RESPONSIBILITY ACCOUNTING - a system of accounting wherein performance, based on

costs/revenues, are recorded and evaluated by levels of responsibility within an organization.

Responsibility Accounting
Cost Center Revenue Center Profit Center Investment Center

Controllable Controllable Controllable Controllable

Non- Non- Non- Non-

controllable controllable controllable controllable

Nature of Expenses
Maintenance Expense
Supplies Expense
Direct Labor
Performance Report
Variance analysis Contribution Margin RoI

EVA

Residual
Income

4 STEPS IN IMPLEMENTING RESPONSIBILITY ACCOUNTING

➔ Responsibility accounting requires that costs and/or revenues be classified according to
responsibility centers.

RESPONSIBILITY CENTER - is a segment of an entity engaged in performing a single

function or a group of related functions; it is usually
governed by a manager who is held reponsible for the
outcome of the activities and attainment of goals of the
segment.

Types of Responsibility Centers:

1. COST center - managers are held responsible for costs incurred by the segment.

2. REVENUE center - managers are held responsible for revenues generated by the segment.

3. PROFIT center - managers are held responsible for both revenues and costs of the segment.

4. INVESTMENT center - managers are held responsible for revenues, costs and investments. The
central performance is measured in terms of the use of the assets as well as revenues earned and
 the costs incurred. The following may be used as basis of evaluating performance of investment
centers:

✔ Return on Investment (Rol) = Operating Income / Operating Assets

Alternative formula: RoI = Margin x Turnover
Where: Margin = Operating Income/Sales
Turnover = Sales / Operating Assets

Rol is patterned after the DuPont technique to compute Return on Assets:

Return on Assets = Return on Sales x AssetTumover

Net Income = Net Income x Sales

Assets Sales Assets

✔ Residual Income = Operating Income - Required Income

Where: Required Income = Operating Assets x Minimum Rol

Economic Value Added (EVA) - more specific version of residual income that measures the
investment center's real economic gains. It uses the weighted-average cost of capital (WACC) to
compute the required income.

✔ EVA = Operating Income after Tax - Required Income

Where: Required Income = (Total Assets - Current Liabilities) x WACC

➔ Within each responsibility center, costs are classified as either controllable or non-controllable.

Generally, all costs are controllable. The key difference lies in the level of management who can
control the costs:
• CONTROLLABLE COSTS are costs that may be directly regulated at lower levels of
management.
• NON-CONTROLLABLE COSTS are costs that cannot be regulated at a particular management
level other than the top level.

Costs may also be classified into DIRECT (attributable to a particular segment) or INDIRECT
(common to a number of segments), the latter being subject to arbitrary allocation.

➔ Within the controllable classification, costs are classified according to the nature of expense.

➔ A performance report is furnished by each center and reported to the appropriate level of
management.

The PERFORMANCE REPORT is the end product of responsibility accounting process. It is a

report that shows and compares actual results with the intended (budgets or standards) results of a
responsibility center, thereby highlighting deviations that need corrective actions.

The 'contribution' format to computing profit is emphasized in responsibility accounting. This income
statement presentation highlights controllability of costs by behavioral classification. In addition to the
usual variable costs and fixed costs, a more detailed classification of costs may be made. Consider the
following illustrative examples (all amounts are assumed):

Sales 500,000
-Variable Manufacturing costs -150,000
Manufacturing Contribution margin 350,000
Variable selling and administrative costs -50,00
Contribution margin 300,000
Controllable direct fixed costs:
Manufacturing 100,000
Selling and administrative 75,000 -175,000
Short run performance margin 125,000
Non-controllable direct fixed costs:
Depreciation 40,000
Rent and Insurance 10,000 -50,000
Segment margin 75,000
-Allocated common Costs -30,000
Income 40,000

DECENTRALIZATON - refers to the separation or division of the organization into more manageable
units wherein each unit is managed by an individual who is given decision authority and is held
accountable for his or her decisions.

DECENTRALIZATION-RELATED CONCEPTS
➢ GOAL CONGRUENCE All units of organization have incentives to perform for a common
interest. The purpose of a responsibility system is to motivate management performance that
adheres to company overall objectives.

➢ SUB-OPTIMIZATION This happens when one segment of a company takes action that is
in its own best interests but is detrimental to the firm as a whole.

NOTE: Aside from its control function, responsibility accounting is designed to achieve goal
congruence and to discourage sub-optimization within an organization.

ORGANIZATIONAL CHART A chart that shows the responsibility relationship among

managers in an organization. It sets forth each principal management position and helps define
authority, responsibility and accountability. A well-designed organizational chart helps a decentralized
organization in carrying out duties with clear lines of responsibilities delegated to each of the segment
of an organization.
EXAMPLE
1.RESPONSIBILITY CENTERS

Indicate how each of the business situations below is most likely to be organized: cost center (CC),
revenue center (RC), profit center (PC), or investment center (IC)

A) The accounting department of ABC Company.

B) The BBB Mall car park ticket outlets.
C) The Magnolia product division of San Miguel Corporation.
D) The repairs and maintenance department of Cebu Pacific.
E) The Santa Rosa branch of KFC.
F) The College of Accountancy of ABC University.
G) The parts department of DEF Motors.
H) The convenience store that is owned by a chain organization ; the head office supplies all the
goods to be sold and determines the selling prices.

2. CONTROLLABLE/NON-CONTROLLABLE COSTS, DIRECT/ INDIRECT COSTS

The supervisor of the ASSEMBLY DEPARTMENT of Mitzubizi Cars is in-charge of (1) purchasing
supplies, (2) authorizing repairs, and (3) hiring labor for the department. Various costs are given:

(1) (2) (3)

A Sales, Salaries and commission 10,000 - - -
B Salary, supervisor of Assembly department 8,000 8,000
C Factory heat and light 6,000 6,000
D General office salaries 4,000 - - -
E Depreciation, factory 2,000 - - 2,000
F Supplies, Assembly dept 4,000 4,000 4,000 -
G Repairs and maintenance, Assembly dept 6,000 6,000 6,000 -
H Factory insurance 8,000 - - 8,000
I Labot costs, Assembly dept 10,000 10,000 10,000 -
J Salary of factory supervisor 12,000 - - 12,000
Total 20,000 28,000 28,000

Required:
(1) Total costs controllable by the supervisor of the Assembly Dept.
(2) Total cost directly identified with the Assembly Dept.
(3) Total cost allocated to the factory departments.

3. SEGMENTED INCOME STATEMENT

The following data pertain to AAA operations for the year 2020:
 TOTAL B Division A Division
Amount % Amount % Amount %
Sales 1,000,000 100% (2) 600,000 100% (8) 400,000 100%
Less: Variable Expenses (14) 320,000 (15) 32% (4) 240,000 (3) 40% (13) 80,000 (12) 20%
Contribution margin (16) 680,000 (17) 68% 360,000 60% (11) 320,00 (10) 80%
Less: traceable fixed expenses (1) 350,000 (18) 35% 150,000 (6) 25% 200,000 (9)50%
Division segment income (19) 330,000 (20) 33% (5) 210,000 (7) 35% 120,000 30%
Less: Common fixed expenses (21) 290,000 (22) 29%
Income 40,000 (23) 4%

REQUIRED: Compute for the missing data.

4. RETURN ON INVESTMENT vs. RESIDUAL INCOME

For each of the following independent cases, the minimum desired Return on Investment (RoI) is
20%.

A B C
Sales 400,000 (5) 900,000= 300k x 3 700,000
Operating Income (1) 60,000=400k x15% (6) 72k= 900 x 8% 42,000
Operating Assets (2) 200,000=60k/30% 300,000 (9) 100k=20k/20%
Margin 15% 8% (10) 6%=42k/700k
Turnover (3) 2x= 400k/200k 3 times (11) 7x= 700k/100k
Return on Investments 30% (7) 24%= 8% x 3 (12) 42%=42k/100k
Residual Income (4) 20k= 60k-(200k (8) 12k=72k-(300k x 22,000
x20%) 20%)

Required Compute for each division’s missing items.

5. Economic Value Added (EVA)

EVA is the incremental difference in the rate of return (RoR) over a company's cost of capital.
Essentially, it is used to measure the value a company generates from funds invested in it. If a
company's EVA is negative, it means the company is not generating value from the funds invested
into the business. Conversely, a positive EVA shows a company is producing value from the funds
invested in it.

The formula for calculating EVA is: EVA = NOPAT - (Invested Capital * WACC)
Where:
NOPAT = Net operating profit after taxes
Invested capital = Debt + capital leases + shareholders' equity
WACC = Weighted average cost of capital
9.1
1. Controllable margin/ short run performance margin/ 800,000-500,000 ‘=300,000
operating income
2. Average operating assets 300,000/12% ‘=2,500,000

9.2
Controllable margin 142,000-77,000 ‘=65,000

9.3
ROI 640,000/4M ‘=16%

9.4
Toys Shirts
Controllable margin 120,000 10,000
- required Income 900,000 x12% -108,000
200,000 x 12% -24,000
Residual Income 12,000 -14,000

9.5
Flexible budget @2,900 units Budget Actual varaince
DM 22 x 2,900 63,800 65,000 1,200 U
DL 28 x 2,900 81,200 81,000 200 F
Fixed OH 35,000 34,500 500 F
Total 500 U

9.6 Static @6,000 U Flexible @9,000 u

Materials @P1 6,000 9,000
Labor@ 7 42,000 63,000
Fixed Cost 24,000 24,000
72,000 96,000

9.7
Current ROI= 150,000/500,000= 30% Required rate of return ‘=15%
ROI (project)= 36,000/180,000= 20%
Combined ROI= 186,000/680,000= 27.35% Yes acceptable

9.8
VC per unit= (18,000 + 2,000 + 10,000)/ 2,000 u ‘=15 x 3,000= ‘=P45,000

9.9
Commissions 4% x 500,000 20,000
Manager’s salary -fixed 80,000
Shipping expenses1% x 500,000 5,000
Miscellaneous selling -fixed 1,000
Misc selling 0.5% x 500,000 2,500 108,500

9.10
Current 25% New ROI
Bud= 332,000/ 1,360,000= 24.4%
Wise= 316,000/ 1,340,000= 23.6%
ER= 366,000/ 1,420,000= 25.8% Best option

9.11 @8,000 @11,000

a. VC 60,000/8,000 u= 7.5 x 11,000 u 60,000 82,500
FC 24,000 24,000
Total 84,000 106,500
b.

9.12 Actual Flexible Variane

VC 2.6 x 31,000 hours 77,300 80,600 3,300 F
FC 15,700 16,000 300 F
Total 93,000 96,800 3,600 F