15-1 15-2

Chapter
Learning Objective
RESPONSIBILITY 15
ACCOUNTING AND To distinguish among cost
TRANSFER PRICING centers, profit centers,
and investment centers.
centers

LO1
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15-3 15-4
The Need for Information About
Responsibility Centers Responsibility Center Performance

Large complex The accounting system provides information

businesses are about resources used and outputs achieved
achieved.
divided into
responsibility This information is used to:
centers enabling  Plan and allocate resources.
managers to have  Control operations.
a smaller effective  Evaluate the performance
span of control. g
of center managers.

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 15-5 15-6
Cost Centers, Profit Centers, and Cost Centers, Profit Centers, and
Investments Centers Investments Centers

Cost Center Profit Center Revenues

A business section A partt off the
th business
b i Sales
that has control over that has control over Interest
Other
th incurrence
the i off both costs and Costs
costs, but no control revenues,, but no Mfg. costs
over revenues or control over Commissions
Salaries
investment funds. investment funds
funds. Other

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15-7 15-8
Cost Centers, Profit Centers, and Cost Centers, Profit Centers, and
Investments Centers Investments Centers

Evaluation Measures
Investment Center Cost control
Costt
C
A profit center where Quantity and quality
Center
management also of services
makes capital
Profit
i
investment
t t P fit bilit
Profitability
Center
decisions.
Corporate Headquarters
Investment Return on assets (ROA)
Center Residual income (RI)
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 15-9 15-10

Learning Objective Responsibility Accounting Systems

An accounting system that

To explain the need for provides information . . .
responsibility center information
and describe a responsibility
responsibilit
Relating to the To evaluate
accounting system.
responsibilities of managers on
i di id l managers.
individual controllable
t ll bl items.
it

LO2
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15-11 15-12

Responsibility Accounting Systems Successful implementation

p of responsibility
p y
accounting may use organization charts with
clear lines of authority
y and clearlyy defined
levels of responsibility.

Board of Directors
 Prepare budgets for  Measure performance of
each responsibility center. each responsibility center. President

Vice President Vice President Vice President

of Finance of Operations of Marketing

Store Manager
 Prepare timely performance reports
comparing actual amounts with budgeted amounts. Department Manager
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 15-13 15-14

Responsibility Accounting Systems Responsibility Accounting Systems

Amount of detail varies according Amount of detail varies according

g
to level in organization. g
to level in organization.
Management by exception:
U
Upper-level
l l managementt
does not receive operating
detail unless problems arise.
arise

A department manager A store manager receives The vice president of operations

receives detailed summarized information receives summarized information
reports. from each department. from each store.
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15-15 15-16

Responsibility Accounting Systems Learning Objective

To be of maximum benefit
benefit, responsibility
reports should . . .
 Be timely. To prepare an income
statement showing
 Be issued regularly
regularly. contribution margin and
 Be understandable. responsibility margin.
 Compare budgeted
and actual amounts.

LO3
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 15-17 15-18
Assigning Revenue and Costs to Assigning Revenue and Costs to
Business Centers Business Centers

Revenue
Re en e is easil
easily and Two guidelines should be followed in
automatically
auto at ca y ass
assigned
g ed to allocating costs to the various parts
specific departments using point of a business . . .
off sale
l entries
t i from
f cash
h According to cost behavior patterns:
registers. Fixed or variable
variable.
According to whether the costs
Service are directly
di tl ttraceable
bl tto th
the
Department
centers involved.

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15-19 15-20

Profit Center Reporting Profit Center Reporting

Webber, Inc. has two divisions. Incom e Sta te m e nt

Contribution Ma rgin Form a t
W bb
Webber, Inc.
I Te le vision Division Cost of goods
Sa le s $ 300,000 sold consists of
Va ria ble COGS $ 120,000 variable
Othe r va ria ble costs 30,000 manufacturing
Computer Division Television Division
Tota l va ria ble costs $ 150,000 costs.
Contribution m a rgin $ 150,000
T ce a ble
Tra bl fix
fi e d costs
t 90 000
90,000
Let’s look more closely at the Television Re sponsibility m a rgin $ 60,000
Division’s income statement.

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 15-21 15-22

Profit Center Reporting Profit Center Reporting

Incom e Sta te m e nt Incom e Sta te m e nt

Contribution Ma rgin Form a t Contribution Ma rgin Form a t
Te le vision Division Te le vision Division
Sa le s $ 300,000 Sa le s $ 300,000
Responsibility margin
Va ria ble COGS $ 120,000 Fixed and Va ria ble COGS $ 120,000
is the Television
Othe r va ria ble costs 30,000 variable costs Othe r va ria ble costs 30,000
Division’s
Division s contribution
Tota l va ria ble costs $ 150,000 are listed in Tota l va ria ble costs $ 150,000
to overall operations.
Contribution m a rgin $ 150,000 separate Contribution m a rgin $ 150,000
T ce a ble
Tra bl fix
fi e d costs
t 90 000
90,000 sections.
ti T ce a ble
Tra bl fix
fi e d costs
t 90 000
90,000
Re sponsibility m a rgin $ 60,000 Re sponsibility m a rgin $ 60,000

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Learning Objective Traceable Fixed Costs

Traceable fixed costs would disappear over

pp
time if the center itself disappeared.
To distinguish between
traceable and No computer No computer
common fixed costs. division means . . . division manager.

LO4
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 15-25 15-26

Common Fixed Costs Profit Center Reporting

Common fixed costs arise because of
overall operation of the company and are not
due to the existence off a particular center.
No computer We still have a
division means . . . company president.
Let’s see how the Television
Division fits into Webber, Inc.

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15-27 15-28
Traceable Costs Can Become
Profit Center Reporting Common Costs
Incom e Sta te m e nt
Com pa ny Te le vision Com pute r Fixed costs that are traceable on
Sa le s $ 500,000 $ 300,000 $ 200,000
Va ria ble costs (230,000) (150,000) (80,000) one level can become common if
CM $ 270,000 $ 150,000 $ 120,000
Tra ce a ble FC (170 000)
(170,000) (90 000)
(90,000) (80 000)
(80,000)
the business is divided into smaller
Re sponsibility m a rgin $ 100,000 $ 60,000 $ 40,000 parts.
Com m on costs ( ,
(25,000))
Ne t incom e $ 75,000
Let’s
Let s see how this works!

Common costs arise because of overall

operating activities and are not due to the
existence of a particular division.
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 15-29 15-30

Profit Center Reporting Profit Center Reporting

Income Statement
S Income Statement
S
Television Television
Division Color HDTV Division Color HDTV
Sales $ 300,000 $ 200,000 $ 100,000 Sales $ 300,000 $ 200,000 $ 100,000
Variable costs (150,000) (95,000) (55,000) Variable costs (150,000) (95,000) (55,000)
CM $ 150,000
150 000 $ 105,000
105 000 $ 45,000
45 000 CM $ 150,000
150 000 $ 105,000
105 000 $ 45,000
45 000
Traceable FC (80,000) (45,000) (35,000) Traceable FC (80,000) (45,000) (35,000)
Responsibility margin $ 70,000 $ 60,000 $ 10,000 Responsibility margin $ 70,000 $ 60,000 $ 10,000
Common costs (10,000) Common costs 10,000
Net income $ 60,000 Net income $ 60,000
$ 45,000
, To Color
35,000 To HDTV
$90,000 cost directly traced 10,000 Common
to the Television Division. $ 90,000 TV Division
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Learning Objective Responsibility Margin

Responsibility margin is the best gauge of the
long-run profitability of a business center.
To explain the usefulness of
the contribution margin
and responsibility margin
in making short-term

Proffits
and long-term
long term decisions.

LO5 Time
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 15-33 15-34
When is a Business When is a Business
Center Unprofitable? Center Unprofitable?
Hom e Applia
pp nce Com pa p nyy Hom e Applia
pp nce Com pa p nyy
Incom e Sta te m e nt Incom e Sta te m e nt
La undry La undry
Division W a she rs Drye rs Division W a she rs Drye rs
Sa le s $ 300,000 $ 200,000 $ 100,000 Sa le s $ 300,000 $ 200,000 $ 100,000
Va ria ble costs (150,000) (95,000) (55,000) Va ria ble costs (150,000) (95,000) (55,000)
CM $ 150,000 $ 105,000 $ 45,000 CM $ 150,000 $ 105,000 $ 45,000
Tra ce a ble FC (95,000) (45,000) (50,000) Tra ce a ble FC (95,000) (45,000) (50,000)
Re sponsibility m a rgin $ 55,000 $ 60,000 $ (5,000) Re sponsibility m a rgin $ 55,000 $ 60,000 $ (5,000)
Com m on costs (10,000) Com m on costs (10,000)
Ne t incom e $ 45,000 Ne t incom e $ 45,000

The Dryer Division is unprofitable because While contribution margin is used for short-run decisions,
th responsibility
the ibilit margin
i is
i negative.
ti responsibility
ibili margin
i iis used
d ffor llong-run decisions?
d i i ? Sh
Should
ld the
h DDryer
Division be discontinued because the responsibility margin is negative?
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15-35 15-36
Evaluating Business Arguments Against Allocating
Center Managers Common Fixed Costs

Common fixed costs would not change

Managers should be evaluated on the portion even if a business center were eliminated.
off responsibility
ibilit margin
i th
they control.
t l
Common fixed costs are not under the
direct control of the center’s
center s managers
managers.
Common fixed costs can not be traced to the
Allocation of common fixed costs may
Dryer Division or the Washer Division
Division, so they
are excluded from the responsibility margin. imply changes in profitability that are
unrelated to the center’s
center s performance.

The key issue is controllability

controllability.
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 15-37 15-38
Nonfinancial Objectives
and Information End of Chapter 15

Product Quality Personnel

Number of defective parts Number of sick days taken
Number of customer returns Employee turnover
Number of customer complaints Number of grievances filed

Marketing Efficiency and Capacity

Number of new customers
Number of sales calls initiated
Market share
Number of product stockouts
Cycle time (manufacturing)
Occupancy rates (hotels)
Passenger miles (airlines)
Patient days (hospitals)
Transactions processed (banks)

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