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ADVANCED MANAGEMENT

ACCOUNTING

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Responsibility Accounting

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Learning Objectives
Define responsibility accounting
and describe the four types of
responsibility centers

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Responsibility Accounting
Responsibility accounting is a system that measures the
results of each responsibility center and compares those
results with some measure of expected or budgeted
outcome.
There are four major types of responsibility
centers:
Cost center
Revenue center

Profit center
Investment center

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10-5

Responsibility Accounting
Cost
Center

Cost, profit,
and investment
centers are all
known as
responsibility
centers.

Profit
Center

Investment
Center

Responsibility
Center
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Cost Center
A segment whose manager has
control over costs, but not over
revenues or investment funds.

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Profit Center

A segment whose
manager has control
over both costs and
revenues,
but no control over
investment funds.

Revenues
Sales
Interest
Other

Costs
Mfg. costs

Commissions
Salaries
Other
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Investment Center
Corporate Headquarters

A segment
whose manager
has control over
costs, revenues,
and investments
in operating
assets.
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10-9

Responsibility Centers
Investment
Centers
Operations
Vice President

Salty Snacks
Product Manger

Bottling Plant
Manager

Beverages
Product Manager

Warehouse
Manager

Superior Foods Corporation


Corporate Headquarters
President and CEO

Finance
Chief FInancial Officer

Legal
General Counsel

Personnel
Vice President

Confections
Product Manager

Distribution
Manager

Cost
Centers

Superior Foods Corporation provides an example of the


various kinds of responsibility centers that exist in an
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organization.

10-10

Responsibility Centers
Superior Foods Corporation
Corporate Headquarters
President and CEO

Operations
Vice President

Salty Snacks
Product Manger

Bottling Plant
Manager

Beverages
Product Manager

Warehouse
Manager

Finance
Chief FInancial Officer

Legal
General Counsel

Personnel
Vice President

Confections
Product Manager

Distribution
Manager

Profit
Centers

Superior Foods Corporation provides an example of the


various kinds of responsibility centers that exist in an
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organization.

10-11

Responsibility Centers
Superior Foods Corporation
Corporate Headquarters
President and CEO

Operations
Vice President

Salty Snacks
Product Manger

Bottling Plant
Manager

Beverages
Product Manager

Warehouse
Manager

Finance
Chief FInancial Officer

Legal
General Counsel

Personnel
Vice President

Confections
Product Manager

Distribution
Manager

Cost
Centers

Superior Foods Corporation provides an example of the


various kinds of responsibility centers that exist in an
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organization.

Management Hubs
Profit Centers.

Subunit that has responsibility for


generating revenue as well as for controlling
costs.
Cost Centers.

Subunit that has responsibility for


controlling costs but does not sell product.
i.e. service departments.
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Profit Center
Organize business into subunits, profit

center & cost centers.


Track variable costs to profit centers.

Control escalators
Allocate asset use to subunits.
Evaluate on contribution margin and

amount of capital invested.


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Word List
Cost Behavior
Variable Costs.

Variable Costs per


unit are constant.
Fixed Costs.

Fixed costs per unit


vary with
production level.

Mixed Costs.

Semi-variable costs
change in total with
changes in
production level,
but not
proportionately.

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Terms to Recognize
Cost volume profit

analysis
Profit = Sales (S)
Variable Costs (VC)
Fixed Costs (FC)

Contribution Margin

Sales -- Variable Costs


Contribution Margin
Ratio

(Sales Variable
Costs) Sales

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Cost-Volume-Profit Diagnostics

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Breakevent Point
Sales (in dollars) = Fixed Costs / Contribution

margin ratio
Sales (units) = Fixed Costs / Contribution

margin per unit

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Cost or
Revenue
($)
Quantity Produced

Break-Even Diagram
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Break Even Quantity

Break Even Quantity

Profit / Loss
Corridor

Variable
Costs

Cost or
Revenue
($)
Fixed Cost

Fixed Cost

Quantity Produced

Break-Even Diagram
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Break Even Quantity

Increased Fixed Costs

Break Even Quantity

Break-Even Diagram

Profit / Loss
Corridor

Variable
Costs

Cost or
Revenue
($)

Fixed Cost

Quantity Produced

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Vocabulary
Differential costs and

revenue

The additional cost


or revenue incurred
when one alternative
is chosen over
another.

Opportunity Costs.

The benefit given


up by selecting one
alternative over
another. i.e. Interest
on stored grain.

Sunk cost.

Costs that are


already incurred &
not reversible.

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Responsibility Accounting Model


The responsibility accounting model is defined
by four essential elements:
assigning responsibility
establishing performance measures or
benchmarks
evaluating performance
assigning rewards
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Types of Responsibility Accounting

Management accounting offers the following


three types of responsibility accounting
systems.
Functional-based
Activity-based
Strategic-based
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Functional-Based
Responsibility Accounting System
A functional-based responsibility accounting
system assigns responsibility to organizational
units and expresses performance measures in
financial terms.

It is the responsibility accounting system


that was developed when most firms were
operating in relatively stable
environments.
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Elements of a Functional-Based
Responsibility Accounting System
Organizational
Unit

Individual
in Charge
Responsibility
is Defined
Operating
Efficiency

Financial
Outcomes

Unit
Budgets

Standard
Costing

Static
Standards

Performance Measures
are Established

Currently
Attainable
Standards
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Elements of a Functional-Based
Responsibility Accounting System
Controllable
Costs

Financial
Efficiency
Performance
is Measured
Actual versus
Standard

Financial
Measures

Promotions

Profit
Sharing

Bonuses
Individuals are Rewarded
Based on
Financial Performance

Salary
Increases
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Activity-Based
Responsibility Accounting System
An activity-based responsibility accounting
system assigns responsibility to processes and
uses both financial and nonfinancial measures
of performance.
It is the responsibility accounting system
developed for those firms operating in
continuous improvement environments.
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Elements of an Activity-Based
Responsibility Accounting System
Process

Team
Responsibility
is Defined
Value
Chain

Financial

Optimal

Dynamic
Performance Measures
are Established

ProcessOriented

ValueAdded
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Elements of an Activity-Based
Responsibility Accounting System
Quality
Improvement

Time
Reductions
Performance
is Measured
Cost
Reductions

Trend
Measures

Promotions

Bonuses

Gainsharing

Individuals are Rewarded


Based on Multidimensional
Performance

Salary
Increases
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Strategic-Based
Responsibility Accounting System
A strategic-based responsibility accounting system
(Balanced Scorecard) translates the mission and
strategy of an organization into operational
objectives and measures for four different
perspectives:
The financial perspective
The customer perspective
The process perspective
The infrastructure (learning and growth)
perspective

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Strategy
Strategy specifies how an organization matches its
own capabilities with the opportunities in the
marketplace to accomplish its objectives
A thorough understanding of the industry is critical
to implementing a successful strategy

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Elements of a Strategic-Based
Responsibility Accounting System
Customer

Financial
Responsibility
is Defined
Process

Communicate
Strategy
Alignment of
Objectives

Infrastructure

Performance Measures
are Established

Balanced
Measures
Link to
Strategy
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Elements of a Strategic-Based
Responsibility Accounting System
Customer
Measures

Financial
Measures
Performance
is Measured
Process
Measures

Infrastructure
Measures

Promotions

Bonuses

Gainsharing

Individuals are Rewarded


Based on Multidimensional
Performance

Salary
Increases
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End of Week

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