1 RESPONSIBILITY ACCOUNTING Chapter 12 I. …

1 1 RESPONSIBILITY ACCOUNTINGC hapter 12I. CHARACTERISTICS OF RESPONSIBILITY ACCOUNTINGA. an ACCOUNTING system that collects, summarizes, and reportsaccounting data relating to the responsibilities of an ACCOUNTING system which tracks and reports costs, expenses,revenues, and operational statistics by area of RESPONSIBILITY ororganizational the system provides information to evaluate each manager onrevenue and expense items over which that manager has primarycontrol (authority to influence).- some reports contain only those items that are controllable bythe RESPONSIBILITY some reports contain both controllable and uncontrollableitems;- in this case, controllable and uncontrollable]e itemsshould be clearly the identification of controllable items is a fundamental taskin RESPONSIBILITY ACCOUNTING and Some Basic to implement a RESPONSIBILITY ACCOUNTING system, the businessmust be organized so that RESPONSIBILITY is assignable toindividual the various managers and their lines of RESPONSIBILITY shouldbe fully the organization chart is usually used as a basis forresponsibility if clear lines of RESPONSIBILITY cannot be determined, it isvery doubtful that RESPONSIBILITY ACCOUNTING can be while decision-making power may be delegated for many items,some decisions (related to particular revenues, expenses, costsor actions) may remain exclusively under the control of several items will be directly traceable to aparticular manager's area of RESPONSIBILITY but not actually becontrollable by that manager.

2 (Items such as property taxes.)- Note: the controllability criterion is crucial to the contentof performance reports for each THE CONCEPT OF Absolute theoretically, a manager should have absolute control over an itemto be held responsible for absolute controllability is frequently, external or internal factors beyond a manager'scontrol may affect revenues or expenses under that manager' the theoretical requirement regarding absolute control mustoften be compromised, since some degree of noncontrollabilityusually the manager is therefore usually held responsible for items overwhich that manager has relative Relative relative control means that the manager has control over most of thefactors that influence a given budget the use of relative control as a basis for evaluation may lead tosome motivational problems, since managers may be evaluated on resultsthat may not reflect the manager's efforts or most budget plans assign control on a relative basis in order todevelop and use segmental RESPONSIBILITY Basic a feature of a RESPONSIBILITY ACCOUNTING system is the varyingamount of detail included in the reports issued to different levels although the amount of detail varies, reports issued under aresponsibility ACCOUNTING system are totals from the report on one level of management are carriedforward in the report to the management level immediately data is appropriately summarized, filtered, and/or condensed asinformation flows upward to higher levels of encourages or allows "management by exception.

3 "- two basic methods are applied to present revenue and expense data:(1) only those items over which a manager has direct control areincluded in the RESPONSIBILITY report for that management any revenue or expense that the manager cannot directlycontrol are not included.(2) include all revenue and expense items that can be traceddirectly or allocated indirectly to a particular manager, whetheror not they are in this approach, care must taken to separate controllablefrom noncontrollable items in order to differentiate thoseitems for which a manager can and should be Desired Timely2. Issued Regularly3. Format should be relatively simple and easy to confusing terminology should be results should be expressed in physical terms whereappropriate, since such figures may be more familiar andunderstandable to to assist management in quickly spotting budget variances,both budgeted and actual amounts should be a budget variance is the difference between the budgetedand actual amounts of an because variances highlight areas which requireinvestigation, they are helpful in applying the managementby exception reports often include both current and RESPONSIBILITY REPORTS SEE TEXT FOR AN RESPONSIBILITY Basic A is a fairly autonomous unit or division of a companydefined according to function or product function: marketing, production, finance, product line.

4 Shoe department, electrical products, food A RESPONSIBILITY is a segment of an organization for which a particularexecutive is there are three types of RESPONSIBILITY centers: (1) expense (or cost) center.(2) profit center.(3) investment Expense (Cost) a RESPONSIBILITY center incurring only expense (cost) items andproducing no direct revenue from the sale of goods or managers are held responsible only for specified expense the appropriate goal of an expense center is the long-runminimization of short-run minimization of expenses may not be Revenue Centers- managers are held responsible for revenues (sales) managers of such centers also responsible for controllingexpenses of unit as Profit a RESPONSIBILITY center having both revenues and the manager must be able to control both of these controllable profits of a segment are shown whenexpenses under a manager's control are deducted from revenuesunder that manager's an expense center can be converted into a profit center by theutilization of transfer , via the use of transfer prices, "artificialrevenues" can be generated for an expense center as itcharges other organizational units of the company for itsservices or Investment Basic a RESPONSIBILITY center having revenues, expenses, and anappropriate investment the manager in charge of an investment center is responsiblefor and has sizable control over revenues, expenses, and theinvestment the two most common ways for evaluating the performance of sucha center are :(1) ROI (return on investment.)

5 (2) Residual Determining the Investment Base to be used in it is a tricky two key issues which must be resolved in determining the value ofthe investment base are(1) which assets should be included, and- key question: are the included assets actual controlled bythe division managers?(2) how those assets should be Major alternative:- Original Book Value (original cost less accumulated depreciation to date.)- Replacement Note: which ever choices are applied, managers will bemotivated in some companies prefer to evaluate segments as investment centers becausethe ROI criterion facilitates performance comparisons betweensegments.