
 From that point of view of the company as a whole, from whom should B
purchase the units?
 Advisable by the company as whole but small chance the segments will
because it is disadvantageous for B and A won’t get his desired price