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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Responsibility Accounting
Cost Center Profit Center Investment Center

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

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

Superior Foods Corporation Corporate Headquarters President and CEO

Finance Chief FInancial Officer

Legal General Counsel

Personnel Vice President

Salty Snacks Product Manger

Beverages Product Manager

Confections Product Manager

Bottling Plant Manager

Warehouse Manager

Distribution Manager

Cost Centers

Superior Foods Corporation provides an example of the various kinds of responsibility centers that exist in an PPT 14 -9 organization.

10-10

Responsibility Centers
Superior Foods Corporation Corporate Headquarters President and CEO

Operations Vice President

Finance Chief FInancial Officer

Legal General Counsel

Personnel Vice President

Salty Snacks Product Manger

Beverages Product Manager

Confections Product Manager

Bottling Plant Manager

Warehouse Manager

Distribution Manager

Profit Centers

Superior Foods Corporation provides an example of the various kinds of responsibility centers that exist in an PPT 14 -10 organization.

10-11

Responsibility Centers
Superior Foods Corporation Corporate Headquarters President and CEO

Operations Vice President

Finance Chief FInancial Officer

Legal General Counsel

Personnel Vice President

Salty Snacks Product Manger

Beverages Product Manager

Confections Product Manager

Bottling Plant Manager

Warehouse Manager

Distribution Manager

Cost Centers

Superior Foods Corporation provides an example of the various kinds of responsibility centers that exist in an PPT 14 -11 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. Mixed Costs.

Variable Costs per unit are constant.

Fixed Costs.

Fixed costs per unit vary with production level.

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

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Terms to Recognize
Cost volume profit Contribution Margin

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

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

Cost or Revenue ($)

Fixed Cost

Variable Costs

Fixed Cost

Quantity Produced

Break-Even Diagram
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Break-Even Diagram
Break Even Quantity

Increased Fixed Costs

Break Even Quantity

Profit / Loss Corridor

Variable Costs

Cost or Revenue ($) Quantity Produced

Fixed Cost

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Vocabulary
Differential costs and Opportunity Costs.

revenue

The additional cost or revenue incurred when one alternative is chosen over another.
Sunk cost.

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

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

Individual in Charge Responsibility is Defined
Operating Efficiency Unit Budgets Static Standards Financial Outcomes Standard Costing Organizational Unit

Performance Measures are Established

Currently Attainable Standards

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Elements of a Functional-Based Responsibility Accounting System

Financial Efficiency Performance is Measured
Actual versus Standard Promotions Individuals are Rewarded Based on Financial Performance Financial Measures Bonuses Controllable Costs

Profit Sharing

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

Team Responsibility is Defined
Value Chain Optimal Performance Measures are Established ProcessOriented ValueAdded
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Process

Financial

Dynamic

Elements of an Activity-Based Responsibility Accounting System

Time Reductions Performance is Measured
Cost Reductions Promotions Individuals are Rewarded Based on Multidimensional Performance Trend Measures Bonuses Quality Improvement

Gainsharing

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

Financial Responsibility is Defined
Process Infrastructure Customer

Communicate Strategy Alignment of Objectives

Performance Measures are Established

Balanced Measures Link to Strategy

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Elements of a Strategic-Based Responsibility Accounting System

Financial Measures Performance is Measured
Process Measures Promotions Individuals are Rewarded Based on Multidimensional Performance Infrastructure Measures Bonuses Customer Measures

Gainsharing

Salary Increases
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End of Week

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