Responsibility Accounting: Acctg 205: Management Science
Responsibility Accounting: Acctg 205: Management Science
Responsibility Accounting: Acctg 205: Management Science
Responsibility
Accounting
1. Responsibility Accounting
and Decentralization
Definitions, Key Concepts, Advantages and Disadvantages,
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Responsibility
Accounting
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Key Concepts
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Decentralization
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Decentralization
Advantages Disadvantages
Greater awareness of needs of the Negative effect of some decisions
people involved in the subunit made in one subunit to the other
More timely decisions subunits or to the organization as
a whole
Faster management development
Cost of gathering and reporting
Greater initiative on the part of data increases
the management, as well as on the
subordinate Job duplication and overlapping
of duties
Improvement of employee’s
morale
Sharper management focus
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Key Concepts
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Break Time!
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2. Responsibility Centers and
Performance Measures
Types of responsibility centers and their respective performance measures
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Responsibility Centers
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Responsibility Typical financial responsibility centers in a divisionalized organization
Centers President
(IC)
Administrative and
Group Group
Financial
Vice President Vice President
Vice Presidents
(IC) (IC)
(CC)
Other
Marketing
Functional
Manager
Managers Source: K. A. Merchant, Modern Management Control Systems: Text and Cases (Upper Saddle
(RC)
(CC) River, NJ: Prentice Hall, 1998), p. 309.
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Performance
Evaluation
Variance Variance
Analysis Analysis
Cost Revenue
Center Center
Profit Investment
Center Center
Variance • ROI
Analysis • RI
• EVA
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Performance
Evaluation
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ROI vs. RI
Coca-Cola Company has an opportunity to invest $100,000 in a project
that will earn $25,000. Coca-Cola Company has a 20 percent desired ROI
and a 30 percent ROI on existing business.
a) As a manager of Coca-Cola Company, would you invest the $100,000,
if you were evaluated using residual income?
Yes, the project’s return of 25% exceeds 20% and the residual income is P50,000.
b) Would your decision be different if your bonus was based on your
division’s ROI (i.e., the higher your ROI, the bigger your bonus)?
I will not accept the project because it will decrease the overall business’s ROI.
Residual income encourages managers to make profitable investments that
would be rejected by managers using ROI.
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Performance
Evaluation Sales xx
Less variable manufacturing costs (xx)
Manufacturing contribution margin xx
Managerial performance
Less variable non-manufacturing costs (xx)
should be evaluated on
the basis of those factors Contribution margin xx
controllable by the Less controllable fixed costs (xx)
manager being evaluated. Short-run performance margin xx
To achieve this, it is best Less direct, non-controllable fixed costs (xx)
to use the contribution Segment margin xx
approach to performance Less common costs allocated to segment (xx)
measurement. Operating income xx
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Control
□ Generally, all costs are controllable. The key difference
lies in the level of management who can control the
costs.
□ Controllable costs are costs which may be directly
regulated at a given level of managerial authority.
□ Controllable costs are direct costs (i.e., costs attributable
to a particular segment) but not all direct costs are
controllable costs.
□ Indirect costs (i.e., costs common to a number of
segment) are always non-controllable.
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3. Transfer Pricing
Methods, Minimum and Maximum Transfer Price, Considerations
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Transfer Pricing
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Methods
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Minimum and
Maximum
= Incremental cost + Opportunity cost
• Incremental cost is the additional cost of producing and transferring the
Minimum product or service
• Opportunity cost is the maximum contribution margin foregone by the
Transfer Price selling subunit of the product or service is transferred internally
(Seller’s POV) • When a company segment is operating at full capacity, the lost CM per
unit on outside sales is the opportunity cost of transferring products to
another company segment.
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Transfer Pricing
Considerations
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Illustration
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Illustration
a) Should Central Lumber process raw lumber into its finished form?
Sell as raw lumber for P200 Sell as finished lumber for P275
Revenue P200 Revenue P275
Variable costs (100) Variable costs:
Contribution margin P100 Raw Lumber Div. P100
Finished Lumber Div. P125 (225)
Contribution margin P50
It would be more profitable for Central Lumber Corp. to sell raw lumber .
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Illustration Sell as Sell as
_____
Raw Finished
b) Assume that internal Raw Lumber Division:
transfers are made at Revenues P200 P110
110% of variable. Will
Variable costs (100) (100)
each division maximize
Contribution margin P100 P10
its division operating
income contribution by Finished Lumber Division:
adopting the action Revenues P0 P275
that is in the best Transferred-in costs - (110)
interests of Central __-
Variable costs (125)
Lumber Corp.?
Contribution margin P0 P40
Both divisions will maximize operating income by selling raw lumber which is also
the best interest of the Company. There is goal congruence.
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Break Time!
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4. Balance Scorecard
Definition, Perspectives, Operating Measures
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Balanced Scorecard
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Perspectives
Financial Customer
• Describes the economic • Source of revenue component
consequences of actions taken for the financial objectives
in the other three • Identifies and defines the
perspectives. customer and market segments
• The customer perspective has in which the firm will compete.
three strategic themes: (1)
revenue growth, (2) cost
reduction, and (3) asset
utilization
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Perspectives
Internal Business Process Learning and Growth
• Describes the internal process • Identifies and defines the
that will provide value for the capabilities that an organization
firm’s customers and owners. needs to create long-term growth
• Process value chain is made up and improvement
of three processes: (1) • Three major objectives: (1)
innovation, (2) operations, and increasing employee capabilities,
(3) after-sales. (2) increasing motivation,
• Delivery time, throughput e0mpowerment, and alignment;
(manufacturing cycle) time, (3) and increasing information
manufacturing cycle efficiency systems capabilities.
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Operating Measures
□ Throughput (Manufacturing Cycle) Time is the total elapsed time between when an
order is placed into production and when it is shipped to a customer. It consists of
process time process time, inspection time inspection time, move time, and queue
time. The only element that adds value is processing time. Inspection, move time, and
queue time, and their associated activities do not add value and should be minimized.
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Operating Measures
Illustration:
A company has the following average time
figures were recorded as follows:
□ Manufacturing Cycle Efficiency is the
ratio of value-added time (i.e., process Wait time 5 days
time) to total throughput time. It Process time 20 days
represents the percentage of time an
order is in production in which useful Inspection time 2 days
work is being done. The rest of the time Move time 1 day
represents non-value-added time (i.e.,
inspection time, move time, and queue Queue time 6 days
time).
Delivery Cycle = 5+20+1+6 = 34 days
𝑉𝑎𝑙𝑢𝑒 𝑎𝑑𝑑𝑒𝑑 𝑡𝑖𝑚𝑒 𝑜𝑟 𝑃𝑟𝑜𝑐𝑒𝑠𝑠 𝑇𝑖𝑚𝑒
𝑴𝑪𝑬 = Throughput = 20+2+1+6 = 29 days
𝑇ℎ𝑟𝑜𝑢𝑔ℎ𝑝𝑢𝑡 (𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑢𝑟𝑖𝑛𝑔 𝐶𝑦𝑐𝑙𝑒) 𝑇𝑖𝑚𝑒
MCE = 20/29 = 68.97%
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