Professional Documents
Culture Documents
System in which a cost is charged to the lowest level of management that has responsibility for it.
An accounting system that collects, summarizes, and reports accounting data relating to the responsibilities of individual managers. An accounting system which tracks and reports costs, expenses, revenues, and operational statistics by area of responsibility or organizational unit.
the system provides information to evaluate each manager on revenue and expense items over which that manager has primary control (authority to influence). some reports contain only those items that are controllable by the responsibility manager. some reports contain both controllable and uncontrollable items in this case, controllable and uncontrollable]e items should be clearly separated.
the identification of controllable items is a fundamental task in responsibility accounting and reporting system which tracks and reports costs, expenses, revenues, and operational statistics by area of responsibility or organizational unit. the system provides information to evaluate each manager on revenue and expense items over which that manager has primary control (authority to influence).
some reports contain only those items that are controllable by the responsibility manager. some reports contain both controllable and uncontrollable items in this case, controllable and uncontrollable]e items should be clearly separated. the identification of controllable items is a fundamental task in responsibility accounting and reporting.
Evaluating
Decision Making
Controlling
Advantages of Decentralization
It allows managers to focus on acquiring expertise in their areas of responsibility. Decentralizing decision making provides excellent training for managers. Delegation improves employee morale. Decentralization helps managers create good customer relations by responding quickly to customers needs. Managers become more creative in suggesting operating and product improvement.
Responsibility Centers
Cost Centers
Managers are held accountable for controlling costs.
Profit Centers Managers are held accountable for costs and making decisions that impact revenues favorably.
Responsibility Centers
Investment Centers
Managers are held accountable for costs and revenues and are also held accountable for the efficient use of assets.
Department of Accounting
Cost Centers
Budget Performance Report Supervisor, Department 1Plant A For the Month Ended October 31, 2006 Budget Actual Over Budget Under Budget
Factory wages Materials Supervisory salaries Power and light Depreciation Maintenance Insurance, taxes
$ 58,100 $ 58,000 32,500 34,225 6,400 6,400 5,750 5,690 4,000 4,000 2,000 1,990 975 975 $109,725 $109,725 $111,280 $111,280
$100 $1,725 60 10
$1,725 $1,725
$170 $170
These totals are shown on the Manager, Plant As budget performance report (Slide 13).
Cost Centers
Budget Performance Report Manager, Plant A For the Month Ended October 31, 2006 Budget Actual Over Budget Under Budget
$ 17,500 109,725
190,500 149,750 $467,475
$150
$1,555 2,100
$3,655
650 $800
Cost Centers
Budget Performance Report Manager, Plant A For the Month Ended October 31, 2006 Budget Actual Over Budget Under Budget
$150
$1,555 2,100
$3,655 $3,655 650 $800 $800
Cost Centers
Budget Performance Report Vice-President, Production For the Month Ended October 31, 2006 Over Budget Actual Budget
Under Budget
Cost Centers
Budget Performance Report Vice-President, Production For the Month Ended October 31, 2006 Over Budget Actual Budget
Under Budget
Profit Centers
NEG, a diversified entertainment company, has two profit centers: the Theme Park Division and the Movie Production Division.
Theme Park Movie Production Division Division $6,000,000 $2,500,000 2,495,000 405,000
Profit Centers
Charging Service Department Costs to Production Divisions
Purchasing Department: $400,000 (Activity base: number of purchase requisitions)
Theme Park Division Movie Production Division: Total 25,000 purchase requisitions 15,000 purchase requisitions 40,000
$400,000
Profit Centers
Charging Service Department Costs to Production Divisions
Payroll Accounting: $255,000 (Activity base: number of payroll checks)
Theme Park Division Movie Production Division: Total 12,000 payroll checks 3,000 payroll checks 15,000
Profit Centers
Charging Service Department Costs to Production Divisions
Legal Department: $250,000 (Activity base: number of payroll checks)
Theme Park Division 100 billed hours Movie Production Division: 900 billed hours Total 1,000
Profit Centers
Nova Entertainment Group Service Department Charges to NEG Divisions For the Year Ended December 31, 2006 Theme Park Division Movie Production Division
Service Department
Purchasing
$250,000
$150,000
25,000 purchase 15,000 purchase requisitions x requisitions $10 x $10 per purchaseper purchase requisition requisition
Profit Centers
Nova Entertainment Group Service Department Charges to NEG Divisions For the Year Ended December 31, 2006 Theme Park Division Movie Production Division
Service Department
$250,000 204,000
$150,000 51,000
12,000 payroll 3,000 payroll checks x $17 checks per x $17 per payroll check payroll check
Profit Centers
Nova Entertainment Group Service Department Charges to NEG Divisions For the Year Ended December 31, 2006 Theme Park Division Movie Production Division
Service Department
100 hours x $250 900 hours x $250 per hour per hour
Profit Centers
Nova Entertainment Group Service Department Charges to NEG Divisions For the Year Ended December 31, 2006 Theme Park Division Movie Production Division
Service Department
Nova Entertainment Group Divisional Income Statements For the Year Ended December 31, 2006
Theme Park Division Movie Production Division
Nova Entertainment Group Divisional Income Statements For the Year Ended December 31, 2006
Theme Park Division Movie Production Division
Revenues $6,000,000 Operating expenses 2,495,000 Income from operations $3,505,000 Less service dept. charges: Purchasing $ 250,000 Payroll accounting 204,000 Legal 25,000 Total service department charges $ 479,000 Income from operations $3,026,000
Investment Centers
Datalink Inc. Divisional Income Statements For the Year Ended December 31, 2006 Northern Division Central Division Southern Division
Revenues Operating expenses Income from operations before service dept. charges Service department charges Income from operations Invested assets Rate of return on investment
Investment Turnover
The investment turnover indicates the rate of sales on each dollar of invested assets.
Investment Turnover
Profit Margin
Income from operation Sales ROI = x Sales Invested assets ROI = $ 70,000 $560,000 x $560,000 $350,000
Profit Margin
Inventory Turnover
Profit Margin Income from operations Revenues (Sales) Profit margin Investment Turnover Revenues (Sales) Invested assets Investment turnover
Northern Division
Central Division
Southern Division
Residual Income
Baldwin Company Divisional Income Statements For the Year Ended December 31, 2006 Northern Division Central Division Southern Division
Income from operations Minimum acceptable income from operations as a percent of invested assets: $350,000 x 10% $700,000 x 10%
35,000 70,000
The balance scorecard is a set of financial and nonfinancial measures that reflect multiple performance dimensions of a business.
Customer
Satisfaction Loyalty Perception
Financial
ROI Residual income Profit Cost Sales
Internal Process
Transfer Pricing
Transfer Pricing
When divisions transfer products or render services to each other, a transfer pricing is used to charge for the products or services
Negotiated Price
Chapter 22
The End