Ch3. Responsibility Accounting and Segment Evaluation Flashcards
an accounting information system and a managerial control device that involves:
1. identifying responsibility centers with their corresponding objectives
2. developing measures of achievement of such objectives
3. preparing and analyzing reports of such measures by the responsibility centers
Responsibility Accounting
a sub-unit of an organization, such as a department, division, plant, business process or any segment whose manager has authority over and is responsible and accountable for a specific or defined group of activities.
Responsibility Centers
a manager has control over the incurrence of costs but not over revenues or investments.
Example: Maintenance Department
Cost Center
– the manager has control over revenues.
- Example: Sales Department
Revenue Center
the manager has control over both cost and revenue
- Example: A branch
Profit Center
the manager has control over both cost and
revenues, as well as over investment in plant and equipment, receivables, inventory and other assets.
Investment Center
usually operated as a cost center; it exists primarily and sometimes solely to provide specialized support to the other segments or sub-units of the organization.
Service Center
Types of Responsibility Centers
- Cost Center
- Revenue Center
- Profit Center
- Investment Center
- Service Center
top management makes most of the decisions and controls most activities of the organizational segments from the firms central office.
Centralized Organization
there is employee empowerment; top management grants subordinate managers a significant degree of autonomy and independence in operating and making decisions relating to their sphere of responsibility.
Decentralized Organization
Benefits of Decentralization
- Greater awareness of needs of the people involved in the subunit, such as the employees,
suppliers, and customers. - More timely decisions.
- Faster management development.
- Greater initiative on the part of management as well as on the subordinate.
- Improvement of employees’ morale.
- Sharper management focus.
Organizational Structures
Centralized Organization
Decentralized Organization
one purpose of a responsibility accounting system is to provide a condition where employees working on their own personal interests or the interest of their responsibility center make decisions that help meet the overall goals of the firm.
Goal Congruence
- the exertion of effort by the decision makers to reach a common goal or objective; this includes all conscious actions such as planning and supervising (controlling).
- To achieve goal congruence and managerial effort, employees must be properly motivated.
Managerial Effort
the power to direct and exact performance fromothers, particularly the subordinates, including the right to prescribe the means and methods by which work must be done.
Authority
the obligation to perform.
Responsibility
the duty to report performance to one’s superior and the physical means for reporting or being able to substantiate performance.
Accountability
behavioral communication oriented responsibility approach where a manager and his subordinates agree upon objectives and the means on how such objectives can be attained
Management by Objectives
the extent to which a manager can influence
activities, cost, revenues or capital; a manager should be evaluated only on matters that he controls.
Controllability
Key Concepts in Responsibility Accounting
Authority
Responsibility
Accountability
Management by Objectives
Controllability
Evaluation should be done on the basis of those factors controllable by the manager being evaluated.
PERFORMANCE EVALUATION
- Cost Center Evaluation Techniques
- The manager has control over both revenues and cost. His evaluation is based on controllable margin while for the center, it’s based on segment or direct margin.
Cost Variance Analysis
- Revenue Center Evaluation Techniques
- The manager has control in generating revenue but not of costs. The Performance report should show the variances between actual and budgeted revenue. The variance can either be favorable or unfavorable.
Revenue Variance Analysis
- Profit Center Evaluation Techniques
- The manager has control over both revenues and cost. His evaluation is based on controllable margin while for the center, it’s based on segment or direct margin.
Segment Margin Analysis
- Investment Center Evaluation Techniques
- Performance is evaluated based on the results of investment.
ROI, Residual Income Model, EVA, Equity Spread, etc.
- a more specific version of Residual Income. It represents the segment’s or company’s true economic profit as it measures the benefits obtained by using the resources in a particular way.
- or true economic profit is the excess over the shareholders’ expectations.
Economic Value Added (EVA)
Economic Value Added (EVA)
Investment base can be the:
Investment base can be the:
- 1. market value (current value) of long
term financing.
- 2. carrying amount of long-term
financing.
- 3. market value of the total assets.
- 4. carrying amount of the total assets.
the value created by the equity base of a business.
Equity spread
equal to profit divided by the average shareholders’ equity.
Return on equity
the change in the stock price plus dividends per share divided by the initial stock price.
Total shareholders’ return
the difference between the market value of the equity and the equity supplied by the shareholders.
Market value added
