Responsibility Accounting Responsibility center managers are evaluated as follows:

☛RESPONSIBILITY ACCOUNTING Center managers Evaluation models

➢ a system of accounting in which costs are assigned to various managerial
levels according to where control of the costs is deemed rest, with Cost center manager Costs variance analysis
managers being held responsible for the difference between actual and
Revenue center Revenue variance analysis
budgeted results.
manager
☛Responsibility center Profit center manager Segment margin analysis
➢ A clearly identified part or segment of an organization that is for a
specified function or set of activities. Investment center Return on investment (ROI), Residual income model,
➢ Any part of the organization whose manager has control over cost, manager Economic value added, Equity spread, Total
revenue, or investment funds. shareholders return, and the Market value added.

TYPES OF RESPONSIBILITY CENTERS

☛Segment margin is determined as follows:
1. Cost Center (or expense center) Contribution margin Pax
➢ A segment of an organization in which managers are held responsible for Less: Avoidable fixed costs and expenses xx
the costs or expenses incurred in the segment. Segment margin xx
2. Revenue Center Less: Unavoidable fixed costs and expenses xx
➢ Where management is responsible primarily for revenues. Profit xx
3. Profit Center Segment margin is the same as segment income or segment profit
➢ A segment of the organization in which the manager is held responsible for a. Return on Investment (ROI) model
both revenues and costs, ➢ It is sometimes refer to as return on assets (ROA). It is computed as
4. Investment Center follows:
➢ A segment of the organization where the manager controls revenues,
costs, and investments. The center’s performance is measured in terms of ROI= Segment income/ Investment
the use of the assets as well as the revenues earned and the costs
incurred. Three advantages of using ROI to evaluate the performance of investment
centers:
☛CENTRALIZATION 1. It encourages managers to pay careful attention to the relationship among sales,
➢ Happens when decisions rests exclusively to top management. expenses, and investment, as should be the case for a manager of an investment
☛DECENTRALIZATION center.
➢ The power to make decision is entrusted to operating managers; this is the 2. It encourages cost efficiency.
model used in designing and managing autonomous responsibility centers. 3. It discourages excessive
☛PERFORMANCE EVALUATION Two disadvantage of using ROI are:
➢ Is done within the concept of controllability (or authority). 1. It discourages managers from investing in projects that would decrease the
☛CONTROLLABILITY divisional ROI but would increase the profitability of the company as a whole.
➢ Refers to the power of the manager to decide or influence the incurrence (Generally, projects with an ROI less than a division’s current ROI would be
or non-incurrence of an item. The span of authority given to a manager rejected.)
defines the items that he has control with. The concept of controllability is 2. It can encourage myopic behavior, in that managers may focus on the short run
extremely important in measuring manager’s performance. at the expense of the long run.
 Equity spread xx
☛ROI Du Pont Analysis **Return on equity= profit/ average shareholders’ equity

ROI= (Segment income/ Sales) x (Sales/ investment) or Return on Sales x Assets e. Total shareholders’ return
turnover = change in the Stock Price + dividend per share
ROI is expressed on percentage and has an inherent limitation of disregarding the Initial stock price
peso value performance of a business segment and its manager.
f. Market Value Added
b. Residual Income Model
Market value of equity
Residual income is computed as follows: (Shares outstanding x market price) xx
Segment income P xx Less: equity supplied by shareholders xx
Less: Minimum income** xx Market Value Added xx
Residual income xx
** Minimum income= investment x imputed income rate
Sometimes, the imputed rate is the cost of capital
If the residual income is positive, the performance is above standard and, is
therefore, favorable.
Residual income is considered superior than the ROI because it is determined in
peso, not in rate.

c. Economic Value added (EVA)

➢ After-tax version of the residual income model.
-

➢ Measures the marginal benefit obtained by using resources in relation to

the business of increasing shareholder value.

Operating profit after tax P xx (PBIT x ATR)

Less: MRLTE*
(TACL*) x WACOC xx
Economic Value Added xx

*TACL= Total assets – Current Liability

*MRLTE = Minimum return on long-term equity
(Where: PBIT = profit before interest and tax and WACOC = weighted average cost
of capital)

d. Equity Spread
➢ It measures managerial performance regarding creation of shareholder
value. It is computed as follows:

Shareholders’ equity-beginning P xx
X (Return on equity** – Cost of equity rate) xx%