Responsibility AccountingUIAMS, Panjab UniversityChandigarhSession 16th September, 2013

Relating to the responsibilities of individual managers.To evaluate managers on controllable items.An accounting system that provides information . . . Responsibility Accounting

DecentralizationIs the systematic effort to delegate to the lowest levels all the authority except that which can be exercised at central points.

Decision Making is Pushed DownDecentralization

DecentralizationPromotes better decision making.Allows upper-level management to concentrate on strategic decisions.Improves productivity.Develops lower-level managers.Improves performance evaluation.Advantages

Benefits of decentralizationReduces workload of the executiveFast decision makingFacilitates product diversificationGives opportunity of learning to each employee

DisadvantagesConflictCost increases because of duplicacy of workDisadvantage related to profit centres

Responsibility AccountingResponsibility accounting is used to measure the performance of people and departments to foster goal congruence.

CostResponsibility ReportsResponsibility Reports Prepared for each individual who has control over revenue or expense items

Responsibility Reports Prepare budgets for each responsibility center. Prepare timely performance reports comparing actual amounts with budgeted amounts. Measure performance of each responsibility center.

Responsibility CentersA subunit in an organization whose manager is held accountable for specified financial results.

Responsibility Centers Cost Center Segment has control over the incurrence of costs.The Paint Departmentin an automobile plant.The ReservationsDepartment of an airline.Revenue Center Segment is responsible for the revenue of a unit

Responsibility Centers Profit Center Segment has control over both costs and revenues.Company-owned restaurant in a fast-food chain.Investment Center Segment has control over profits and invested capital.

A division of alarge corporation

Measuring Managerial Performance

Return on Investment Return on investment is the ratio of income to the investment used to generate the income.

ROI = Net IncomeInvestmentROI = MarginTurnoverReturn on Investment

Improving R0IThree ways to improve ROI Increase Sales Reduce Expenses Reduce Investment

ROI - A Major DrawbackAs division manager,I wouldnt invest inthat project becauseit would lower my pay!Gee . . .I thought we weresupposed to do what was best for the company!

Performance ReportsShow the budgeted and actual amounts, and the variances between these amounts, of key financial results appropriate for the type of responsibility center.

Performance Reports

Ch. 10

Raw-Material Inventoryxxx

Direct-Material Price VariancexxxRaw-material InventoryWork-in-Process InventoryWork-in-Process Inventory

Accounts PayablexxxActual quantity atStandard quantityStandard quantity

To record the purchase of raw material and the incurrence of anstandard costat standard priceat standard price

unfavorable price variance.

Work-in-Process Inventoryxxx

Direct-Material Quantity Variancexxx

Raw-Material InventoryxxxDirect-Material Price VarianceDirect-Material Quantity VarianceDirect-Labor Rate Variance

To record the use of direct material in production and the incurrenceUnfavorableFavorableUnfavorableFavorableUnfavorableFavorable

of an unfavorable quantity variancevariancevariancevariancevariancevariancevariance

Work-in-Process Inventoryxxx

Direct-Labor Rate Variancexxx

Direct-Labor Efficiency Variancexxx

Wages PayablexxxAccount PayableRaw-material InventoryWages Payable

To record the usage of direct labor, the incurrance of an unfavorableActual quantity atActual quantity atActual quantity at

direct-labor rate variance and the incurrence of a favorable direct-laboractual coststandard costactual cost

efficiency variance

Cost of Goods Soldxxx

Direct-Labor Efficiency Variancexxx

Direct-Labor Rate VariancexxxCost of Goods SoldDirect-Labor Efficiency Variance

Direct-Material Price VariancexxxUnfavorableFavorableUnfavorableFavorable

Direct-Material Quantity Variancexxxvariancevariancevariancevariance

Disposition of Variances

Sheet2

Normal Costing

Manufacturing OverheadWork-in-Process Inventory

ActualAppliedApplied

overheadoverhead:overhead:

Actual hoursActual hours

xx

PredeterminedPredetermined

overhead rateoverhead rate

Difference lies in the quantity of hours used.Standard Costing

Manufacturing OverheadWork-in-Process Inventory

ActualAppliedApplied

overheadoverhead:overhead:

StandardStandard

allowed hoursallowed hours

xx

PredeterminedPredetermined

overhead rateoverhead rate

Sheet3

BudgetedPlannedPredetermined

OverheadMonthly ActivityOverhead Rate

Variable . . . . . . .$60,000* . . . . . . . . .8,000machine hours. . . . . . . . .$7.50per process hour

Fixed . . . . . . . . .14,000* . . . . . . . . .8,000machine hours. . . . . . . . .1.75per process hour

Total . . . . . . . . .$74,000. . . . . . . . .8,000machine hours. . . . . . . . .$9.25per process hour

* From the flexible budget for planned activity of 8,000 machine hours

Sheet1

Variable costs:

Indirect material:

Wax

Plastic wrap

Paper products

Misc. supplies

Indirect labor:

Maintenance

Janitorial

Utilities:

Electricity

Natural gas

Water

Total variable cost

Fixed costs:

Indirect labor:

Inspection

Production supervisor

Set up

Depreciation:

Equipment

Insurance

Property taxes

Total fixed cost

Total overhead cost

Sheet4

Normal Costing

Manufacturing OverheadWork-in-Process Inventory

ActualAppliedApplied

overheadoverhead:overhead:

Actual hoursActual hours

xx

PredeterminedPredetermined

overhead rateoverhead rate

Standard Costing

Manufacturing OverheadWork-in-Process Inventory

ActualAppliedApplied

overheadoverhead:overhead:

StandardStandard

allowed hoursallowed hours

xx

PredeterminedPredetermined

overhead rateoverhead rate

Disposition of Variances

Manufacturing OverheadCost of Goods Sold

ActualAppliedBalance (1)Balance (2)

overheadoverhead:ActualApplied

Standardoverheadoverhead

allowed hoursgreater thangreater than

xAppliedActual

Predeterminedoverheadoverhead

overhead rate

Balance (1)Balance (2)

Balance (2)Balance (1)

Sheet5

Flexible Budget*Actual Results*Variance

FebruaryYear to DateFebruaryYear to DateFebruaryYear to Date

Company . . . . . . . . . . . . . . . . . . . . . .$30,660$64,567$30,716$64,570$56 F$ 3 F

Maui Division . . . . . . . . . . . . . . . . . .$18,400$38,620$18,470$38,630$70 F$10 F

Oahu Division . . . . . . . . . . . . . . . . . .$12,260$25,947$12,246$25,94014 U7 U

Total profit . . . . . . . . . . . . . . . . . . . .$30,660$64,567$30,716$64,570$56 F$ 3 F

Oahu Division

Waimea Beach Resort . . . . . . . . . . .$6,050$12,700$6,060$12,740$10 F$40 F

Diamond Head Lodge. . . . . . . . . . .$2,100$4,500$2,050$4,43050 U70 U

Waikiki Sands Hotel . . . . . . . . . . . . .$4,110$8,747$4,136$8,77026 F23 F

Total profit . . . . . . . . . . . . . . . . . . . .$12,260$25,947$12,246$25,940$14 U$ 7 U

Waikiki Sands Hotel

Grounds and Maintenance . . . . . . . .($45)($90)($44)($90)$ 1 F

Housekeeping and Custodial . . . . . .$(40)$(90)$(41)$(90)1 U

Recreational Services . . . . . . . . . . . .$40$85$41$881 F$ 3 F

Hospitality . . . . . . . . . . . . . . . . . . . .$2,800$6,000$2,840$6,03040 F30 F

Food and Beverage . . . . . . . . . . . . .$1,355$2,842$1,340$2,83215 F10 U

Total profit . . . . . . . . . . . . . . . . . . . .$4,110$8,747$4,136$8,770$26 F$23 F

Food and Beverage Department

Banquets and Catering . . . . . . . . . . .$600$1,260$605$1,265$ 5 F$ 5 F

Restaurants . . . . . . . . . . . . . . . . . . .$1,785$3,750$1,760$3,74025 U10 U

Kitchen. . . . . . . . . . . . . . . . . . . . . . .$(1,030)$(2,168)$(1,025)$(2,173)5 F5 U

Total profit . . . . . . . . . . . . . . . . . . . .$1,355$2,842$1,340$2,832$15 U$10 U

Kitchen

Kitchen staff wages . . . . . . . . . . . . .($80)($168)($78)($169)$ 2 F$ 1 U

Food . . . . . . . . . . . . . . . . . . . . . . . .$(675)$(1,420)$(678)$(1,421)3 U1 U

Paper products. . . . . . . . . . . . . . . . .$(120)$(250)$(115)$(248)5 F2 F

Variable overhead. . . . . . . . . . . . . . .$(70)$(150)$(71)$(154)1 U4 U

Fixed overhead. . . . . . . . . . . . . . . . .$(85)$(180)$(83)$(181)2 F1 U

Total expense . . . . . . . . . . . . . . . . . .($1,030)($2,168)($1,025)($2,173)$ 5 F$ 5 U

*Numbers without parentheses denote profit; numbers with parentheses denote expenses; numbers in thousands.

F denotes favorable variance; U denotes unfavorable variance.

Cost AllocationThe process of assigning the costs in the cost pool to the cost objects is called cost allocation or cost distribution.

Cost Allocation BasesAn allocation base is a measure of activity, physical characteristic, or economic characteristic that is associated with the responsibility centers, which are the cost objects in the allocation process.

Behavioral Effects of Responsibility Accounting

Segmented ReportingSegmented reporting refers to the preparation of accounting reports by segment and for the organization as a whole.A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data.

Segmented ReportingDivisionsUnitsAloha Hotels and ResortsOahu DivisionMaui DivisionWaikiki Sands HotelDiamond Head LodgeWaimea Beach Resort

Segmented Reporting

THANK U!

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