UST - ALFREDO M.

VELAYO COLLEGE OF ACCOUNTANCY

Management Advisory Services

Responsibility Accounting

Responsibility Accounting

Most organizations are divided into smaller units, each of which is assigned particular responsibilities.
These units may be called ‘divisions’, ‘segments’, ‘business units’ or ‘departments’. Each of which is
composed of individuals who are responsible for particular tasks or managerial functions. The main
goal of any manager is to ensure that the people in each department strive toward the same overall
goals

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 decision authority and is held
accountable for his or her decisions. Decision-making authority is spread throughout the organization,
and lower-level managers are given the authority to decide how to manage their individual units. A
decentralized organization would help top management to concentrate on strategic planning and
for division managers to react promptly to problems involving operating decisions.

Responsibility accounting – a system of accounting that is implemented to an organization so that

performance, in terms of costs and/or revenues, are recorded, reported and evaluated by levels of
responsibility within an organization. It also refers to various concepts and tools used by managers to
measure the performance of people and departments in order to foster goal congruence.

• Goal congruence – the result when managers of subunits throughout an organization strive to
achieve the goals set by top management.

Responsibility of managers – managers is given responsibility for a particular part of the business and
are then evaluated based on performance in that area. The area of business that managers are
responsible for is referred to as responsibility center.

Controllability principle – states that managers should be held responsible only for what they can
control. In responsibility accounting, the most relevant classification of costs is whether such costs are
controllable or non-controllable.

Responsibility center – a segment of organization engaged in the performance of a single function or

a group of closely related functions and is usually governed by a manger, who is accountable and
responsible for the activities of the segment.

Types of responsibility centers:

• Cost center – the manager is responsible for controlling cost. The managers have the authority
to incur costs to support their areas of responsibility. Cost centers are evaluated by comparing
actual costs to budgeted costs.

• Revenue center – the manager is responsible for generating revenue for their segment of the
business. Companies often give revenue center managers sales targets or quotas and then
evaluate and reward them based on whether they meet those targets.

• Profit center – the managers are held responsible for both revenues and costs (profit) of the
segment. Unlike cost center managers who are primarily responsible for cost, and revenue
center managers who are primarily responsible for revenue, profit center managers are
responsible for both.

1|Page
 • Investment center – managers have the authority to make decisions about how and where to
invest the company’s assets to drive long-term profitability. They have more responsibility than
the previously discussed managers because they are also responsible for investing the
company’s assets.

Profit Centers
Segmented income statement – The most common method of evaluating a profit center manager.
This is an income statement that is broken down by product line, region, or other business segment.
This is useful in evaluating because it separates those costs that are within the segment manager’s
control from those costs that are outside it.

Exercise 1. DMCI Co. is the largest holding company in the country engaged in real estate,
manufacturing, mining, power, retailing and banking. Its power plant segment, Semirara Corp has
shown the following data for the year ended 31 December 2022.

Revenues P 3,000,000
Variable expenses 1,000,000
Fixed expenses controllable by Semirara Corp.’s general manager 800,000
Fixed expenses controllable by DMCI Co.’s general manager 1,300,000
traceable to Semirara Corp.
DMCI Co.’s head office’s common expenses allocated to its business 800,000
units (25% of these expenses were allocated to Semirara Corp.)

a. How much is Electro Corp’s contribution margin? 2000K

b. How much is Electro Corp’s segment controllable margin? 1200K
c. How much is Electro Corp’s segment margin? (100K)
d. How much is Electro Corp’s operating income? (300K)
e. What figure is relevant in deciding whether the manager of Semirara Corp is doing a good
job? 1200K
f. What figure is relevant in deciding whether the division, Semirara Corp is doing well? (100K)

2|Page
Problem 1. The Cloth division of JEANS, Inc. produces only one type of fabric. The 1mx1m sized fabric
has a selling price of PhP20.00. Costs for each 1mx1m piece of fabric include:

Direct material of PhP3.00; Direct labor of PhP4.00; Variable factory overhead of PhP1.00; Fixed
factory overhead allocation of PhP4. Variable selling and Fixed administrative costs are PhP2.00 and
PhP1.00 respectively.

The division produced 100 000 1mx1m fabric squares this year and sold 95 000 of them. This is the first
year of operations. Actual figures equal budgeted. JEANS’ head office allocated PhP700 000
common fixed costs to the division.

a. How much is the Cloth division’s manufacturing margin? 1140K

b. How much is the Cloth division’s contribution margin? 950K
c. If only 40% of the Cloth division’s fixed cost is controllable by the manager of the cloth division,
how much is the segment controllable margin? 750K
d. If only 40% of the Cloth division’s fixed cost is controllable by the manager of the cloth division,
how much is the segment margin? 450K
e. How much is the division’s operating income? (250K)
f. What is the purpose of computing for (e.)? NONE

3|Page
Problem 2. Segmented income statement of the two division of KEVIN Co. for the month of June is
given below:

Division A Division B
Sales P165,000 P135,000
Variable expenses (99,000) (54,000)
Segment’s Contribution margin 66,000 81,000
Controllable fixed expenses (30,000) (40,000)
Segment controllable margin 36,000 41,000
Non-controllable traceable fixed expenses (12,000) (19,000)
Segment margin P24,000 P22,000

a. Assuming that the two divisions are of the same size and operations, which division has a
better performance for the month? A
b. Assuming the two divisions is of the same size and operations, the manager of which division
performed better in June? B
c. During June, the salesclerks in Division A received salaries that totaled PhP25 000. Assume that
in July, the salaries of these salesclerks are discontinued and instead they are paid a
commission of 18% of sales. If sales in Division A increase by P35,000 as a result of this change,
the segment margin for Division A in July would be: 27K
d. A proposal has been made that will lower variable costs in Division B to 37% of sales. The
reduction can be accomplished only if Division B‘s traceable fixed costs are allowed to
increase by P12 000. If this proposal is implemented, and if sales remain constant, Division B’s
segment margin would be: 14,050

4|Page
Investment Centers
The following may be used as basis for evaluating the performance of investment centers:

• Return on Investment = Net operating income / Average invested assets

= Net profit margin * Asset turnover

• Residual income = net operating income – required income

• Where required income = average invested assets * hurdle rate
• It compares the net operating income and the minimum acceptable profit
based on the required rate of return (aka hurdle rate). The hurdle rate will
depend on a number of factors, including the risk of the investment, the cost of
financing it, and the return that could be earned in other investments.
• It is the amount of net operating income earned over and above the minimum
amount needed to meet the required rate of return.
• It encourages managers to maximize pesos of profit after a required ROI has
been achieved.
• It overcomes some of the problems associated with ROI.
• It encourages managers to accept projects which provide returns in excess of
the company’s required rate of return.

Exercise 2. Return on Investment. ABC Corporation, a subsidiary of XYZ Holdings has shown the
following information for 2021 and 2022:

2022 2021
Income P 100 000 P 200 000
Assets 700 000 900 000

a. What is the return on investment for year 2022? 12.5%

Problem 3. DEF Company, a division of MARIO Inc. has shown the following income statement for the
year ended 2022:
Sales revenue P 900 000
Cost of sales 100 000
Gross profit P 800 000
Selling and admin expenses 200 000
Operating income P 600 000
Interest expenses 100 000
Net income before tax P 500 000
Income tax (30%) 150 000
Net income P 350 000

Total assets as of 31 December of the year are as follows:

2022 2021
Total assets P 2 000 000 P 2 800 000

a. What is the return on investment for the year 2022? 25%

5|Page
Problem 4. GHI Inc., a subsidiary of SM Corp, has shown the following information for the year just
ended:

Asset TO 5x
Profit margin 2%

a. What is the return on investment for the year? 10%

b. So what’s the point?

Problem 5. ALC Company has 2 investment centers, ETHYL and METHYL. The following details for given
for the two centers:
ETHYL METHYL
Net sales P 200 000 P 6 300 000
Cost of goods sold 50 000 700 000
Selling and admin expenses 30 000 1 400 000
Average assets 800 000 42 000 000

Desired rate of return for these types of investments 5%

a. What is the sales margin for both centers? 60% 66.67%

b. What is the turnover for both centers? 25% 15%
c. What is the return on investment for both centers (Use the Du-pont equation)? 15% 10%

Problem 6. You are a manager of ABC division, a segment of J&J Corporation with an average
invested capital of around P2 000 000. You boast ABC division’s ROI of 20%, which is higher than J&J’s
required rate of return of 12%. It is in the belief of the top executives in J&J Corporation that any
investment that gives the company a return of 12% is desirable and thus should be engaged in. J&J
evaluates its subordinate managers based on the ROI of their corresponding segments.

A new project requiring an investment of P500 000 is available and can give ABC an ROI of 15%. In
other words, it gives ABC an additional income of P75 000 (P500 000 x 15%).

a. Assume that for the coming year, ABC is expected to yield the same ROI if it will not engage in
other businesses. Should you, as the manager of ABC division, invest in that project? 20% to
19%, Yes, for the good of XYZ Corporation. But No, as a selfish manager.
b. Describe the implications of this situation to J&J Corporation. The use of ROI in evaluating a
segment manager may cause goal incongruence in an organization

6|Page
Exercise 3. Residual Income ABC Corporation, a subsidiary of XYZ Holdings has shown the following
information for 2021 and 2022:

2022 2021
Income P 120 000 P 200 000
Assets 700 000 800 000

Desired rate of return:12%

a. What is the residual income in 2022? 30,000

Problem 7. You are a manager of ABC division, a segment of J&J Corporation with an average
invested capital of around P2 000 000. You boast ABC division’s ROI of 20%, which is higher than J&J’s
required rate of return of 12%. It is in the belief of the top executives in J&J Corporation that any
investment that gives the company a return of 12% is desirable and thus should be engaged in. J&J
evaluates its subordinate managers based on the ROI of their corresponding segments.

A new project requiring an investment of P500 000 is available and can give ABC an ROI of 15%. In
other words, it gives ABC an additional income of P75 000 (P500 000 x 15%).

a. What is the ROI of ABC division if you will not invest in the project? What about if you will invest
in the project? 20% 19%
b. Assume this time that RI will be used instead of ROI in evaluating subordinate managers. Will
this facilitate goal congruence? P160,000 P175,000 YES

Problem 8. You are the manager of the Home Care Products Division of EQUITY Corporation. As a
manager of an investment center, your performance is measured using the residual income method.

For the coming year, you want to achieve a residual income target of P100 000 using an imputed
interest charge of 20%, other forecasted figures for the coming year are as follows:

Working capital P 90 000

Plant and equipment 860 000
Cost and expenses 1 210 000

a. How much should revenues be next year to achieve the residual income target? P1.5M
b. By what percent would the division’s ROI next year exceed the desired rate of return? (answer
in percentage points) 10.53%

7|Page
Problem 9. ALC Company has 2 investment centers, ETHYL and METHYL. The following details for given
for the two centers:
ETHYL METHYL
Net sales P 200 000 P 6 300 000
Cost of goods sold 50 000 700 000
Selling and admin expenses 30 000 1 400 000
Average assets 800 000 42 000 000

Desired rate of return for these types of investments 5%

a. What is the return on investment for both centers? 15% 10%

b. What is the residual income for both centers? P80K P2100K
c. How does one arrive at the desired rate of return? Top management’s target

Exercise 4. Consider the following for one of REGINE Company’s investment center:
Investment center’s after tax operating profit P 50 000
Investment center’s total assets 800 000
Investment center’s total current liabilities 80 000

WACC 6.50%
Minimum required ROI 8.00%

a. What is the economic value added? 3,200

Problem 10. The following year-end data pertains to ROLLS Corporation:

Earnings before interest and taxes P 800 000
Current assets 800 000
Non-current assets 3 200 000
Current liabilities 400 000
Non-current liabilities 1 000 000

a. ROLLS Corporation pays an income tax rate of 30%. Its weighted average cost of capital is
10%. What is ROLLS Corporation’s economic value added? 200,000

-END-
8|Page