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Responsibility Accounting Performance Management System

Responsibility-Accounting-performance-management-system

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Nisperos, Rovietskya, B.
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49 views18 pages

Responsibility Accounting Performance Management System

Responsibility-Accounting-performance-management-system

Uploaded by

Nisperos, Rovietskya, B.
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 PPTX, PDF, TXT or read online on Scribd
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RESPONSIBILITY

ACCOUNTING
As a tool for Performance Management System
Responsibility Accounting
a system of accounting wherein
performance, based on cost/revenues, are
recorded and evaluated by levels of
responsibility within an organization. It
involves:
1. Identifying responsibility centers with
their corresponding objectives
2. Developing measures of achievement
of such objectives
3. Preparing reports of such measures by
the responsibility centers
Responsibility Accounting
Responsibility Center (aka
Accountability Center)
 A clearly identified part or
segment of an organization that is
accountable for a specified
functions or set of activities
 Any part of the organization that a
particular manager is responsible
for.
Types of Responsibility Centers
1. Cost Center (Expense Center) – a segment of
an organization in which managers are held
responsible for the costs or expenses incurred
in the segment
2. Revenue Center – primarily for revenues
3. Profit Center – both revenues and costs
4. Investment Center – managers controls,
revenues, costs and investments. The center’s
performance is measured in terms of the use of
the assets as well as the revenues earned and
cost incurred.

*These centers can have a controllable and non-


Classifications of costs in
Responsibility Accounting
1. By responsibility Center
2. By cost type, as to controllability
3. By specific costs items or cost
elements within each classification (1)
or (2)
Responsibility Vs Accountability

Responsibility
1. The obligation to secure results
2. The obligation to report back the
results achieved to higher authority

Accountability – denotes the obligation


to report results achieved to higher
authority
Concept of 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 decision authority and held accountable for
his decisions
• Goal congruence – all members of an
organization have incentives to perform
common interest
• Sub-optimization – occurs when one segment of
a company takes action that is in its own best
interests, but detrimental to the firm as a whole.
Benefits of Decentralization

1. Better access to the local


information
2. Cognitive limitations
3. More timely response
4. Focusing of central management
5. Training and evaluation
6. Motivation
7. Enhanced Competition
Costs of Decentralization

1. Some decisions made in one sub-unit may


bring about negative effect to the other
sub-units or the organization as a whole.
2. Decentralization necessitates a more
elaborate reporting system, hence, the
costs of gathering and reporting of data
increase.
3. Job duplication or overlapping of functions
is usually encountered in a decentralized
set-up.
Measuring Performance of
Investment centers
1. Return on Investment (ROI)
- is the most common measure of performance
investment centers
Defined as:
ROI=Operating Income/Average Operating
Assets

Operating Income – earnings before interest and


taxes. Operating assets include all assets acquired to
generate operating income, including cash,
receivables, inventories, land, buildings and
equipment.
Measuring Performance of
Investment centers
Alternate formula:
ROI = Margin * Turnover
ROI = (Operating
Income/Sales)*(Sales/Average
Operating Assets)
Margin(Return on Sales) = Operating
Income/Sales
Turnover (Asset Turnover)=
Sales/Average Operating Assets
Advantages of ROI:
1. It encourages managers to pay
careful attention to the
relationships among sales,
expenses and investment, as
should be the case for a manager
of an investment center.
2. It encourages cost efficiency
3. It discourage excessive
investment in operating assets.
Disadvantage of ROI:
1. It discourages managers from
investing in projects that would
decrease the divisional ROI but would
increase the profitability of the
company as a whole. (Generally,
projects with an ROI less than a
division’s current ROI would be
rejected)
2. It can encourage myopic behavior, in
that managers may focus on the short
run at the expense of the long run.
Measuring Performance of
Investment centers
2. Residual Income = Operating
Income less Required income

*usually, the required income is


equal to desired income
Required income = Operating
Assets * Minimum Rate of Return
Measuring Performance of
Investment centers
3. Economic Value Added (EVA) – more
specific version of residual income that
measures the investment centers real
economic gains. It uses the weighted
average cost of capital (WACC) to
compute the required income.
EVA = Operating Income after Tax –
Required Income
Where: Required Income = (total assets –
current liabilities ) * WACC
Sample Problem:
The following data were taken from the records of
Mariah Company, a division of Great Meow
Corporation for the year ended December 31,
2020:
Sales 120,000
Less: VC and Expenses 80,000
Contribution Margin 40,000
Less: Direct FC and expenses 10,000
Segment Income 30,000

The company used an average assets of P80,000


in 2020. the cost of capital is 12%
Sample Problem:

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