Responsibility Accounting

PPT 14 -1
 Learning Objectives

Define responsibility accounting

and describe the four types of
responsibility centers

PPT 14 -2
 Responsibility Accounting
Responsibility accounting is a system that measures the
results of each responsibility center and compares those
results with some measure of expected or budgeted
outcome.
There are four major types of responsibility
centers:
Cost center
Revenue center
Profit center
Investment center PPT 14 -3
10-4

Responsibility Accounting

Cost Profit Investment

Center Center Center

Cost, profit,
and investment
centers are all
known as Responsibility
Center
responsibility
centers. PPT 14 -4
10-5

Cost Center

A segment whose manager has

control over costs, but not over
revenues or investment funds.

PPT 14 -5
10-6

Profit Center

Revenues
A segment whose
Sales
manager has control Interest
over both costs and Other
revenues, Costs
but no control over Mfg. costs
investment funds. Commissions
Salaries
Other
PPT 14 -6
10-7

Investment Center

Corporate Headquarters

A segment
whose manager
has control over
costs, revenues,
and investments
in operating
assets.

PPT 14 -7
10-8

Responsibility Centers

Investment
Centers Superior Foods Corporation
Corporate Headquarters
President and CEO

Operations Finance Legal Personnel

Vice President Chief FInancial Officer General Counsel Vice President

Salty Snacks Beverages Confections

Product Manger Product Manager Product Manager

Bottling Plant Warehouse Distribution

Cost
Manager Manager Manager
Centers
Superior Foods Corporation provides an example of the
various kinds of responsibility centers that exist in an
PPT 14 -8
organization.
10-9

Responsibility Centers
Superior Foods Corporation
Corporate Headquarters
President and CEO

Operations Finance Legal Personnel

Vice President Chief FInancial Officer General Counsel Vice President

Salty Snacks Beverages Confections

Product Manger Product Manager Product Manager

Bottling Plant Warehouse Distribution

Profit
Manager Manager Manager
Centers
Superior Foods Corporation provides an example of the
various kinds of responsibility centers that exist in an
PPT 14 -9
organization.
10-10

Responsibility Centers
Superior Foods Corporation
Corporate Headquarters
President and CEO

Operations Finance Legal Personnel

Vice President Chief FInancial Officer General Counsel Vice President

Salty Snacks Beverages Confections

Product Manger Product Manager Product Manager

Bottling Plant Warehouse Distribution

Cost
Manager Manager Manager
Centers
Superior Foods Corporation provides an example of the
various kinds of responsibility centers that exist in an
PPT 14 -10
organization.
 Management Hubs
Profit Centers.

Subunit that has responsibility for

generating revenue as well as for controlling
costs.
Cost Centers.

Subunit that has responsibility for

controlling costs but does not sell product.
i.e. service departments.
PPT 14 -11
 Profit Center
Organize business into subunits, profit
center & cost centers.
Track variable costs to profit centers.

Control escalators
Allocate asset use to subunits.

Evaluate on contribution margin and

amount of capital invested.
PPT 14 -12
 Word List

Cost Behavior Mixed Costs.

Variable Costs. Semi-variable costs

change in total with
Variable Costs per
changes in
unit are constant.
production level,
Fixed Costs. but not
proportionately.
Fixed costs per unit
vary with
production level.
PPT 14 -13
 Terms to Recognize

Cost volume profit Contribution Margin

analysis
Sales -- Variable Costs
Profit = Sales (S)
Contribution Margin
Variable Costs (VC)
Ratio
Fixed Costs (FC)
(Sales Variable
Costs) Sales

PPT 14 -14
Cost-Volume-Profit Diagnostics

PPT 14 -15
 Breakevent Point

Sales (in dollars) = Fixed Costs / Contribution

margin ratio
Sales (units) = Fixed Costs / Contribution
margin per unit

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 Cost or
Revenue
($)

Quantity Produced

Break-Even Diagram

PPT 14 -17
 Break Even Quantity
Break Even Quantity
Profit / Loss
Corridor

Variable
Cost or Costs
Revenue
($)
Fixed Cost Fixed Cost

Quantity Produced

Break-Even Diagram

PPT 14 -18
 Break-Even Diagram
Increased Fixed Costs

Break Even Quantity

Break Even Quantity
Profit / Loss
Corridor

Variable
Costs
Cost or
Revenue
($)
Fixed Cost

Quantity Produced

PPT 14 -19
 Vocabulary
Differential costs and Opportunity Costs.
revenue
The benefit given
The additional cost up by selecting one
or revenue incurred alternative over
when one alternative another. i.e. Interest
is chosen over on stored grain.
another.
Sunk cost.

Costs that are

already incurred & PPT 14 -20
not reversible.
 Responsibility Accounting Model

The responsibility accounting model is defined

by four essential elements:
assigning responsibility
establishing performance measures or
benchmarks
evaluating performance
assigning rewards
PPT 14 -21
 Types of Responsibility Accounting

Management accounting offers the following

three types of responsibility accounting
systems.
Functional-based
Activity-based
Strategic-based

PPT 14 -22
 Functional-Based
Responsibility Accounting System
A functional-based responsibility accounting
system assigns responsibility to organizational
units and expresses performance measures in
financial terms.
It is the responsibility accounting system
that was developed when most firms were
operating in relatively stable
environments.
PPT 14 -23
 Elements of a Functional-Based
Responsibility Accounting System
Individual Organizational
in Charge Unit
Responsibility
is Defined
Operating Financial
Efficiency Outcomes

Unit Standard
Budgets Performance Measures Costing
are Established
Currently
Static Attainable
Standards Standards
PPT 14 -24
 Elements of a Functional-Based
Responsibility Accounting System
Financial Controllable
Efficiency Costs
Performance
is Measured
Actual versus Financial
Standard Measures

Promotions Bonuses
Individuals are Rewarded
Based on
Financial Performance
Profit Salary
Sharing Increases
PPT 14 -25
 Activity-Based
Responsibility Accounting System

An activity-based responsibility accounting

system assigns responsibility to processes and
uses both financial and nonfinancial measures
of performance.
It is the responsibility accounting system
developed for those firms operating in
continuous improvement environments.
PPT 14 -26
 Elements of an Activity-Based
Responsibility Accounting System
Team Process

Responsibility
is Defined
Value Financial
Chain

Optimal Dynamic
Performance Measures
are Established

Process- Value-
Oriented Added
PPT 14 -27
 Elements of an Activity-Based
Responsibility Accounting System
Time Quality
Reductions Improvement
Performance
is Measured
Cost Trend
Reductions Measures

Promotions Bonuses
Individuals are Rewarded
Based on Multidimensional
Performance
Gain- Salary
sharing Increases
PPT 14 -28
 Strategic-Based
Responsibility Accounting System
A strategic-based responsibility accounting system
(Balanced Scorecard) translates the mission and
strategy of an organization into operational
objectives and measures for four different
perspectives:
The financial perspective
The customer perspective
The process perspective
The infrastructure (learning and growth)
perspective PPT 14 -29
 Strategy

Strategy specifies how an organization matches its

own capabilities with the opportunities in the
marketplace to accomplish its objectives
A thorough understanding of the industry is critical
to implementing a successful strategy

PPT 14 -30
 Elements of a Strategic-Based
Responsibility Accounting System
Financial Customer

Responsibility
is Defined
Process Infrastructure

Communicate Balanced
Strategy Performance Measures Measures
are Established

Alignment of Link to
Objectives Strategy
PPT 14 -31
 Elements of a Strategic-Based
Responsibility Accounting System
Financial Customer
Measures Measures
Performance
is Measured
Process Infrastructure
Measures Measures

Promotions Bonuses
Individuals are Rewarded
Based on Multidimensional
Performance
Gain- Salary
sharing Increases
PPT 14 -32
End of Week

PPT 14 -33