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OBJECTIVES:
Determination of contribution of a division:
• Efficient responsibility centre is one which does what it does with the
lowest consumption of resources
• Expense/Cost Centre
•
• Limitations
• Profit Centres
• There are two types of profit centres, one is the natural profit centre
which is very much like an independent firm and the other is constructive
profit centre which is made to appear as a natural profit centre.
• Limitations
•
• Criterion for Profit Centres
• One problem with profit centre is that it cannot be used for all
responsibility centres. The criterion to use profit centre as a responsibility
centre includes the consideration of the following points: (i) Extra record
keeping is involved to measure input and output in monetary terms (ii)
When a responsibility centre is required by management to provide service
to other responsibility centres, the service department should not be a
profit department (iii) If the output of a product division is fairly
homogeneous , a profit centre may not offer substantial advantage,
however an expense centre (iv)Due to intense competition there may be
friction between various profit centres.
•
• Measurement of expenses
• Transfer prices
• Investment Centres
• The investment centre analysis can be used as a basis for evaluating the
contribution of a division as an entity as also the performance of a
divisional manager. The measure of performance in an investment centre
is based on the relationship between the profits and the amount of assets
employed in generating the profits.
•
INTRODUCTION TO COST ACCOUNTING
Cost accounting is that branch of the accounting information system which
records measures and reports information about costs. A cost is a sacrifice of
resources.
The primary purpose of cost accounting is cost ascertainment and its use in
decision making and performance evaluation.
A cost accounting provides data for both financial accounting and
management accounting.
Cost accounting also helps in planning. Planning is a process of setting
goals and allocating resources to achieve these goals
Cost accounting is also useful for the purpose of control. Control comprises
managerial action to correct conditions that cause deviation between the actual
and planned performance. Comparison between the actual and budgeted cost will
highlight a poor or good performance, as well as operations that have gone out of
control and warrant corrective action.
Thus cost accounting proved the basis for managerial control.