9

Responsibility
Accounting

9-1
 Objectives
Objectives
 Define goal congruence and explain its
After
After
relationship to reading
and this
reading
control this
performance
evaluation. chapter,
chapter, you
you should
should
be
be able
able to:
to:
 Identify the types of responsibility centers
and explain the differences among them.
 Determine the positive and negative aspects
of specific criteria used for evaluating the
performance of responsibility centers.
9-2

Continued
Continued
 Objectives
Objectives
 Calculate contribution margin variances and
explain their significance.
 Describe the pros and cons of including cost
allocation in performance reports.
 Describe some approaches to allocating costs
to responsibility centers.
 Explain how cost allocations can create
ethical problems.
9-3
A major objective of
management control is
to encourage goal
congruence, which
means that as people
work to achieve their
own goals, they also
work to accomplish the
company’s goals. 9-4
 Responsibility
Responsibility Centers
Centers
A responsibility center is an activity, such
as a department, that a manager controls.
Types of Responsibility Centers
Cost centers
Revenue centers
Profit centers
Investment centers 9-5
 Responsibility
Responsibility Centers
Centers
A cost center is a segment whose manager is
responsible for costs, but not revenues. A
cost center can be relatively small.
Examples:
A manufacturing cell
The office of the chief executive
The legal department 9-6
 Responsibility
Responsibility Centers
Centers
A revenue center is a segment whose
manager is responsible for earning
revenues, but not for the costs of
generating revenues.
Examples:
Hospitals
Marketing departments
9-7
 Responsibility
Responsibility Centers
Centers
• A profit center is a segment whose manager is
responsible for revenues as well as costs.
• An investment center is a segment whose
manager is responsible not only for revenues and
costs, but also for the investment required to
generate profits.

9-8
 Transfer
Transfer Price
Price
A transfer price is the price that one
center charges another center within the
company.

9-9
Performance
Performance Evaluation
Evaluation
Criteria
Criteria
Selecting criteria to measure and evaluate
performance is important because the criteria
influence managers’ actions. The most common
deficiencies in performance measures are:
• using a single measure that emphasizes only
one objective of the organization; and
• using measures that either misrepresent or
fail to reflect the organization’s objectives or
the employee’s responsibilities.
9-10
 The
The Balanced
Balanced Scorecard
Scorecard
An approach known as the
balanced scorecard has become
popular recently. This approach
extends performance evaluation
from merely looking at financial
results to formally incorporating
measures that look at customer
satisfaction, internal business
processes, and the learning and
growth potential of the
organization. 9-11
The
The Balanced
Balanced Scorecard
Scorecard
The balanced scorecard asks four basic questions:
1. How do customers see us? (the customer
perspective)
2. What must we excel at? (the internal business
process perspective)
3. Can we continue to improve and create value?
(the learning and growth perspective)
4. How do we look to stockholders? (the financial
perspective)
9-12
 Responsibility Reports for Cost Centers
Current Month Year to Date
Over Over
Budget (Under) Budget (Under)
Report to Supervisor of Work
Station 106—Drill Press

Materials $ 3,200 $(80 ) $ 12,760 $ 110

Direct labor 14,200 170 87,300 880
Supervision 1,100 (50 ) 4,140 (78 )
Power, supplies, miscellaneous 910 24 3,420 92
Totals $19,410 $ 64 $107,620 $1,004
9-13
Report to Supervisor of
Fabrication Department
 Responsibility Reports for Cost Centers
Current Month Year to Date
Over Over
Budget (Under) Budget (Under)
Report to Supervisor of
Fabrication Department

Station 106—Drill Press $19,410 $ 64 $107,620 $1,004

Station 107—Grinding 17,832 122 98,430 (213 )
Station 108—Cutting 23,456 876 112,456 1,227
Total work stations $60,698 $1,062 $318,506 $2,018

Continued
Continued 9-14
 Responsibility Reports for Cost Centers
Current Month Year to Date
Over Over
Budget (Under) Budget (Under)
Report to Supervisor of
Fabrication Department

Departmental costs (common

to work stations):
General supervision $12,634 $ 0 $ 71,234 $ 0
Cleaning 6,125 324 32,415 762
Other 1,890 (67 ) 10,029 (108 )
Total $81,347 $1,319 $432,184 $2,672
9-15
Report to Manager of
Factory
 Responsibility Reports for Cost Centers
Report to Manager of Factory
Fabrication department
Milling department
Assembly department
Casting department
Total departments
Current Month Year to Date
Over Over
Budget (Under) Budget (Under)
$ 81,347 $1,319 $ 432,184 $2,672
91,234 (2,034 ) 405,190 (4,231 )
107,478 854 441,240 1,346
78,245 (433 ) 367,110 689
$358,304 $ (294 )$1,645,724 $ 476

Continued
Continued 9-16
 Responsibility Reports for Cost Centers
Current Month Year to Date
Over Over
Budget (Under) Budget (Under)
General factory costs
(common to departments):
Engineering $ 14,235 $261 $ 81,340 $842
Heat and light 8,435 178 46,221 890
Building depreciation 3,400 0 20,400 0
General administration 23,110 340 126,289 776
Total factory costs $407,484 $ 485 $1,919,974 $2,984

9-17
 Responsibility Reports for Profit Centers (000s)
Current Month Year to Date
Over Over
Budget (Under) Budget (Under)
Report to Product Manager—
Appliances, European Region
Sales $122.0 $ 1.5 $387.0 $ 3.2
Variable costs:
Production $ 47.5 $ 2.8 $150.7 $ 5.9
Selling and administrative 12.2 1.8 38.7 1.9
Total variable costs $ 59.7 $ 4.6 $189.4 $ 7.8
Contribution margin $ 62.3 $ (3.1 ) $197.6 $(4.6 )
Direct fixed costs 36.0 $ (1.2 ) 98.5 (3.1 )
Product margin $ 26.3 $ (1.9 ) $ 99.1 $ (1.5 )
9-18

To report to manage—European Region

 Responsibility Reports for Profit Centers (000s)
Current Month Year to Date
Over Over
Report to Manager— Budget (Under) Budget (Under)
European Region
Profit margins:
Appliances $26.3 $(1.9 ) $ 99.1 $(1.5 )
Industrial equipment 37.4 3.2 134.5 7.3
Tools 18.3 1.1 59.1 (2.0 )
Total product margins $82.0 $ 2.4 $292.7 $ 3.8
Regional expenses (common
to all product lines) 18.5 0.8 61.2 (1.3 )
Regional margin $63.5 $ 1.6 $231.5 $ 5.1
9-19
Report to Executive Vice President
 Responsibility Reports for Profit Centers (000s)
Current Month Year to Date
Over Over
Report to Executive Vice Budget (Under) Budget (Under)
President
Regional margins:
European $ 63.5 $ 1.6 $ 231.5 $ 5.1
Asian 78.1 (4.3 ) 289.4 (8.2 )
North American 211.8 (3.2 ) 612.4 (9.6 )
Total regional margins $353.4 $ (5.9 ) $1,133.3 $(12.7 )
Corporate expenses (common
to all regions) 87.1 1.4 268.5 3.1
Corporate profit $266.3 $ (7.3 ) $ 864.8 $(15.8 )
9-20
 Analyzing
Analyzing Contribution
Contribution
Margin
Margin Variance
Variance
Profit depends on several factors, including selling
prices, sales volumes, and costs. Budgeted and
actual profits rarely coincide because prices,
volume, and costs can (and do) vary from
expectations. To plan and to evaluate previous
decisions, managers need to know the sources of
variances.
9-21
 Contribution
Contribution Margin
Margin
Variance
Variance Example
Example
Horton Company expected to sell 20,000 units at $20
with unit variable costs of $12. Horton actually sold
21,000 units at $19.
Budgeted Actual Difference
Sales $400,000 $399,000 $(1,000)
Variable costs 240,000 252,000 (12,000)
Contribution margin $160,000 $147,000 $(13,000)
9-22
 Sales
Sales Volume
Volume Variance
Variance
The sales volume variance is the difference between
(1) the contribution margin the company would have
earned selling the budgeted number of units at the
budgeted unit contribution margin and (2) the
contribution margin it would have earned selling the
actual number of units at the budgeted unit
contribution margin.
Sales = budgeted contribution x (actual unit – budgeted unit)
volume variance margin per unit sales sales
$8,000 = $8 x (21,000 – 20,000) 9-23
 Sales
Sales Price
Price Variance
Variance
The sales price variance is the difference between (1) actual total
contribution margin and (2) total contribution margin that would
have been earned at the actual volume and budgeted unit
contribution margin.
Sale price variance = units sold x (actual price – budgeted
price)
$21,000 F = 21,000 x ($19 - $20)

9-24
 Cost
Cost Allocations
Allocations on
on
Responsibility
Responsibility Reports
Reports
Operating departments in manufacturers work directly on
products. Operating departments in a retail company serve
customers directly.
Service departments (service centers) provide services to
operating departments and to one another. Examples: human
resources, accounting, and building security.

9-25
 Arguments
Arguments Against
Against Allocating
Allocating
Indirect
Indirect Fixed
Fixed Costs
Costs
1. Because indirect fixed costs are not controllable
by the users, allocating them violates the
principle of controllability.
2. Including allocated costs on performance
reports could lead to poor decisions because
managers will treat the costs as differential.

9-26
Allocation
Allocation Methods Methods and and
Effects:
Effects: Allocating
Allocating Actual Actual
Costs
Costs BasedBased
on
on Actual Use
This method is flawedUse
Actual in two respects.
• It allocates actual costs rather than budgeted costs. Allocating
actual costs passes the inefficiencies (or efficiencies) of one
department to the next.
• It allocates fixed costs based on use.

9-27
Allocation Example
Raleigh Company has one service department, Maintenance, and two
operating departments, Fabrication and Assembly. Data for the departments
follow:
Operating Hours of Maintenance Service Used
Department: Budgeted Actual
Fabrication 20,000 20,000
Assembly 20,000 10,000
Total 40,000 30,000
Maintenance Department Costs for Year:
Budgeted Actual
Variable (budgeted, $5.00; actual, $5.10) $200,000 $153,000
Fixed 75,000 79,500
Totals $275,000 $232,500
9-28
 Allocation Example
Actual per-hour cost $232,500
of providing the service = = $7.75/hr.
30,000 hours

Allocations would be:

Fabrication (20,000 x $7.75) $155,000
Assembly (10,000 x $7.75) 77,500
Total maintenance costs allocated $232,500
9-29
Methods
Methods to
to Allocate
Allocate Service
Service
Department
Department Costs
Costs (Appendix)
(Appendix)
 Direct method
 Step method
 Reciprocal method

9-30
Direct Method
• Illustrated in the chapter material
• Direct method ignores services that service depts. Provide to
other service depts.

9-31
Step-Down Method
• Also called: step-down allocation or step method
• Recognizes that service depts. Provide services for other
service depts. As well as operating depts.
• Result: costs of all service depts., except first to be allocated,
will reflect their shares of the costs of some other service
depts.

9-32
Reciprocal Method
• Also called simultaneous method
• Recognizes the services that each service dept.
renders to other service depts.
• 1st – the percentages that each service dept.
receives from the other are decided upon.
• 2nd – adjusted costs are calculated – to recognize
that depts. Provide service to each other.
• Finally – these adjusted costs are allocated to the
operating depts. Using the percentages
computed. 9-33
Chapter 9

The
The End
End

9-34
9-35