OBOT YENOBOT UDO

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Acct group 3

RESPONSIBILITY ACCOUNTING

Responsibility accounting is a management accounting approach that involves identifying various

responsibility centers in an organization and assigning responsibility to individual managers for specific
areas of the organization's activities." (Hilton, 2015)

"Responsibility accounting provides a means of measuring the performance of each responsibility center
and the managers who operate them. It also provides a means of evaluating the effectiveness of a
manager in controlling costs and generating revenues in relation to the resources entrusted to him or
her." (Garrison, Noreen, & Brewer, 2014)

Responsibility accounting is a management control system that involves assigning responsibility for the
costs and revenues of specific segments of an organization to the individuals who are accountable for
them. This system is used to evaluate the performance of different departments or business units within
an organization, and to ensure that each unit is meeting its financial targets and contributing to the
overall success of the company.

Responsibility accounting is a management accounting technique that involves identifying, allocating,

and reporting costs and revenues to individuals or departments within an organization that are
responsible for managing them. This technique can help organizations track and measure the
performance of individual departments or business units against specific targets, goals or budgets.

The concept of responsibility accounting is based on the principle of decentralization, which means that
decision-making authority is distributed throughout the organization rather than being centralized in a
few individuals or departments. Under this system, each department or business unit is responsible for
its own financial performance, and is held accountable for meeting its targets.

Responsibility accounting involves the use of performance metrics such as sales revenue, cost of goods
sold, and operating expenses to evaluate the performance of each department or business unit. These
metrics are used to determine whether each unit is meeting its financial targets, and to identify areas
where improvements can be made.
One of the key benefits of responsibility accounting is that it promotes accountability and transparency
within the organization. By assigning responsibility for specific costs and revenues to individual
departments or business units, managers are incentivized to make decisions that are in the best
interests of their unit, and to take ownership of their financial performance.

Here are some examples of situations where responsibility accounting can be used:

A manufacturing company may have a separate responsibility center for production, where the manager
is responsible for overseeing the production process and ensuring that products are manufactured
efficiently and at a reasonable cost.

A sales department may have a separate responsibility center where the manager is responsible for
achieving sales targets and developing new business opportunities.

A retail store may have a separate responsibility center for inventory management, where the manager
is responsible for ensuring that the store has the right level of stock on hand at all times.

A hospital may have a separate responsibility center for patient care, where the manager is responsible
for ensuring that patients receive quality care and that the hospital operates efficiently.

In each of these situations, responsibility accounting can help to evaluate the performance of individual
managers based on their specific areas of responsibility. By assigning responsibility for specific tasks or
functions to individual managers, organizations can identify areas where improvements can be made
and take steps to address any issues that arise.

Overall, responsibility accounting is an important tool for organizations that want to improve their
financial performance and promote accountability and transparency within their operations. By
implementing this system, companies can ensure that each department or business unit is contributing
to the overall success of the organization, and that resources are being used efficiently and effectively.
In order to implement responsibility accounting effectively, organizations need to follow a
number of key steps. These include:

1. Defining the organizational structure: The first step in implementing responsibility accounting is to
define the organizational structure of the company. This involves identifying the different departments
or business units within the organization, and determining the reporting relationships between them.

2. Identifying the responsibility centers: Once the organizational structure has been defined, the next
step is to identify the responsibility centers within each department or business unit. Responsibility
centers are the specific segments of the organization that are responsible for specific costs and
revenues.

3. Assigning responsibility for costs and revenues: Once the responsibility centers have been identified,
the next step is to assign responsibility for the costs and revenues associated with each center. This
involves determining which individuals or departments are responsible for each cost or revenue item.

4. Establishing performance metrics: Once responsibility has been assigned for costs and revenues, the
next step is to establish performance metrics for each responsibility center. These metrics should be
aligned with the overall goals and objectives of the organization, and should be measurable and
quantifiable.

5. Monitoring and evaluating performance: The final step in implementing responsibility accounting is to
monitor and evaluate the performance of each responsibility center. This involves regularly reviewing
performance metrics and comparing actual results to budgeted targets. Any variances should be
investigated and corrective action taken if necessary.

Types of responsibility centers that can be used in responsibility accounting.

1. Cost centers: Cost centers are responsible for controlling costs within an organization. They do not
generate revenue, but are responsible for managing expenses within their area of responsibility.
2. Revenue centers: Revenue centers are responsible for generating revenue within an organization.
They are typically sales or marketing departments, and are responsible for driving revenue growth.

3. Profit centers: Profit centers are responsible for generating both revenue and profit within an
organization. They are typically business units that operate as separate profit centers within a larger
organization.

4. Investment centers: Investment centers are responsible for generating both revenue and profit, as
well as managing capital investments within an organization. They are typically large business units that
require significant capital investment to operate.

Responsibility accounting can be used in a variety of different industries and organizations. It is

particularly useful in manufacturing companies, where different departments are responsible for
different stages of the production process. It is also commonly used in service industries, where
different departments are responsible for different aspects of the service delivery process.

In order to be effective, responsibility accounting must be integrated into the overall management
control system of the organization. This involves aligning performance metrics with the overall goals and
objectives of the organization, and ensuring that managers are incentivized to make decisions that are in
the best interests of the company as a whole.

Overall, responsibility accounting is an important tool for organizations that want to improve their
financial performance and promote accountability and transparency within their operations. By
implementing this system, companies can ensure that each department or business unit is contributing
to the overall success of the organization, and that resources are being used efficiently and effectively.

PERFORMANCE EVALUATION IN A DIVISIONAL ORGANIZATION

Performance evaluation is a critical process for any organization, and is particularly important for
divisional organizations. In a divisional structure, the organization is divided into different business units
or divisions, each of which is responsible for its own operations and financial performance.
The purpose of performance evaluation in a divisional organization is to assess the performance of each
division against its goals and objectives, and to identify areas where improvements can be made. This
process is essential for ensuring that each division is contributing to the overall success of the
organization, and that resources are being used effectively and efficiently.

Performance evaluation in a divisional organization refers to the process of assessing and measuring the
performance of various divisions or sections within an organization. The objective of this system is to
ensure that each division is meeting its target and contributing to the overall success of the
organization. The following are some notes that explain the performance evaluation process in a
divisional organization:

1. Setting Objectives: The first step in the performance evaluation process is to set objectives for each
division based on the overall goals of the organization. For example, if the organization's goal is to
increase revenue, the objective for the sales division will be to increase sales revenue by a certain
percentage.

2. Measuring Performance: Once objectives are set, the next step is to measure the performance of
each division. This can be done using various metrics such as revenue, profit, customer satisfaction, and
employee satisfaction.

3. Identifying Performance Gap: Once the performance of each division is measured, it's important to
identify the gap between the actual performance and the targeted performance. This gap helps the
organization to understand where the division needs improvement.

4. Providing Feedback: After identifying the performance gap, the organization should provide feedback
to the division. Feedback provides an opportunity for the division to learn from their mistakes and
improve their performance in the future.

5. Continuous Improvement: The final step is to continuously improve the performance of each division.
This can be achieved through regular performance monitoring, feedback, and providing resources to the
division to help them reach their objectives.
Example: Let's assume that XYZ Inc. is a divisional organization that has three divisions, Sales, Marketing,
and Finance. The organization's overall objective is to increase revenue by 15%. The following is an
example of how the performance of each division is evaluated:

Sales Division: Objective - Increase sales revenue by 20%

Measured Performance - Increased sales by 12%

Performance Gap - 8%

Feedback - The division needs to work on increasing the number of leads and closing more deals.

Marketing Division: Objective - Increase brand recognition by 25%

Measured Performance - Increased brand recognition by 20%

Performance Gap - 5%

Feedback - The division needs to focus on improving their social media campaigns and digital
advertising.

Finance Division: Objective - Reduce expenses by 10%

Measured Performance - Reduced expenses by 8%

Performance Gap - 2%
Feedback - The division needs to identify more areas where expenses can be reduced and streamline
their budgeting process.

By following this process, XYZ Inc. can ensure that each division is meeting its targeted objectives and
contributing to the overall success of the organization.

There are a number of different methods that can be used for performance evaluation in a divisional
organization. These include:

1. Financial performance measures: Financial performance measures are the most common method of
performance evaluation in a divisional organization. These measures include metrics such as revenue,
profit margin, return on investment, and cash flow. By comparing the financial performance of each
division to its targets and to other divisions within the organization, managers can identify areas where
improvements can be made.

2. Non-financial performance measures: Non-financial performance measures are also important for
evaluating the performance of divisional organizations. These measures include metrics such as
customer satisfaction, employee engagement, and quality of products or services. By measuring these
factors, managers can gain a more holistic view of the performance of each division and can identify
areas where improvements can be made.

3. Balanced scorecards: Balanced scorecards are a popular method of performance evaluation in

divisional organizations. They involve the use of a balanced set of financial and non-financial
performance measures to evaluate the performance of each division. By using a balanced set of
measures, managers can gain a more comprehensive view of the performance of each division and can
identify areas where improvements can be made.

4. Benchmarking: Benchmarking involves comparing the performance of each division to that of other
similar organizations in the same industry. By benchmarking performance, managers can identify areas
where their division is performing well and areas where improvements can be made.
Regardless of the method used, performance evaluation in a divisional organization should be a regular
and ongoing process. Managers should set clear goals and objectives for each division, and should
regularly review performance metrics to ensure that these goals are being met.

In addition, performance evaluation should be used as a tool for continuous improvement. By

identifying areas where improvements can be made, managers can develop strategies to address these
issues and can work to improve the performance of each division over time.

Overall, performance evaluation is a critical process for any divisional organization. By regularly
assessing the performance of each division, managers can ensure that resources are being used
effectively and efficiently, and can work to improve the overall performance of the organization.

STANDARD COSTING AND VARIANCE

Standard costing is a management tool that helps to analyze and evaluate the cost of a product or
service. It involves comparing the actual cost of production with the predetermined or estimated cost of
the product or service. Variance, on the other hand, is the difference between the actual cost and the
estimated cost, calculated using standard costing. There are two types of variance: favorable variance
and unfavorable variance. Therefore, a company uses standard costing to determine the variance
between actual cost and expected cost.

Example: XYZ manufacturing company produces widgets. The company has a standard cost of producing
one widget, which is $50. This standard cost includes material, labor, and overhead costs. If the
company actually produces 500 widgets this month and spends $27,000 on material, $18,000 on labor,
and $10,000 on overhead, the total cost of production is $55 per widget.

The variance can be calculated by the following formula:

Variance = Actual cost - Standard cost

Variance = 500 widgets * ($27,000 + $18,000 + $10,000) - ($50 * 500 widgets)

Variance = $55,000 - $25,000

Variance = $30,000 (unfavorable)

In this example, the actual cost of producing one widget was significantly higher than the standard cost.
The unfavorable variance of $30,000 shows that there was a problem in the production process that
resulted in an increase in the cost of production. Therefore, the company has to analyze the situation
and find ways to reduce the cost of production to avoid future unfavorable variances.

Standard costing is a costing technique used by businesses to estimate the cost of production based on
expected or predetermined standards. These standards are set for various components of production,
including materials, labor, and overhead costs. The actual costs of production are then compared to
these predetermined standards to identify any variances.

The variances can be either favorable or unfavorable and can be attributed to various factors such as
labor efficiencies, material wastage, changes in market conditions, or production process inefficiencies.
The analysis of these variances helps businesses identify areas of improvement or potential cost-saving
opportunities.

For example, if a company sets a standard for material cost for producing a product at $100, but the
actual cost of material ends up being $110, there is an unfavorable variance of $10. This could be due to
a higher price of raw material or higher wastage during the production process.

Similarly, if the standard for labor cost for producing a product is set at $50 per hour and it takes
workers only 40 hours to complete the production process, resulting in an actual labor cost of $2,000,
then there is a favorable variance of $400.

Overall, standard costing and variance analysis provide businesses with valuable insights into their
production costs and help them make informed decisions to optimize their operations and achieve
profitability.