Professional Documents
Culture Documents
RESPONSIBILITY ACCOUNTING
Decentralization
• Refers to the separation or division of the organization into more manageable units
o Each unit is managed by an individual who is given decision authority and is held accountable for his or her
decisions.
• Authority is delegated throughout the organization
o Given to subordinate managers
o Top managers deal with long term goals
o Segment managers are concerned with day-to-day activities
• Many years ago, companies have a Centralized Structure
o Organizational structure in which decision making is made strictly at the top management level
o Top management oversees everything, including operations or day-to-day activities and even simply buying
toilet paper
o Its hard to be dynamic that’s why Decentralized Structure was adopted
Sub-Optimization
• One disadvantage of Decentralization
• Happens when one segment of a company takes action that is in its own best interests but is detrimental to the firm.
• Practice of focusing efforts on one component of a whole and improving that one component and ignoring the
impact on the other components and on the whole
• What’s best for one segment is not necessarily for the benefit of the entire organization
Goal Congruence
• A situation where the goals of each part of the organization are aligned with the overall goals set by the top
management
• Is the term which describes the situation when the goals of different interest groups coincide.
• A way of helping to achieve goal congruence between shareholders and managers is by the introduction of
carefully designed remuneration packages for managers
o Which would motivate managers to take decisions which were consistent with the objectives of the
shareholders.
The data or information gathered from RESPONSIBILITY ACCOUNTING from this system to create PERFORMANCE EVALUATION
MEASURES, which then is used for MOTIVATION so each manager would set goals aligned with the overall goals, thus having
GOAL CONGRUENCE.
Responsibility Center
• Is a segment of organization that is engaged in the performance of a single function or a group of closely related
functions.
• This segment is usually governed by a manager, who is accountable and responsible for the activities of the segment.
o Incurrence of Cost
o Maximization of Revenue
o Generation of Assets
• Cost Center – managers are held responsible for the costs incurred by the segment.
o Puro cost incurrence lang, walang nage-generate na revenue for the company
o Common Types: Accounting Department, Legal Dept., Maintenance Department, HR Department
o Measured by the incurrence of cost
• Cost Variance Analysis
• Revenue Center – managers are held responsible primarily for revenues of the segment.
o May mga costs din sila pero yung nage-generate nilang revenue ay napaka-laki compared to the costs
incurred
o Common Types: Insurance Centers, Sales Department (may costs here pero mas malaki yung revenue), BIR,
GSIS, SSS, PhilHealth, PAG-IBIG
o Measured by Sales Variance Analysis
• Comparison of Actual Sales and Budgeted Sales
• Profit Center – managers are held responsible for both revenues and costs of the segment.
o The difference between the cost and the revenue generated is not too big
o Common Types: Schools, Fast Food Chains
o Measured by the way you generate revenue and incur costs; Segmented Income Statement
• 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.
o Manager is concerned of the effective utilization of assets
o Common Types: Another branch of a company
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EXERCISES | IDENTIFICATION
Direction: Indicate how each of the business situations below is most likely to be organized: cost center, revenue center,
profit center, or investment center.
Revenue Center | Sales Variance Analysis (Sales Volume, Market size, Market share)
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Consider the following illustrative example:
Sales xxx
Less: Variable manufacturing costs xxx
Manufacturing contribution margin xxx
Less: Variable selling and administrative costs xxx
Contribution margin xxx
Less: Controllable fixed costs:
Manufacturing xxx
Selling and administrative xxx xxx
Short-run performance margin xxx
Less: Non-controllable direct fixed costs:
Depreciation xxx
Rent and leases, insurance xxx xxx
Segment margin xxx
Less: Allocated/common costs xxx
Income xxx
Illustration 1:
Fog City Retail operates a retail store in Phoenix, Las Vegas, and Portland. The following information relates to the
Phoenix facility:
• The store sold 65,000 units at P18.00 each, after having purchased the units from various suppliers for P12.50. Phoenix
salespeople are paid a 5% commission based on gross sales dollars.
• Phoenix’s sales manager oversees the placement of local advertising contracts, which totaled P54,000 for the year.
Local property taxes amounted to P14,500.
• The sales manager’s P65,000 salary is set by Phoenix’s store manager. In contrast, the store manager’s P134,000 salary
is determined by Fog City’s vice president.
• Phoenix incurred P6,800 of other noncontrollable costs along with P10,000 of income tax expense.
• Nontraceable (common) corporate overhead totaled P68,000.
Fog City’s corporate headquarters is located in Portland, and the company uses responsibility accounting to evaluate
performance.
Required: Prepare a segmented income statement for the Phoenix store, being sure to disclose the segment
contribution margin, the segment profit margin, and net income.
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Illustration 2:
Ella Holding is a conglomerate engaged in real estate, manufacturing, mining, power, retailing, and banking. Its power
plant segment, Electro Corp has shown the following data for the year ended 31 December 2019:
Revenues P 3,000,000
Variable Costs P 1,000,000
Fixed Costs Controllable by Electro Corp’s General Manager PPn800,000
Fixed Costs Controllable by Electro Corp’s Ella Co’s President P 1,100,000
traceable to Electro Corp
Ella Holding’s head office’s common costs to be allocated to x lw800,000
its business units (25% of expenses were allocated to Electro Corp)
Prepare a Segmented Income Statement for Electro Corp for internal evaluation.
NOTE 1: At this point, everything that has been deducted (variable costs and fixed costs controllable) is within the control of
the general manager. Example: Salary of the staff of the manager
NOTE 2: Fixed costs that are not controllable by the general manager of Electro Corp, but it is traceable to the segment/
Example: Depreciation of power plant. It is traceable but it is not controllable because you cannot stop a machine from
depreciating
NOTE 3: At this point, everything that has been deducted all pertain to the segment’s operations, controllable or not
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Illustration 1:
• Operating Income not Net Income because Interest Expense is not from assets
• Operating Assets could sometimes be the average of the Assets
Residual Income
• Encourages managers to maximize pesos of profit after a required ROI has been achieved
• Amount of income generated in excess of the minimum income for the investment
Illustration
SUMMARY
• 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
o Minimum Rate of Return < ROI of Investment < ROI of Division: DESIRABLE FOR TOP MANAGEMENT
• Accepting the project will
o Decrease the Division’s ROI ➔ Reject the Investment
o Increase the Division’s RI ➔ Accept the Investment
o Goal congruence is attained if RI is used as the basis of evaluation
EXERCISES:
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To solve these, first solve for the Operating Asset by deriving it from the formula of the Asset Turnover:
Asset Turnover = Sales ÷ Operating Assets
2 = 1,000,000 ÷ x
x = 500,000
PROBLEM 2: For each of the following independent cases, the minimum desired Return on Investment (ROI) is 20%.
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Illustration: Economic Value Added, Weighted-Average Cost of Capital
Weighted Average Cost of Capital = [(Weighted Debt x Cost of Debt) x (1 – Tax Rate)] + (Weighted Equity x Cost of
Equity)
• Generally, all costs are controllable. The key difference lies in the level of management who can control the costs:
o Controllable Costs – are those items of cost that may be directly regulated at lower levels of management.
o Non-controllable Costs – are costs that cannot be regulated at a particular management level other than
the top level.
• Of most relevance in deciding how or which costs should be assigned to a responsibility center is the degree of
controllability.
• Costs may also be classified into
o Direct (attributable to a particular segment)
o Indirect (common to a number of segments)
o The latter being subject to arbitrary allocation.
NOTE: All controllable costs are also direct costs, but not all direct costs are controllable.
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Illustration: CONTROLLABLE/NON-CONTROLLABLE COSTS, DIRECT/INDIRECT COSTS
The supervisor of Painting Department of Honda Cars is in-charge of purchasing supplies, authorizing repairs, and hiring labor
for the department. Various costs are given:
1) Sales, salaries, and commission P 18,200
2) Salary of supervisor of Painting Department PP 2,500
3) Factory heat and light PP 3,900
4) General office salaries P 11,000
5) Factory depreciation PP 1,800
6) Supplies, Painting Department PP 1,500
7) Repairs and maintenance, Painting Department PP 1,400
8) Factory insurance PP 2,100
9) Labor costs, Painting Department P 15,600
10) Salary of factory supervisor PP 2,700