Responsibility Accounting and Performance Measurements Flashcards
Centralization
Is a business structure in which one individual makes the important decision and provides the primary strategic direction for the company
Decentralization
Is a business structure in which the decision making is made at various levels of the organization
Responsibility Accounting
Refers to an accounting system that collects, summarizes, and reports accounting data relating to the responsibilities of individual managers
Provides information to evaluate each manager on the revenue and expense items over which that manager has primary control.
Only those costs and revenues over which an individual has definite control can be assigned to him for evaluating his performance
Responsibility Centers
Represent the sphere of authority or decision points in an organization
> > Cost center, revenue center, profit center, and investment center
Performance Reporting
Reports should contain comparative information form to show plans vs. the actual performance and should give details of variances that are related to that center
The variances which are not controllable at a particular responsibility center should be mentioned separately in the report
Management by Exception
An effective responsibility accounting system must focus the attention of the management on significant deviations and not burden them with other routine matters
Cost center (Responsibility Centers)
A department or function within an organization that does not directly add to profit but still costs the organization money to operate
How to measure?
» actual costs vs. budgeted cost
» how they manage resources
» were they able to reduce costs
Revenue center (Responsibility Centers)
A responsibility center where a manager would only be accountable for the generation of revenues, with no control over costs
(not likely)
Profit center (Responsibility Centers)
A responsibility center where a manager is responsible for generating revenues, while also planning and controlling costs and expenses
How to measure?
» how were they able to manage the cost to contribute to the overall income
Investment center (Responsibility Centers)
A business unit in a firm that can utilize capital to contribute directly to a company’s profitability
How to measure?
» how were they able to utilize the assets to contribute to the overall income
» ROI= Net Income/ Investment
» Residual Income= Net Income - (Assets x WACC)
Balanced Scorecard
refers to a strategic management performance metric used to identify and improve various internal business functions and their resulting external outcomes.
It involves the use of both financial and non-financial measures to evaluate performance
Four Major Perspectives (Balanced Scorecards)
The vision and strategy of the entity must be translated into four perspectives:
1) Financial
2) Customer
3) Internal Business process
4) Learning and Growth
Financial perspective
To succeed financially, how should we appear to our stakeholders
Measured by:
» Revenue and profits
» Cost savings and efficiency
» Profit Margins
» Revenue sources
Customer perspective
To achieve our vision, how should we appear to our customers
Measured by:
» Customer service and satisfaction
» Market share
» Brand awareness
Internal Business Process perspective
To satisfy our shareholders and customers, what business process must we excel at
Measured by:
» Process improvements
» Quality optimization
» Capacity utilization
