cost and profit centres Flashcards
what is decentralized
control of operations is given to many managers throughout the organization
what is control
managers should be held accountable only for what they can control
what is responsibility accounting
accumulating and reporting revenues and/or costs tthat relate to the manager who has the authority to make the decisions about the cost items
what should be considered under responsibility accounting
costs and revenues directly associated with management accounting
costs and revenues that are controllable
information where budget data can be developed
what are profit centres responsible for
revenue and expenses
what are cost centres responsible for
expenses
what are investment centres responsible for
revenue and expenses and ROI
what is responsibility accounting responsible for
accumulating and reporting revenues and costs for the manager who making decisions about the cost items
what are the three types of responsibility centers
- cost
- profit
- investments
what are the three ways the evaluate performance in an investment center
- ROI
- income measure
- valuation of operating assets
what is roi and what is the formula
measures how effectively the managers users the assets at their disposal
return on investment = controllable margin / average operating assets
only include elements that manager can control
can consider fixed costs as controllable in an investment centre
what is income measure
controllable margin
income from operations
net income
what is average valuation of operating assets formula
average operating assets = [opening operation assets (i.e. january 1) + closing operating assets (i.e. december 31)] / 2
what is the residual income formula and what does it show
residual income = income - (minimum rate of return * average operating assets)
income that remains after subtracting the minimum rate of return on average operating assets
