Responsibility Accounting

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CHAPTER 9

• Responsibility Accounting

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Learning Objective
To describe the concept ofdecentralization
LO1
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Responsibility Accounting
An accounting system thatprovides information .
. .
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Decentralization
Improves qualityof decisions.
Improvesproductivity.
Developslower-levelmanagers.
Improvesperformanceevaluation.
Encourages upper-level management toconcentrate
on strategic decisions.
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Decentralization
Decentralizationoften occurs asorganizationscon
tinue to grow.
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Learning Objective
To describe the differences among cost, profit,
and investment centers
LO2
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Organization Chart
ResponsibilityLevel
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Corporate headquarters Panther Holding Company
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Lumber manufacturing division
Homebuildingdivision
Furniture manufacturingdivision
3
Wilson Carpet Company
Selma Sopha Corporation
Tables Incorporated
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Sales department
Production department
Planning department
Accounting department
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Cutting department
Finishing department
Assembly department
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Learning Objective
To prepare and use responsibility reports
LO3
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Responsibility Reports

• Prepare budgets for each responsibility center.

• Measure performance ofeach responsibility
  center.

• Prepare timely performance reportscomparing
  actual amounts with budgeted amounts.

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Responsibility Reports
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Responsibility Reports
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Responsibility Reports
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Responsibility Reports
Panther Income Statement (Contribution Margin
Format)
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Learning Objective
To relate management by exception to
responsibility reports
LO4
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Management by Exception
Amount of detail varies according to level in an
organization.
Departmentmanager receives detailed reports.
Store manager receives summarized information
from each department.
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Management by Exception
Amount of detail varies according to level in an
organization.
Management by exception Upper-level management
does not receive operating detail unless problems
arise.
The vice president of operations receives
summarized information from each unit.
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Controllability Concept
Managers shouldonly be evaluated onrevenues or
coststhey control.
Since the exercise of control may be
clouded,managers are usually held responsible
for itemsover which they have predominant
ratherthan absolute control.
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Qualitative Reporting Features

• To be of maximum benefit, responsibility
  reports should . . .
• Be timely
• Be issued regularly
• Be understandable
• Compare budgetedand actual amountsof
  controllable items

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Managerial Performance Measurement
Evaluation Measures
Cost Center
Profit Center
Investment Center
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Learning Objective
To evaluate investment opportunities using return
on investment
LO5
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Return on Investment

• Return on investment is the ratio of income
  to the investment used to generate the income.

ROI
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Return on Investment
Panther Holding Company provides the following
information for the companys second level
investment centers.
Lets calculate ROI
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Return on Investment
60,000300,000
LumberManufacturing

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Home Building
46,080256,000

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Furniture Manufacturing
81,940482,000

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Measuring Operating Assets
Using the book value of operating assets to
calculate ROI will result in a higher ROI.
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Learning Objective
To identify factors that affect return on
investment
LO6
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Factors Affecting ROI
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Factors Affecting ROI

• The Lumber Manufacturing Division reported the
  following information
• Operating Income 60,000
• Sales 600,000
• Operating Assets 300,000

Lets calculate ROI usingthe expanded equation.
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Factors Affecting ROI
ROI .10 2 20
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Factors Affecting ROI
? Reduce Expenses
? Reduce Operating Assets
? Increase Sales

• Three ways to improve ROI

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Factors Affecting ROI

• The Lumber Manufacturing Division was able to
  increase sales to 660,000 which increased
  operating income to 79,200.
• There was no change in operating assets.

Lets calculate the new ROI.
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Factors Affecting ROI
ROI .12 2.2 26.4
The divisions ROI increased from 20 to 26.4.
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ROI - A Major Drawback

• As division manager in Lumber Manufacturing,your
  compensation package includesa salary plus bonus
  based on your divisionsROI -- the higher your
  ROI, the bigger your bonus.
• The company requires an ROI of 20 on all new
  investments -- your division has been producing
  an ROI of 30.
• You have an opportunity to invest in a new
  project that will produce an ROI of 25.

As division manager would you invest in this
project?
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ROI - A Major Drawback
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Learning Objective
To evaluate investment opportunities using
residual income
LO7
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Residual Income
Operating Income Investment charge
Residual income
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Residual Income

• The Lumber Manufacturing Division currently earns
  60,000 of operating income with the 300,000 of
  operating assets it controls.
• Panther has a 18 desired ROI.

Lets calculate residual income.
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Residual Income
Operating assets 300,000 Desired ROI
18 Desired income
54,000
Panthers desiredreturn on investment.
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Residual Income
Residual income encourages managers to make
profitable investments that would be rejected by
managers using ROI.
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Responsibility Accounting and the Balanced
Scorecard
The balanced scorecard is a holisticapproach to
evaluating managers.
BalancedScorecard
Multiple financialmeasures
Multiple non-financialmeasures
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End of Chapter 9