Responsibility Accounting,

Department Cost Allocations, and

Transfer Pricing
JBCG
Introduction
 Employee empowerment can be achieved through decentralization
of the decision making from the top management to the lower-level
employees.
 Responsibility can also be delegated to the managers of each
department.
Responsibility Accounting
 Aninformation system and a managerial control device that
involves:
Identifying responsibility centers with their corresponding objectives
Developing measures of achievement of such objectives
Preparing/analyzing reports of such measures by the responsibility
centers
Responsibility Center
 A sub-unit of an organization, such as a department, division, plant,
business process, or any segment whose manager has authority over,
and is responsible and accountable for a specific or defined group of
activities.
Cost Center
Revenue Center
Profit Center
Investment Center
Service Center
Organizational Structures
 Centralized organization
Top management makes most decisions and controls most activities of
the organizational segments from the firm’s central office.
 Decentralized organization
Top management grants subordinate managers a significant degree of
autonomy and independence in operating and making decisions
relating to their sphere of responsibility.
Goal Congruence
 One purpose of responsibility accounting system.
 Itis a condition where employees, working on their own personal
interests of their responsibility center, make decisions that help meet
the overall goals of the firm.
 Sub-optimization occurs when one organizational segment takes
actions that is in its own best interests, but is detrimental to the
organization as a whole
Other Key Concepts
 Authority
The power to direct and exact performance from others, particularly
subordinates, including the right to prescribe the means and methods
by which work must be done.
 Responsibility
Refers to the obligation to perform.
 Accountability
The duty to report performance to one’s superior and the physical
means for reporting or being able to substantiate performance.
Other Key Concepts
 Controllability
 The extent to which a manager can influence activities, cost, revenues, or
capital
 Management by Objectives
 A behavioral,communications-oriented, responsibility approach where a
manager and his/her subordinates agree upon objectives and the means on
how objectives can be attained.
Transfer Pricing
 Established for reasons such as:
Help promote goal congruence
Ensure optimal resource allocation
Promote operating efficiency
Make comparable performance evaluations among segments
Motivate managers to be more entrepreneurial
Transfer Price
 Theamount charged by one segment of the organization for
goods/services transferred/provided to another segment of the same
organization.
Factors for Transfer Pricing Policy

 Goal Congruence
 Segmental Performance
 Negotiation
 Capacity
 Cost Structure
 Taxes
Determining Transfer Prices
 Market Price if a market for the goods/services exists
 Incremental cost plus opportunity cost to the seller
 Full Absorption cost
 Cost plus Markup
 Negotiated transfer price
Minimum Price – Seller’s point of view; seller’s incremental cost plus
opportunity cost
Maximum Price – buyer’s point of view; the prevailing market price
 Dual Transfer price
CREATING A BETTER
LEARNING EXPERIENCE
JBCG

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