Subject – Management Accounting

Class –B.B.A./M.B.A.

Topic – Responsibility Accounting and Transfer Pricing

Key-Words – Cost centre, Evaluate, Profitability, Revenues , Procurement

Dr. Dileep Kumar Singh

Institute of Management Studies
Faculty of Commerce and Management Studies
Mahatma Gandhi Kashi Vidyapith Varanasi – 221002
e-mail : singh96906238@gmail.com
Responsibility Accounting and
Transfer Pricing

Dr. Dileep Kumar Singh

Assistant Professor
Institute of Management Studies
Mahatma Gandhi Kashi Vidyapith
Varanasi

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 Responsibility Accounting
Meaning :-
The term “responsibility accounting” is refers to process that reports
how well managers have fulfilled their responsibility.

Objective of Responsibility accounting:-

1. Plan and allocate resources
2. Control operations
3. Evaluate the performance of center managers.
4. Prepare budgets for each responsibility center.
5. Measure performance for each responsibility center.
6. Prepare timely performance reports comparing actual amounts with
budgeted amounts.
 Responsibility Centers

Types of responsibility centers:-

1. Cost Center
2. Profit Center
3. Investment Center
 Responsibility Centers

Cost Centers

Managers are held accountable for controlling costs

Cost control quantity and quality of services.

Profit Centers
Managers are held accountable for costs and making decisions
that impact revenues favorably
Profitability
 Responsibility Centers

Investment Centers
Managers are held accountable for costs and revenues and are
also held accountable for the efficient use of assets.

Return on assets (ROA)

Residual Income (RI)
 Investment Centers
• Example (Return on Assets):
IPPR Mfg. Co. Ltd.
Income Statement for year ended 31st Mar2016
Particulars
Mumbai Bangalore Delhi

Revenues from Operation 560,000.00 672,000.00 750,000.00

Less - Operating expenses 490,000.00 580,000.00 670,000.00

Income from operations 70,000.00 92,000.00 80,000.00

Investment in Asset procuring 350,000.00 700,000.00 500,000.00

Rate of return on investment 20% 12% 15%

 Implementation process of responsibility accounting system

1. Identifying the Responsibility Centers

2. Delegation of Authority and Responsibility or Decentralization
3. Controllable of the Object
4. Establishing Performance Evaluation Criteria
a) Standard Costing
b) Budgetary control
c) Profitability ratios
d) Valuation measures
5. Electing Cost Allocation Bases
 Why responsibility accounting system is required ?

1. Decentralization
2. Performance Evaluation
3. Motivation
4. Transfer Pricing
5. Help in saving cost
Tansfer Pricing
Meaning :-
When divisions transfer products or render services to each other, a
transfer pricing is used to charge for the products or services.

For example, if a subsidiary company sells goods to a parent company, the

cost of those goods paid by the parent to the subsidiary is the transfer
price

Advantages of Transfer Pricing:-

1. Divisions can be evaluated as profit or investment centers.

2. Divisions are forced to control costs and operate
competitively.
3. If divisions are permitted to buy component parts wherever
they can find the best price (either internally or externally),
transfer pricing will allow a company to maximize its profits.
Battery Division Auto Division

Greater profits Lower profits for

for Battery Auto division.
division.
• Methods used for Transfer pricing:

1. Market price approach sets the price at which the product transferred
could be sold to outside buyers.
2. Negotiated price approach allows decentralized managers to agree
(negotiate) among themselves.
3. Cost price approach (variable or full) uses a variety of cost concepts for
setting the transfer price.

TRANSFER PRICE have no direct effect upon the company’s overall

net income.
 Cost-Based Transfer Pricing Options

Traditional Variable
Costing Costing

Direct Materials
Product
Product Direct Labour
Cost
Cost Variable Mfg Overhead

Fixed Mfg Overhead

Period
Period Cost
Variable Selling and Admin Overhead
Cost
Fixed Selling and Admin Overhead
 Cost-Based Transfer Pricing Options

• Variable Cost
o Variable cost is used as the transfer price
o The biggest drawback with using variable cost is that when excess
capacity exists, the selling unit can’t show contribution margin on the
transferred goods.

• Traditional / Full Cost

o FC - VC + allocated fixed overhead
o The biggest drawback affects the buying unit’s view of costs as fixed for
the company as a whole as the variable costs for the buying unit.
 Comprehensive Questions
Short answer question
Q.1 Define Responsibility Accounting.
Q2. What are the principals of Responsibility Accounting.
Q3. Describe the requirements of effective Responsibility Accounting

Long answer question

Q. 1 Describe the role of profit centre.

Q.2 What is the investment centre of an organization?
Q.3 What do you mean by transfer price? How it works.
 References
1. Introduction to Management Accounting – Horngreen and Sundlem
2. Principles of Management Accounting – Manmohan & Goyal
3. Management Accounting – Dr. E.B. Khedkar, Dr. D.B. Bharati and Dr. A.
B. Kharpas.
4. Cost and Management Accounting – S.M.Inamdar
5. Management Accounting – Dr. Mahesh Kulkarni
6. Double Entry Book Keeping – T.S.Grewal
7. Principles and Practice of Cost Accounting – Ashish K. Bhattacharya
8. Management Accounting 3rd Ed. – Khan & Jain
9. Theory & Problems in Management & Cost Accounting – Khan & Jain

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