Chandigarh Session 16 th September, 2013 Relating to the responsibilities of individual managers. To evaluate managers on controllable items. An accounting system that provides information . . . Responsibility Accounting Decentralization Is the systematic effort to delegate to the lowest levels all the authority except that which can be exercised at central points. Decision Making is Pushed Down Supervisor Supervisor Middle Management Supervisor Supervisor Middle Management Top Management Decentralization often occurs as organizations continue to grow. Decentralization Decentralization Promotes better decision making. Allows upper-level management to concentrate on strategic decisions. Improves productivity. Develops lower-level managers. Improves performance evaluation. Advantages Benefits of decentralization Reduces workload of the executive Fast decision making Facilitates product diversification Gives opportunity of learning to each employee Disadvantages Conflict Cost increases because of duplicacy of work Disadvantage related to profit centres Responsibility Accounting Responsibility accounting is used to measure the performance of people and departments to foster goal congruence. Responsibility Reports Responsibility Reports Prepared for each individual who has control over revenue or expense items Responsibility Reports Prepare budgets for each responsibility center. Prepare timely performance reports comparing actual amounts with budgeted amounts. Measure performance of each responsibility center. Responsibility Centers A subunit in an organization whose manager is held accountable for specified financial results. Responsibility Centers Cost Center Segment has control over the incurrence of costs. The Paint Department in an automobile plant. The Reservations Department of an airline. Revenue Center Segment is responsible for the revenue of a unit Responsibility Centers Profit Center Segment has control over both costs and revenues. Company-owned restaurant in a fast-food chain. Investment Center Segment has control over profits and invested capital.
A division of a large corporation Measuring Managerial Performance Return on investment (ROI) Residual income (RI) Cost Center Cost control Quantity and quality of services Profit Center Investment Center Evaluation Measures Profitability Return on Investment Return on investment is the ratio of income to the investment used to generate the income. ROI = Net Income Investment ROI = Net Income Investment ROI = Net Income Sales
Sales Investment Margin Turnover Return on Investment Improving R0I Three ways to improve ROI Increase Sales Reduce Expenses Reduce Investment ROI - A Major Drawback As division manager, I wouldnt invest in that project because it would lower my pay! Gee . . . I thought we were supposed to do what was best for the company! Performance Reports Show the budgeted and actual amounts, and the variances between these amounts, of key financial results appropriate for the type of responsibility center. Performance Reports February Year to Date February Year to Date February Year to Date Company . . . . . . . . . . . . . . . . . . . . . . $30,660 $64,567 $30,716 $64,570 $56 F $ 3 F Maui Division . . . . . . . . . . . . . . . . . . $18,400 $38,620 $18,470 $38,630 $70 F $10 F Oahu Division . . . . . . . . . . . . . . . . . . 12,260 25,947 12,246 25,940 14 U 7 U Total profit . . . . . . . . . . . . . . . . . . . . $30,660 $64,567 $30,716 $64,570 $56 F $ 3 F Oahu Division Waimea Beach Resort . . . . . . . . . . . $6,050 $12,700 $6,060 $12,740 $10 F $40 F Diamond Head Lodge. . . . . . . . . . . 2,100 4,500 2,050 4,430 50 U 70 U Waikiki Sands Hotel . . . . . . . . . . . . . 4,110 8,747 4,136 8,770 26 F 23 F Total profit . . . . . . . . . . . . . . . . . . . . $12,260 $25,947 $12,246 $25,940 $14 U $ 7 U Waikiki Sands Hotel Grounds and Maintenance . . . . . . . . ($45) ($90) ($44) ($90) $ 1 F Housekeeping and Custodial . . . . . . (40) (90) (41) (90) 1 U Recreational Services . . . . . . . . . . . . 40 85 41 88 1 F $ 3 F Hospitality . . . . . . . . . . . . . . . . . . . . 2,800 6,000 2,840 6,030 40 F 30 F Food and Beverage . . . . . . . . . . . . . 1,355 2,842 1,340 2,832 15 F 10 U Total profit . . . . . . . . . . . . . . . . . . . . $4,110 $8,747 $4,136 $8,770 $26 F $23 F Food and Beverage Department Banquets and Catering . . . . . . . . . . . $600 $1,260 $605 $1,265 $ 5 F $ 5 F Restaurants . . . . . . . . . . . . . . . . . . . 1,785 3,750 1,760 3,740 25 U 10 U Kitchen. . . . . . . . . . . . . . . . . . . . . . . (1,030) (2,168) (1,025) (2,173) 5 F 5 U Total profit . . . . . . . . . . . . . . . . . . . . $1,355 $2,842 $1,340 $2,832 $15 U $10 U Kitchen Kitchen staff wages . . . . . . . . . . . . . ($80) ($168) ($78) ($169) $ 2 F $ 1 U Food . . . . . . . . . . . . . . . . . . . . . . . . (675) (1,420) (678) (1,421) 3 U 1 U Paper products. . . . . . . . . . . . . . . . . (120) (250) (115) (248) 5 F 2 F Variable overhead. . . . . . . . . . . . . . . (70) (150) (71) (154) 1 U 4 U Fixed overhead. . . . . . . . . . . . . . . . . (85) (180) (83) (181) 2 F 1 U Total expense . . . . . . . . . . . . . . . . . . ($1,030) ($2,168) ($1,025) ($2,173) $ 5 F $ 5 U *Numbers without parentheses denote profit; numbers with parentheses denote ex penses; numbers in thousands. F denotes fav orable v ariance; U denotes unfav orable v ariance. Flexible Budget* Actual Results* Variance Cost Allocation The process of assigning the costs in the cost pool to the cost objects is called cost allocation or cost distribution. Cost Allocation Bases An allocation base is a measure of activity, physical characteristic, or economic characteristic that is associated with the responsibility centers, which are the cost objects in the allocation process. Behavioral Effects of Responsibility Accounting Information versus Blame Controllability Motivating Desired Behavior Segmented Reporting Segmented reporting refers to the preparation of accounting reports by segment and for the organization as a whole. A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data. Segmented Reporting Divisions
Units
Aloha Hotels and Resorts Oahu Division Maui Division Waikiki Sands Hotel Diamond Head Lodge Waimea Beach Resort Segmented Reporting THANK U!