MS -08 RESPONSIBILTY ACCOUNTING

RESPONSIBILITY ACCOUNTING a system of accounting that is implemented to an organization so that

performance may be evaluated on the basis of responsibility given to a manager of a segment within the
organization.

STEPS IN IMPLEMENTING RESPONSIBILITY ACCOUNTING

1. Responsibility accounting requires that costs and/or revenues can be classified according to responsibility
centers.
RESPONSIBILITY CENTER is a segment of organization engaged in the performance of a
single function or group of closely related functions. This segment is usually supervised by a
manager , who is accountable and responsible for the activities of the segment.

Types of Responsibility Centers

1. Cost Center managers are held responsible for the costs incurred by the segment.
2. Revenue Center managers are held responsible primarily for responsible primarily for revenues of the
segment.
3. Profit Center managers are held responsible for revenues, costs and investments.
4. Investment Center managers are held responsible for revenues, costs and investments. The central
performance is measured in terms of the use of the assets of the assets as well as revenues earned and the
costs incurred. The following may be used as basis of evaluating performance of investment centers.
RoI (Return of Investment) Operating Income Operating Assets
Alternative formula: RoI = Margin x Turnover
Where Margin: Operating Income Sales
Turnover: Sales Operating assets

RoI computation is based on DuPont formula:

Return on Assets = Return on Sales x Asset Turnover

Net Income = Net Income x Sales

Assets Sales Assets

Residual Income = Operating Income Required Income

Where: Required Income = Operating assets x Minimum RoI

Economic Value Added (EVA) = more specific version of residual income that measures the
investment centers real economic gains. It uses the weighted-average costs of capital (WACC) to
compute the required income.

EVA = Required Income = (Total Assets Current Liabilities) x WACC

2. Within each responsibility center, costs are classified as either controllable or non-controllable.

Generally, all costs are controllable. The key difference lies in the level management who can control the
costs:

CONTROLLABLE COSTS are those items of cost that may be directly regulated at lower levels
of management.
NON-CONTROLLABLE COSTS are costs that cannot be regulated at a particular management
level other than the top level.

Costs may also be classified into DIRECT (traceable to a particular segment) or INDIRECT (common
to a number of segments), the latter being subject to arbitrary allocation.

3. Within the controllable classification, costs are classified according to the nature of expense.
4. A performance report is furnished by each center and reported to the appropriate level of management.
The PERFORMANCE REPORT is the end product of responsibility accounting process. It is a report that
shows and compares actual results with the intended (budgets or standards) results of a responsibility
center, thereby highlighting deviations that need corrective actions.

The CM format to computing results of operations (income) is emphasized in responsibility accounting.

This income statement presentation highlights controllability of costs bybehavioral classification. In

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 addition to the usual variable costs and fixed costs, a more detailed classification of costs may be made.
Consider the following illustrative example:

Sales P xxx
Variable manufacturing costs xxx
Manufacturing contribution margin P xxx
Variable selling and administrative cost xxx
Contribution margin (CM) P xxx
Controllable Fixed Cost:
Manufacturing P xxx
Selling and administrative xxx (xxx)
Short-run performance margin P xxx
Non-controllable fixed costs:
Depreciation P xxx
Rent and leases, insurance xxx (xxx)
Segment margin xxx
Allocated common costs (xxx)
Income P xxx
DECENTRALIZATION

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 authority and is held accountable for his
or her decisions.

DECENTRALIZATION-RELATED CONCEPTS

GOAL CONGRUENCE All units of organization have incentives to perform for a common interest. The
purpose of a responsibility system is to motivate management performance that adheres to company overall
objectives.

SUB-OPTIMIZATION This 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.

Note: Aside from its control function, responsibility accounting is designed to achieve goal congruence and
discourage sub-optimization within an organization.

ORGANIZATIONAL CHART a chart that shows the responsibility relationship among managers in an
organization. It sets forth each principal management position and helps define authority, responsibility, and
accountability. A well-designed organizational chart helps decentralized organization in carrying out duties
with clear lines of responsibilities delegated to each of the segment of an organization.

PROBLEMS:

1. CONTROLLABLE / NON CONTROLLABLE COSTS, DIRECT/INDIRECT COSTS

The supervising officer of the Painting department of PARIS Manufacturing purchases supplies, authorizes repairs
and maintenance services, and hires labor for the department. Various costs for the month are given:

Sales, salaries and commission P 7, 500

Salary, supervisor of Painting department 7, 000
Factory heat and light 6, 500
General office salary 6,000
Depreciation, factory 5, 500
Supplies, Painting department 5, 000
Repairs and maintenance, Painting department 4, 500
Factory insurance 4, 000
Labor costs, Painting department 3, 500
Salary of factory superintendent 3, 000

REQUIRED
1. How much is the total costs that can be controlled by the supervisor of the Painting department?
2. How much is the total costs that can be directly identified with the Painting department?

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 3. How much is the total costs that will be to be allocated to the factory department?
4. How much is the total costs that do not pertain to factory operations?

2. RETURN ON INVESTMENTS VS RESIDUAL INCOME

Each case is independent of the others. In all cases, the minimum desired Return on Investment (ROI) is 20%.
Wan For Tri
Sales P 400,000 (5) P 700,000
Operating Income (1) (6) 42,000
Operating Assets (2) P 300,000 (9)
Margin 15% 8% (10)
Turnover (3) 3 times (11)
Return on Investments 30% (7) (12)
Residual Income (4) (8) P 22,000

REQUIRED:

Compute for each divisions missing items.

3. SERVICE COST ALLOCATION

LONDON Co. has two services department (A and B) and two producing departments (X and Y)

Service Department Operating Department

A B X Y
Direct costs P 150 P 300
Services performed by Dept A 40% 40% 20%
Services performed by Dept. B 20% 70% 10%

REQUIRED:Compute allocated cost to departments X and Y using the following method:

a. Direct method
b. Step down method (cost of department A is allocated first)
c. Step down method (cost of department B is allocated first)
d. Reciprocal method

4. SEGMENTED INCOME STATEMENT

The following data pertain to NEW YORK, Inc. operations for July 2005.

Total Northwest Division Central Division

Amount % Amount % Amount %
Sales P 1,000,000 (100%) __________ (100%) ___________ (100%)
Less: Variable Expenses ________ ( ) __________ ( ) __________ ( )
Contribution Margin ________ ( ) P 360, 000 (60%) ___________ ( )
Less: Traceable fixed expenses ________ ( ) P (150, 000) ( ) P (200, 000)( )
Division segment margin ________ ( ) _________ ( ) P 120,000 (30% )
Less: Common fixed expenses ________ ( )
Income P 40,000

REQUIRED: Fill-in the missing data.

5. SALES VARIANCES
Osseo Company had the following results in June.

Planned Actual
-------- --------
Sales $160,000 $162,500
Variable costs at $5 per unit 100,000 102,500
-------- --------
Contribution margin $ 60,000 $ 60,000
======== ========
Planned sales were 20,000 units, actual sales were 20,500 units.

a. Find the sales price variance. Indicate F or U

b. Find the sales volume variance. Indicate F or U