Responsibility Acctg and Segment Evaluation Flashcards
Module 3
An accounting information system and a managerial control device.
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. Ex. Maintenance Department
Cost Center
Manager has control over revenues. ex. Sales Dept
Revenue center
The manager has control over both cost and revenue. Ex. 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
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
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).
Managerial Effort
To achieve goal congruence and managerial effort, employees must be properly
MOTIVATED
the power to direct and exact performance from others, 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
AUTHORITY = ?
RESPONSIBILITY
RESPONSIBILITY=?
ACCOUNTABILITY
a behavioral communications 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
The performance report should separate the controllable from the non-controllable cost and should highlight the variances between the actual and the budgeted costs.
Cost Center
Cost Variance Analysis
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 Center
Revenue Variance Analysis
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.
Profit Center
Segment Margin Analysis
Performance is evaluated based on the results of investment.
Basis for Evaluating Responsibility Centers
Investment Center
ROI, Residual Income Model, EVA, Equity Spread
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
Economic Value Added (EVA)
the minimum income that must be earned taking into account the cost of capital obtained from borrowings.
Shareholders’ expectation
the value created by the equity base of a business.
Equity spread
the excess over the shareholders’ expectations.
true economic profit
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
