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Responsibility Acctg Summary

This document discusses performance evaluation of different responsibility centers in a decentralized organizational structure. It outlines four types of responsibility centers: investment centers, profit centers, revenue centers, and cost centers. It then discusses several models for evaluating investment center performance, including return on equity, return on investment, residual income, and economic value added. The key performance indicators and factors evaluated differ for each type of responsibility center based on their level of control and responsibilities.

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mnohairah
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31 views1 page

Responsibility Acctg Summary

This document discusses performance evaluation of different responsibility centers in a decentralized organizational structure. It outlines four types of responsibility centers: investment centers, profit centers, revenue centers, and cost centers. It then discusses several models for evaluating investment center performance, including return on equity, return on investment, residual income, and economic value added. The key performance indicators and factors evaluated differ for each type of responsibility center based on their level of control and responsibilities.

Uploaded by

mnohairah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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 In a decentralized organizational structure, divisions, departments, segments, or unit are considered responsibility Some of the models used in evaluating

luating investment center performance


centers  Return on Equity (ROE)
 A responsibility center could be an investment center, profit center, revenue center, or cost center  Return on Investment (ROI / DuPont Model)
Investment center manager- decides which strategic business opportunity should be taken  Residual Income
Profit center manager- control the occurrence or non-occurrence of both revenues and costs  Economic Value Added (EVA)
Revenue center manager- controls the generation of revenue
Cost center manager- control or influence over the incurrence of costs Return on Investment (ROI)
 Controllability refers to the power of the manager to decide or influence the incurrence or non-incurrence of an - sometimes referred to as ROA, or ARR
item. Within the principle of decentralization is the truism that a manager should be evaluated only on matters that
he has control over ROI = Profit
Invested Capital
Performance Evaluation
 Different responsibility center managers should be evaluated differently inasmuch as their authority, responsibility, - the higher the ROI, the better it will be for the business
and accountability vary from each other - increased by increasing NI and reducing investment
 Performance evaluation could be done before, during, or after a process. It is assessed based on reports submitted - only those investment of which the investment center manager has control and use in operations shall be included in
to the manager the ROI determination
 Responsibility accounting reports may either be information reports or performance reports
 Reports should segregate controllable from non-controllable DuPont Model:

Cost center manager’s performance ROI = NOPAT x Sales


- should highlight variances between the actual and budgeted costs Sales Invested Capital
Profit Margin/ROS Asset Turnover
Revenue center manager’s performance
- should be focused in getting the variances between actual revenue and budgeted revenue Note:

Actual revenue > Budgeted revenue = Favorable revenue variance Increase in ROI = Increase in Income / Decrease in Investment

- responsibility centers that are responsible in developing and maintaining sources of supply, such as sources of materials Residual Income
and labor may also be classified as revenue centers - improved the limitations encountered in ROI
- uses amount as a basis of evaluating the acceptance of a prospective investment
Profit center manager’s performance
- managerial performance is evaluated on controllable margin while the center’s performance is evaluated based on RI = NOPAT - [ Cost of capital x Investment ]
segment margin
Economic Value Added
Contribution margin - residual income with adjustment*
Less: Controllable direct fixed costs and expenses - represents the business unit’s true economic profit because a change in the cost of equity capital is implicit in the cost of
Controllable margin capital
Less: Noncontrollable direct fixed costs and expenses - a measure of the management effectiveness in increasing investor’s value
Segment margin
Less: Allocated fixed costs
Profit / Loss

Investment center manager’s performance


- performance is evaluated based on the results of decisions on investments
- cost-benefit criterion plays a vital role in investment selection decision process

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