9-1

Responsibility
Accounting
Prepared
Preparedby
by

Douglas
DouglasCloud
Cloud

Pepperdine
PepperdineUniversity
University

9-2

Objectives
Objectives
Define goal congruence and explain its
After
reading
this
After
reading
this
relationship to control and performance
chapter,you
you should
should
evaluation. chapter,
be
able
to:
be
able
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.
Continued
Continued

9-3

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.

9-4

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
companys goals.

9-5

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

9-6

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

9-7

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

9-8

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.

9-9

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

9-10

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 organizations objectives or the
employees responsibilities.

9-11

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.

9-12

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)

9-13

Responsibility Reports for Cost Centers

Current Month
Year to Date
Over
Over
Budget (Under) Budget (Under)
Report to Supervisor of Work
Station 106Drill Press
Materials

$ 3,200

Direct labor

14,200

Supervision

1,100

Power, supplies, miscellaneous

Totals

910

$(80 ) $ 12,760 $ 110

170

87,300

880

(50 )

4,140

(78 )

24

3,420

92

$19,410 $ 64
Report to Supervisor of
Fabrication Department

$107,620 $1,004

9-14

Responsibility Reports for Cost Centers

Current Month
Year to Date
Over
Over
Budget (Under) Budget (Under)
Report to Supervisor of
Fabrication Department
Station 106Drill Press

$19,410 $

64 $107,620 $1,004

Station 107Grinding

17,832

122

Station 108Cutting

23,456

876

Total work stations

98,430

(213 )

112,456 1,227

$60,698 $1,062 $318,506 $2,018

Continued
Continued

9-15

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
Report to Manager of
Factory

9-16

Responsibility Reports for Cost Centers

Current Month
Year to Date
Over
Over
Budget (Under) Budget (Under)
Report to Manager of Factory
Fabrication department
Milling department
Assembly department
Casting department
Total departments

$ 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

9-17

Responsibility Reports for Cost Centers

Current Month
Over
Budget (Under)
General factory costs
(common to departments):
Engineering
$ 14,235
Heat and light
8,435
Building depreciation
3,400
General administration
23,110
Total factory costs
$407,848

$261
178
0
340
$ 485

Year to Date
Over
Budget (Under)

$ 81,340 $842
48,221
890
20,400
0
126,289
776
$1,919,974 $2,984

9-18

Responsibility Reports for Profit Centers (000s)

Report to Product Manager

Appliances, European Region
Sales
Variable costs:
Production
Selling and administrative
Total variable costs
Contribution margin
Direct fixed costs
Product margin

Current Month
Year to Date
Over
Over
Budget (Under) Budget (Under)
$122.0

$ 1.5

$387.0

$ 3.2

$ 47.5
12.2
$ 59.7
$ 62.3
36.0
$ 26.3

$ 2.8
1.8
$ 4.6
$ (3.1 )
$ (1.2 )
$ (1.9 )

$150.7 $ 5.9
38.7
1.9
$189.4 $ 7.8
$197.6 $(4.6 )
98.5
(3.1 )
$ 99.1 $ (1.5 )

To report to manageEuropean Region

9-19

Responsibility Reports for Profit Centers (000s)

Report to Manager
European Region
Profit margins:
Appliances
Industrial equipment
Tools
Total product margins
Regional expenses (common
to all product lines)
Regional margin

Current Month
Year to Date
Over
Over
Budget (Under) Budget (Under)

$26.3
37.4
18.3
$82.0

$(1.9 )
3.2
1.1
$ 2.4

$ 99.1
134.5
59.1
$292.7

$(1.5 )
7.3
(2.0 )
$ 3.8

18.5
$63.5

0.8
$ 1.6

61.2
$231.5

(1.3 )
$ 5.1

Report to Executive Vice President

9-20

Responsibility Reports for Profit Centers (000s)

Report to Executive Vice

President
Regional margins:
European
Asian
North American
Total regional margins
Corporate expenses (common
to all regions)
Regional margin

Current Month
Year to Date
Over
Over
Budget (Under) Budget (Under)

$ 63.5
78.1
211.8
$353.4

$ 1.6 $ 231.5 $ 5.1

(4.3 )
289.4
(8.2 )
(3.2 )
612.4
(9.6 )
$ (5.9 ) $1,133.3 $(12.7 )

87.1
$266.3

1.4
268.5
3.1
$ (7.3 ) $ 864.8 $(15.8 )

9-21

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.

9-22

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
25,000
(12,000)
Contribution margin $160,000 $147,000 $(13,000)

9-23

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)

9-24

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 x ($19 - $20) = $21,000 F

9-25

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.

9-26

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 principles of
controllability.
2. Including allocated costs on performance reports
could lead to poor decisions because managers will
treat the costs as differential.

9-27

Allocation
Allocation Methods
Methods and
and Effects:
Effects:
Allocating
Allocating Actual
Actual Costs
Costs Based
Based
on
on Actual
Actual Use
Use
This method is flawed 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.

Allocation Example

9-28

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

Allocation Example
Actual per-hour cost
of providing the service =

$232,500

30,000 hours = $7.75/hr.

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

9-30

Methods
Methods to
to Allocate
Allocate Service
Service
Department
Department Costs
Costs (Appendix)
(Appendix)
Direct method
Step method
Reciprocal method

9-31

Chapter 9
The
The End
End

9-32