Responsibility Accounting

• Responsibility center - a segment of organization engaged in the performance of a single function or a group of related functions and is usually governed by a single manager, who is accountable and responsible for the results of the segment.
• Types of responsibility centers:

  1. Cost center
  2. Revenue
  3. Profit
  4. Investment
• True or False

  Out of all the four responsibility centers, the profit center has the most responsibility.

  False. Investment center.
• Decentralization - refers to the separation or division of the organization into more manageable units wherein each unit is managed by an individual who is given decision authority and is held accountable for his decisions.
• True or False.

  One of the advantages of decentralization is goal congruence and duplication of efforts.

  False.
• Responsibility accounting - is a system of accounting that is implemented to an organization so that performance, in terms of costs and/or revenues, are recorded, reported and evaluated by levels of responsibility within an organization.
• S1: Controllable costs are those costs that may be directly regulated at lower levels of management

  S2: Controllable costs are costs that cannot be regulated at a particular management level other than the top level management

  Statement 2 is incorrect
• Controllability principle - states that managers should be held responsible only for what they can control.
• Segmented Income Statement

  Sales Rev

  Less: VC

  CM

  Less: Cont FC

  Cont Segment Mar

  Less: Uncont FC

  Segment Mar

  Less: Alloc costs

  Operating income
• Service cost allocation - there are instances when an organization has several operating departments and service departments
• Under service cost allocation, costs may be allocated thru:

  1. Direct method
  2. Step-down method
  3. Algebraic/Reciprocal/Simulatneous
• ROI = Net Operating Income/Average Invested Assets or Net Profit Margin* Asset TO
• Residual Income = Net Operating Income - Req. Income

  Req. Income = Average Invested Assets*Hurdle rate
• Economic value added - it measures the economic wealth that is created when a company's after tax net operating income exceeds its cost of capital
• EVA = Operating income after tax - ((TA-CL)*WACC))
• Sub-optimization - happens when one segment of a company takes action that is in its own best interest but is detrimental to the firm as a whole
• Transfer pricing - the amount charged by one segment of a firm for products or services that are supplied to another segment of the same firm
• Transfer pricing - Addtl outlay cost per unit + OC/u
• Basis of transfer pricing

  1. Cost-based

  • variable cost
  • full cost
  • cost plus some % mark-up

  1. Market-based

  • Market price
  • Modified market

  1. Negotiated price
• Max vs min transfer prices

  • Upper limit: Max TP = cost of buying from outside suppliers
  • Lower limit: Min TP = addtl outlay cost/u + lost cm/u
• True or False

  Transfer pricing should be based on actual costs and not standard costs.

  False.