RESPONSIBILITY ACCOUNTING

Next class: Chapter 18 p. 767-781

Goal Congruence

Goal congruence results when the managers of subunits throughout an organization have a common set of objectives.

Behavioral congruence is when an individual behaves in the best interests of the organization regardless of his or her own goals.

Responsibility accounting refers to the various concepts and tools used to measure performance of people and departments and/or to foster goal or behavioral congruence.

Decentralization in Organizations

Benefits ofDecentralization Top management

freed to concentrateon strategy.

Top managementfreed to concentrate

on strategy.Lower-level managers

gain experience indecision-making.

Lower-level managersgain experience indecision-making. Decision-making

authority leads tojob satisfaction.

Decision-makingauthority leads tojob satisfaction.

Lower-level decisionoften based on

better information.

Lower-level decisionoften based on

better information.Lower level managers can respond quickly

to customers.

Lower level managers can respond quickly

to customers.

Decentralization in Organizations

Disadvantages ofDecentralization

Lower-level managersmay make decisionswithout seeing the

“big picture.”

Lower-level managersmay make decisionswithout seeing the

“big picture.”

May be a lack ofcoordination among

autonomousmanagers.

May be a lack ofcoordination among

autonomousmanagers.

Lower-level manager’sobjectives may not

be those of theorganization.

Lower-level manager’sobjectives may not

be those of theorganization.

May be difficult tospread innovative ideas

in the organization.

May be difficult tospread innovative ideas

in the organization.

Responsibility Centers

Responsibility center a set of activities assigned to a manager, a group

of managers or a group of employees Responsibility accounting

identifying what parts of the organization have primary responsibility for each objective, development of measures of achievement and objective

When organizations use a single index to provide a broad assessment of operations, they frequently use a financial number because it is a measure that describes the primary objectives of shareowners in profit-seeking organizations

Types (classified by financial responsibility) Cost, Expense, Revenue, Profit, Investment

Responsibility Centers

A responsibility center is an organizational unit for which a manager is made responsible

The manager and supervisor establish goals for their responsibility center Be specific and measurable so as to provide employees

with focus Promote the long-term interests of the larger organization Promote the coordination of each responsibility center’s

activities with the efforts of all the others

Responsibility Center Types

Underlying the accounting classifications of responsibility centers is the concept of controllability: the manager of a responsibility center should be held responsible only for the revenues, costs, or investment that responsibility center personnel control

Five types: Cost centre Discretionary Cost centre Revenue centre Profit centre Investment centre

1. Cost Center

A responsibility center in which employees control costs but do not control revenues or investment level

Organizations evaluate the performance of cost center employees by comparing the center’s actual costs with target or standard cost levels for the amount and type of work done

If management evaluates cost center performance only on the center’s ability to control costs, its members may ignore unmeasured attributes of performance

2. Discretionary Cost Centre

A responsibility for costs when the input-output relationship is not well specified

Managers typically are evaluated on bases other than costs however there usually penalties for exceeding the budget

3. Revenue Center

A responsibility center whose members control revenues but control neither the manufacturing or acquisition cost of the product or service they sell nor the level of investment made in the responsibility center

Some revenue centers control price, the mix of stock carried, and promotional activities

In general, focusing only on revenues causes organization members to increase the use of activities that create costs in order to promote higher revenue levels

4. Profit Center

A responsibility center where managers and other employees control both the revenues and the costs of the product or service they deliver

A profit center is like an independent business, except that senior management, not the responsibility center manager, controls the level of investment in the responsibility center

Most units of chain operations are treated as profit centers

5. Investment Center

A responsibility center in which the manager and other employees control revenues, costs, and the level of investment in the responsibility center

Responsibility and Behavior

Does it provide information or place blame? – focus is information not blame

Is there really cost or revenue controllability? – report recognize certain results that are beyond his or her control

How can desired behavior be motivated? – motivate actions that are considered desirable.

Charley’s Family Steak House: Variance Analysis

Charley's Family Steak HouseOperating Profit Statement

Actual Flexible Variance1994 1994 1994

Gross Sales 1,936,025 1,936,025 0Net Sales (net coupons) 1,726,725 1,831,938 -105,213 UFood 1,025,870 1,064,811 -38,941 FLabour 207,000 228,763 -21,763 FExpenses 152,450 154,883 -2,433 F Contribution 341,405 383,480 -42,075 Advertising 78,625 65,165 13,460 UMiscellaneous 3,320 3,000 320 UDepreciation 24,000 24,000 0Insurance 9,780 9,400 380 UTaxes and licenses 10,940 11,700 -760 FRent (Base) 72,000 72,000 0Rent (Overage) 26,980 23,275 3,705 UManagement 98,000 95,000 3,000 U Operating Profit 17,760 79,940 -62,180