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Mas - Responsibility Accounting

This document discusses responsibility accounting and how it can be used to manage decentralized organizations. It describes centralized and decentralized decision-making structures and the challenges of sub-optimization in decentralized structures. Responsibility accounting addresses this by defining responsibility centers (cost, revenue, profit, investment) and using tools like variance analysis and segmented income statements to evaluate performance and align goals across departments. Key performance measures discussed include return on investment, residual income, economic value added, and balanced scorecards.

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Lance Gallogo
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96 views6 pages

Mas - Responsibility Accounting

This document discusses responsibility accounting and how it can be used to manage decentralized organizations. It describes centralized and decentralized decision-making structures and the challenges of sub-optimization in decentralized structures. Responsibility accounting addresses this by defining responsibility centers (cost, revenue, profit, investment) and using tools like variance analysis and segmented income statements to evaluate performance and align goals across departments. Key performance measures discussed include return on investment, residual income, economic value added, and balanced scorecards.

Uploaded by

Lance Gallogo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Responsibility Accounting:

Responsibility Accounting – Accounting for results at the level responsible for such results.

Firms with multiple responsibility centers usually choose one of two decision-making approaches to
manage their diverse and complex activities: CENTRALIZED or DECENTRALIZED

Centralized Structure in which decision making is made strictly at the top management level.
-decisions are made at the very top level, and lower-level managers are charged with implementing
these decisions.

Decentralized Structure authority is delegated throughout the organization (i.e. given to subordinate
Managers).

CHALLENGES IN DECENTRALIZED STRUCTURE:

 Sub Optimization – Lack of Communication and focus in 1 department only.

To prevent sub optimization, the Company needs Goal Congruence.


GOAL CONGRUENCE - Aligning goals of different departments with the top management’s goal.

To attain Goal Congruence by using Responsibility Accounting:


FOUR (4) major types of responsibility centers:

 1.Cost Center – Manager is accounting only for costs (i.e Accounting Department, HR
Department)

 2.Revenue Center – Manager focuses in revenues and but not costs (i.e Insurance agencies)

 3.Profit Center – Manager is Accountable for both revenues and costs (i.e fast food chains)

 4.Investment Center – Manager is responsible for generating revenues, controlling costs and
effective utilization of assets (i.e. holding company)

PROFIT CENTER EVALUATION:

Variance analysis – Comparison between actual and expected results. It can be used to evaluate Cost
Centers, Revenue Centers, Profit Centers, and Investment Centers.

According to Management by Exception, INVESTIGATE ONLY SIGNIFICANT VARIANCES.

Segmented Income Statement - Income Statement as a part of a Financial Statement for external
purpose (creditors, investors /entire company)

For preparation of each department’s income statement, Contribution Margin Approach is used.

ANSWER:
HOW TO USE SEGMENTED INCOME STATEMENT TO ATTAIN PURPOSE:
 If the goal is to evaluate person’s in charge’s performance, look at SEGMENT CONTROLLABLE
MARGIN
Reason: We can only focus on the PIC’s controllable things which includes V.C, and CTRL F.C
 To determine the performance of the Segment, look at SEGMENT MARGIN
Reason: It would en compasses everything including non-controllable cost (N-CTRL F.C but TRC)

INVESTMENT CENTER EVALUATION:

RETURN ON INVESTMENT – Income/Loss generated relative to the amount of invested.


Formula for ROI:

ROI = Income
Investment
Or
ROI = Income -> entire period
Assets -> last day of the period

SAMPLE CASE:

ANSWER:
ALTERNATIVE APPROACH IN ARRIVING ROI: DU PONT EQUATION

SAMPLE CASE:
3. RESIDUAL INCOME (RI)-> point of view of top mgt.
RI=INC. – min. Income
RI=INC. –(A x min. ROR)

Assets Opt. liabilities


Debt
C /E

4. ECONOMIC VALUE ADDED(EVA) -> point of view from capital providers of the entity.
EVA = OPAT – (TA-OL) X WACC

INTERNAL BUSINESS PERSPECTIVE: Non financial measures


BALANCED SCORECARD-Strategic management tool the evaluates performance relating to four
perspectives: Financial , Customer , Internal business and Learning and growth.

TRANSFER PRICE -> It is a revenue of one segment and Cost of other segment within the organization.
-First Priority : Market Price –most objective of all price
-Second : Set a range(maximum- for the buyer will not loss & minimum price-for the seller will not
Loss)

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