RESPONSIBILITY

ACCOUNTING AND
PERFORMANCE
EVALUATION
DEBBIE A. PATIGAYON, CTT, CFMP, ADP
The Concept of Decentralization
Decentralization refers to the separation or
division of the organization into more
manageable units wherein each unit is
managed by an individual who is given
authority and held accountable for his
decisions.
Benefits of Decentralization
1. Division into more manageable size
2. Sound decision-making
3. Timely decision-making
4. Boosts employee morale
5. Subunits serve as training ground for future leaders
 Cost of Decentralization
1. Negative effect of some decision made in one
subunit to the other subunits or the whole
organization as a whole.
(due to lack of coordination)
2. Needs more elaborate reporting system
(causes job duplication or overlapping of functions)
RESPONSIBILTY ACCOUNTING
A system of accounting wherein costs
and revenues are accumulated and
reported by levels of responsibility or by
responsibility centers within the
organization.
RESPONSIBILTY ACCOUNTING
GOALS:
1. COST CONTROL
2. PERFORMANCE EVALUATION
 GUIDELINES FOR ATTAINING
GOALS
1. REWARDS AND PUNISHMENT STRUCTURE
2. PARTICIPATION OF MANAGERS IN GOAL-SETTING
3. ATTAINABLE GOALS
4. CLEAR RATIONALE BEHIND THE SYSTEM
5. TIMELY SUBMISSION OF PERFORMANCE REPORTS AND FEEDBACK
TO MANAGERS
RESPONSIBILITY CENTERS
It is also called as accountability center, is a clearly identified
part or segment of an organization that is accountable for a
specified function or set of activities.
1. Revenue Center
2. Expense/Cost Center
3. Profit Center
4. Investment Center
 EXPENSE/COST CENTER
A SEGMENT IN WHICH MANAGERS ARE HELD RESPONSIBLE
FOR THE COSTS OR EXPENSES INCURRED IN THE SEGMENT.

GOAL: TO PROVIDE THE BEST SERVICE AT A MINIMUM COST

 EVALUATION OF COST CENTERS’
PERFORMANCE
OBJECTIVE: EVALUATION BASED ON THE OBJECTIVES SET FOR SUCH CENTER

PERFORMANCE MEASUREMENTS:
1. PERFORMANCE REPORTS FROM MANAGERS
2. FEEDBACK REPORTS FROM OTHER DEPARTMENTS
USE OF BUDGETS IN COST
EVALUATION
OBJECTIVE:
ACTUAL COSTS < BUDGETED COSTS
RESPONSIBILITY ACCOUNTING
REPORTS
CLASSIFICATION OF COSTS
1. CONTROLLABLE COSTS
2. NON-CONTROLLABLE COSTS
3. DIRECT COSTS/INDIRECT COSTS
 CONTROLLABLE COSTS
Costs which may be directly regulated at given level of managerial authority.
Guidelines need to be considered to determine whether a cost item is
controllable:
1. A person has authority over both the acquisition and use of services
2. A person can significantly influence the amount or the incurrence of cost
through his own action
3. Though he cannot directly influence the incurrence of cost, but the
management wishes him to be concerned with the cost items involved.
 TWO IMPORTANT NOTES FOR
CONTROLLABILITY
1. IT MUST REFER TO A SPECIFIC RESPONSIBILITY
CENTER AT A CERTAIN POINT

2. IT RESULTS FROM A SIGNIFICANT INFLUENCE AND

NOT FROM A COMPLETE INFLUENCE

Note: Controllability results from significant rather than complete influence

 UNCONTROLLABLE COSTS
IT IS AN EXPENSE THAT IS NOT WITHIN THE SPHERE OF CONTROL OF A MANAGER.
The cost may be controllable at a higher level of the organization, but it is not
controllable from the perspective of the person in question.

EXAMPLE:
A manager cannot alter his own salary.
 DIRECT COSTS/INDIRECT
COSTS
DIRECT COST - THESE ARE COSTS THAT CAN BE SPECIFICALLY IDENTIFIED TO A CERTAIN RESPONSIBILITY
CENTER.
INDIRECT COST - THESE ARE COSTS THAT CANNOT BE SPECIFICALLY IDENTIFIED TO A CERTAIN RESPONSIBILITY
CENTER.
NOTES:
CONTROLLABLE COSTS, THEREFORE, WHICH MUST BE DIRECTLY CHARGED TO A SPECIFIC BUSINESS SEGMENT
MUST BE DIRECT COSTS.
INDIRECT COSTS ARE COMPOSED MOSTLY OF COSTS THAT ARE MERELY ALLOCATED TO THE RESPONSIBILITY
CENTER UNDER CONSIDERATION.
THEREFORE, INDIRECT COSTS ARE NON-CONTRALLABLE.
NOT ALL DIRECT COSTS ARE CONTROLLABLE.
 RESPONSIBILITY COST REPORT
PARU-PARU G MANUFACTURING COMPANY
MAINTENANCE DEPARTMENT
COST BUDGET FOR FEBRUARY 2022
SALARIES AND WAGES P20,000
SUPPLIES 10,000
POSTAGE AND TELEPHONE 5,000
LIGHT AND WATER 3,000
DEPRECIATION – TOOLS AND EQUIPMENT 8,000
TOTAL BUDGED COSTS P46,000
 RESPONSIBILITY COST REPORT
ACTUAL COSTS INCURRED:
SALARIES AND WAGES P25,000
SUPPLIES 8,000
POSTAGE AND TELEPHONE 3,000
LIGHT AND WATER 3,000
DEPRECIATION – TOOLS AND EQUIPMENT 11,000
TOTAL COSTS INCURRED P50,000
 RESPONSIBILITY COST REPORT
If the cost items will not be broken down into controllable and uncontrollable costs, the
evaluation of the department will be based on total costs.

Total actual cost P50,000

Total budgeted cost 46,000
Budget variance – unfavorable P 4,000
 RESPONSIBILITY COST REPORT

PARU-PARU G MANUFACTURING COMPANY

MAINTENANCE DEPARTMENT

RESPONSIBILITY COST REPORT

FOR THE MONTH OF FEBRUARY 2022

CONTROLLABLE COSTS BUDGET ACTUAL VARIANCE (FAV./UNFAV.)

SUPPLIES P10,000 P8,000 P2,000

POSTAGE AND TELEPHONE 5,000 3,000 2,000

TOTAL CONTROLLABLE COSTS P15,000 P11,000 P4,000 FAVORABLE

 RESPONSIBILITY COST REPORT
UNCONTROLLABLE COSTS BUDGET ACTUAL VARIANCE (FAV./UNFAV.)
SALARIES AND WAGES P20,000 P25,000 (P5,000)
LIGHT AND WATER 3,000 3,000 -
DEPRECIATION – TOOLS AND EQUIPMENT 8,000 11,000 (P3,000)
TOTAL UNCONTROLLABLE COSTS P 31,000 P39,000 (P8,000) UNFAVORABLE

TOTAL COSTS P46,000 P50,000 (P4,000) UNFAVORABLE

NOTE: THE P4,000 UNFAVORABLE VARIANCE ON TOTAL COST IS NOT ACTUALLY CHARGEABLE TO THE
DEPARTMENT. THE DEPARTMENT SHOULD BE COMMENDED FOR THE COST SAVINGS IT GENERATED
AS SHOWN BY THE FAVORABLE VARIANCE OF P4,000 ON ITS CONTROLLABLE COSTS.
 PROFIT CENTER
IT IS A SEGMENT OF AN ORGANIZATION IN WHICH THE MANAGER
IS HELD RESPONSIBLE FOR BOTH REVENUES AND COSTS.

OBJECTIVE: Not only to minimize costs, but to also maximize

profits.

Note: The same objective with the company as a whole.

 CRITERIA TO
CONSIDERED AS PROFIT
CENTER
1. THE COMPANY HAS TWO OR MORE UNITS FOR WHICH REVENUES AND
EXPENSES CAN BE MEASURED SEPARATELY.

2. THE MANAGERS OF THESE UNITS CAN CONSIDERABLY CONTROL THE

UNITS’ REVENUES AND EXPENSES.

3. PROFIT OF EACH UNIT MUST BE REGULARLY CALCULATED AND

REPORTED TO TOP MANAGEMENT FOR USE AS BASIS IN EVALUATING
EACH UNIT’S PERFORMANCE.
 EVALUATION OF PROFIT
CENTERS’ PERFORMANCE
MEASUREMENTS:
BUDGETED INCOME STATEMENTS PREPARED FOR EACH PROFIT CENTER
ACTUAL RESULTS COMPARED TO BUDGETED FIGURES TO DETERMINE VARIANCES
 RESPONSIBILITY ACCOUNTING
REPORT
PARU-PARU G MANUFACTURING COMPANY

SALES DEPARTMENT

RESPONSIBILITY ACCOUNTING REPORT

FOR THE MONTH ENDED FEBRUARY 2022

BUDGET ACTUAL VARIANCE

SALES XXXX XXXX XXXX

LESS: CONTROLLABLE COSTS AND EXPENSES XXXX XXXX XXXX
INCOME BEFORE UNCOTROLLABLE COSTS XXXX XXXX XXXX
AND ALLOCATION OF INDIRECT COSTS
LESS: ALLOCATED AND OTHER UNCONTROLLABLE XXXX XXXX XXXX
COSTS
INCOME BEFORE TAX XXXX XXXX XXXX
NET INCOME AFTER TAX XXXX XXXX XXXX
 INVESTMENT CENTERS
IT IS A SEGMENT OF AN ORGANIZATION WHERE THE MANAGER CONTROLS REVENUE, COSTS AND
INVESTMENTS.

GOAL: TO MAXIMIZE PROFIT AT A MINIMUM COST/EXPENSE AND CAPITAL (INVESTMENT)

EMPLOYED.
 EVALUATION OF INVESTMENT
CENTERS’ PERFORMANCE
MEASUREMENT:
PERFORMANCE IS EVALUATED BASED NOT ONLY THE
PROFIT FIGURES PER SE, ON THE PROFIT FIGURES IN
RELATION TO THE INVESTMENT IN THE CENTER.
(RATE OF RETURN ON INVESTMENT)
EVALUATION OF INVESTMENT
CENTERS’ PERFORMANCE
ROI = NY
TA
WHERE: ROI = RETURN ON INVESTMENT
NY = NET INCOME OF THE CENTER
TA = TOTAL ASSETS OF THE CENTER
 EVALUATION OF INVESTMENT
CENTERS’ PERFORMANCE
EXAMPLE: No Way Home Company has two divisions, A and B, which are both classified as
investment centers. Net income and total assets figures are shown below:
Division A Division B
Net Income P300,000 P500,000
Total Assets 1,200,000 2,500,000

ROI = NY P300,000 P500,000

TA P1,200,000 P2,500,000
= 25% 20%
 RESIDUAL INCOME
UNDER THIS METHOD, A TARGET OR DESIRED RATE OF RETURN IS
ESTABLISHEDFOR THE INVESTMENT CENTER.

ACTUAL INCOME FIGURE IS COMPARED WITH THE DESIRED

AMOUNT; ANY EXCESS OF ACTUAL INCOME OVER DESIRED INCOME
IS THE RESIDUAL INCOME.
 RESIDUAL INCOME
EXAMPLE: ASSUME THAT THE DESIRED RATE OF RETURN ESTABLISHED FOR DIVISION X OF
COCOMELON COMPANY IS 18%. LAST YEAR, THE DIVISION EARNED NET INCOME OF P480,000
WHEN TOTAL ASSETS AMOUNTED TO P2,500,000. THE RESIDUAL INCOME FOR DIVISION X MAY
BE COMPUTED AS FOLLOW:

ACTUAL NET INCOME P480,000

LESS TARGET NET INCOME (18% X P2,500,000) 450,000
RESIDUAL INCOME P30,000
ECONOMIC VALUE ADDED (EVA)
IT IS A PERFORMANCE METRIC THAT CALCULATES THE
CREATION OF SHAREHOLDER VALUE.
THE CALCULATION OF WHAT PROFIT REMAINS AFTER THE
COST OF COMPANY’S CAPITAL (DEBT AND EQUITY) ARE
DEDUCTED FROM OPERATING PROFIT.
 ECONOMIC VALUE ADDED (EVA)
CALCULATION
There are four steps in the calculation of EVA:
1. Calculate Net Operating Profit After Tax (NOPAT)
2. Calculate Total Invested Capital (TC)
3. Determine the Weighted Average Cost of Capital (WACC)
4. Calculate EVA ( EVA = NOPAT – WACC * TC)
Where: TC = DEBT + EQUITY (TOTAL ASSETS)
ECONOMIC VALUE ADDED (EVA)
CALCULATION
NET OPERATING PROFIT AFTER TAX = P 10,000,000
TOTAL DEBT = P 15,000,000
TOTAL EQUITY = P 20,000,000
WACC = 10%
Compute for the EVA.
 ECONOMIC VALUE ADDED (EVA)
CALCULATION
TC = DEBT + EQUITY = P15M + P20M = P35M
EVA = NOPAT – (WACC * TC)
EVA = P10M – (10% * P35M)
EVA = P10M – (P3.5M)
EVA = P6.5M
Note: A positive EVA indicates that the center is performing well.
 END

Sources: Management Advisory Services, Rodelio S. Roque

Investopedia.com
Management Advisory Services, Rodelio Roque
https://esmepatterson.com/responsibility-accounting/