RESPONSIBILITY ACCOUNTING AND TRANSFER o Developing measures of

PRICING achievement of such objectives

o Preparing/analyzing reports of
Centralization such measures by the
 Top management retains the major responsibility centers
portion of authority  Managers delegate decision-making
authority but retain responsibility for
Decentralization outcomes
 Top management delegates decision-  Consistent with standard costing and
making authority to subunit managers ABC
 Advantages:  Monetary and nonmonetary
o Personnel  Adjusted for planning, controlling, and
o Effective means of achieving decision-making needs of each unit
organizational goals manager
o Reduces decision-making time  Separates costs as controllable or
o Allows management by noncontrollable by the unit manager
exception  Various concepts and tools used in
o Shaper management focus measuring the performance of the
o Improvement of employee’s people in the departments in an
morale organization
o Faster management  Disadvantages:
development o Important details may not be
 Disadvantages: visible at upper management
o Lack of goal congruence levels
o Suboptimization o Managers might promote their
o Requires more effective unit while blaming their
communication skills competitor units
o Managers must relinquish o Departmental
control interdependencies might not be
o Expensive visible
 There is employee empowerment  Focuses on gaining information and
 Responsibility accounting system works knowledge
best in a decentralized organization  Each segment has a manager or
 Can lead to greater job enrichment and supervisor whose authority and
satisfaction responsibility may differ from those of
other managers depending on the type
Responsibility Accounting of their responsibility center.
 An accounting information system and  Basic purpose: motivation
a managerial control device that  A successful responsibility accounting
involves: system is dependent upon the proper
o Identifying responsibility delegation of responsibility and
centers with their authority.
corresponding objectives
Responsibility Reporting
  Upward flow of information (from o Profit Center
operations to top management)  Manager has control
 Unit level reports are detailed over both costs and
 Upper-level reports are summarized revenues
 Encourages management by exception  Example: branch
 The format for internal reports is  Performance
prescribed by management.  Manager has the
 Internal reports prepared under authority to make
responsibility accounting should be decisions concerning
classified not only as to behavior but markets and sources of
also as to controllability. supply.
o Investment center
Responsibility Centers  Manager has control
 Activity that a manager control over both costs and
(significant influence) revenues, as well as
 Can be structured to promote better over investment in PPE,
alignment of individual and company receivable, inventory
goals and other assets
 Types:  Performance should be
o Cost center evaluated based on ROI
 A manager has control  Can increase its ROI by
over the incurrence of increasing peso sales
costs but not over and operating expenses
revenues or by the same percentage
investments  “Business within a
 Example: maintenance business” It is most like
department, service, an independent
administrative business because it is
 Highest priority is responsible for its own
normally the revenues, costs and
minimization of capital invested.
unfavorable cost  The criteria for evaluating the
variances performance of responsibility centers
 Performance is should be carefully selected because
evaluated using the managers’ behavior can be affected
performance reports or by such criteria that are used to judge
variance analysis their performance.
 Least complex type of
segment Goal Congruence
o Revenue Center  One purpose of a responsibility
 Manager has control accounting system
over revenues  Condition where employees, working
 Example: sales on their own personal interests or
department interest of their responsibility center,
 make decisions that help meet overall  Describes the internal
goals of the firm process that will
 Managers are concerned about provide value for the
performance of their own subunit firm’s customers and
rather than the entire organization owners
 Divisional managers work together in o Learning and growth
an effort to achieve the organization’s perspective
goals.  Identifies and defines
the capabilities that an
Managerial effort organization needs to
 Exertion of effort by the decision- create long-term
makers to reach a common goal or growth and
objective improvement
 Help management focus on critical
Sub-optimization success factors which may be financial
 Occurs when one organizational and nonfinancial in nature
segment takes action that is in its own
best interests, but is detrimental to the Transfer Price/Pricing
organization as a whole  Amount charged by one segment of the
 A management decision may be organization for goods or services
beneficial for a given profit center, but transferred or provided to another
not for the entire company segment of the same organization
 Affect each subunit’s operating income
Balanced Scorecard  Creates revenues for selling subunit and
 Translates an organization’s mission purchase costs for buying subunit
and strategy into operational objectives  Subunit managers when making
and performance measures for 4 decisions, need only focus on how their
different perspectives: decisions will affect their subunit’s
o Financial Perspective performance without evaluating their
 Describes the economic impact on company-wide performance
consequences of  Criteria for evaluating transfer prices:
actions taken in o TP should promote goal
customer, internal congruence.
business process, and o They should induce managers
learning and growth to exert a high level of effort.
perspective o It should help top management
o Customer Perspective evaluate the performance of
 Identifies and defines individual subunits.
the customer and o If top management favors a
market segments in high degree of decentralization,
which the firm will TP should preserve a high
compete degree of subunit autonomy in
o Internal business process decision making.
perspective  Calculating transfer prices:
o Market-based TP prices, buying
 Use the price of similar division is free to
product or service purchase outside.
 Top management may o Cost-based TP
select, for internal  Based on cost of
price, the external price producing the product
that a subunit changes  Can be actual cost or
to outside customers budgeted cost
 Best transfer price o Hybrid TP
 Price at which the  Take into account both
goods are sold on the cost and market
open market information
 Designed for situations  For motivating division managers
in which there is an  For establishing and maintaining cost
outside market for the control systems and for measuring
transferred product or internal performance
service
 Most effective for Controllable/ Traceable cost GAME
common high cost and  Subject to the influence of a given
high-volume standard responsibility center manager for a
services given period
 Avoid waste and  Controllability is difficult for 2 reasons:
maximize efficiency o Few costs are clearly under the
when transferring sole influence of one manager
products among o With a long enough time span,
divisions in a all costs will come under
competitive economy somebody’s control
 Guidelines:  Not all direct costs are controllable
1. Buying division costs
must purchase  Fixed cost can be controllable, and
internally so as long some costs not controllable may need
as selling division to be assigned to a responsibility
meets all bona fide center.
outside prices and
wants to sell if Return on Investment (ROI)
internally.  Emphasize short-run performance
2. Selling division  The income calculation for division’s
must be free to ROI should be based on profit margin by
reject internal division manager
business if it prefers
to sell outside. Residual Income
3. If selling division  Incorporates a firm’s cost of acquiring
does not meet all invested capital
bonafide outside
  Net operating income that an
investment center is able to earn above
some minimum return on operating
assets
 More superior than ROI
 To maximize pesos of profit after a
required ROR has been achieved
 To have a division maximize its income
in excess of corporate imputed interest
charge
 In order to promote goal congruence, a
manager of investment center is best
evaluated using residual income

Economic Valued Added (EVA)

 Represents the segment’s true
economic profit
 Income after tax and after deducting
the cost of capital
 Main advantage: focuses manager’s
attention of creating value for
shareholders by earning profit greater
than the firm cost of capital

Management by objectives
 Manager and is/her subordinates agree
upon objectives and the means on how
such objectives can be attained
 Managers agree on common set of
goals.
 A behavioral, communications-oriented
responsibility approach to employee
self-direction

Segment Margin
 Best measure of performance for a
profit center
 Measure of long-term profitability

Allocated costs
 Indirect costs which are not controllable
by the manager of the responsibility
center being evaluated