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    Notes On Responsibility Accounting

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    Alyza Calleja
    Responsibility Accounting

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Notes On Responsibility Accounting

    Uploaded by

    Alyza Calleja
    12 views2 pages
    Responsibility Accounting

    Original Title

    Notes-on-Responsibility-Accounting

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    © © All Rights Reserved

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    Responsibility Accounting

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    12 views2 pages

    Notes On Responsibility Accounting

    Uploaded by

    Alyza Calleja
    Responsibility Accounting

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    Responsibility Accounting is a performance measurement tool where managers are held responsible for

    their performance, actions of subordinates and all activities within their area of authority and control.

    - This is best under a decentralized form of organization. DECENTRALIZATION allows separation of an


    entity into department or unit which is managed by an individual who is given decision authority.
    Example: leader and members.
    - Decentralized organization must avoid SUB-OPTIMIZATION, which happens when managers decide in
    favor of their own department at the expense of the entire organization. Example: Exposing an issue
    of CABEIHM Department by a JPIA officer.
    - Decentralized organizations are divided into RESPONSIBILITY CENTERS

    Responsibility Centers:

    1. Cost Center – responsible mainly for the costs incurred by the unit. Example: Repair and Maintenance
    Department
    2. Revenue Center – responsible mainly for the revenues generated by the unit. Example: Sales
    Department
    3. Profit Center – responsible for both revenues and costs of the unit. Example: JPIA Organization
    4. Investment Center - responsible for revenues, costs and investment of capital. Example: Branch

    Responsibility Centers Evaluation Models


    Cost Center Cost Variance Analysis
    Revenue Center Revenue Variance Analysis
    Profit Center Segment Margin
    Investment Center ROI, Residual Income and EVA

    SEGMENTED INCOME STATEMENT – detailed version of the contribution format of income statement. This
    highlights the controllability of costs by behavioral classification.

    Sales

    Less: Variable Manufacturing Costs (product costs)

    Manufacturing Contribution Margin

    Less: Variable Non-Manufacturing Costs (Variable Selling and Administrative)

    Contribution Margin

    Less: Controllable DIRECT Fixed Costs – Example: membership dues, allowances

    Controllable or Performance Margin – used to evaluate the performance of the manager

    Less: Non-Controllable DIRECT Fixed Costs – Example: insurance, depreciation, taxes

    Segment Margin – used to evaluate the department

    Less: Allocated Common Costs – indirect fixed cost like security expense

    Profit

    IMPORTANT REMINDERS:

    • The evaluation of the department is based on its SEGMENT MARGIN while the performance of the
    manager is evaluated based on CONTROLLABLE MARGIN. Simply stated, the manager is evaluated
    only to the extent that he/she can only control.
    DU PONT TECHNIQUE

    RETURN ON INVESTMENT (ROI) = MARGIN x ASSET TURNOVER

    Operating Income Operating Income Sales

    Operating Assets Sales Ave. Operating Asset

    • Operating Income for most investment centers is based on earnings before interests & taxes (EBIT)
    • Invested Capital is sometimes used (instead of Operating Asset) in computing the ROI. These may also
    mean total assets, owners’ equity or total assets less current liabilities depending on the situation and
    application

    RESIDUAL INCOME (RI) Operating Income Required Income*

    *Required Income Operating Assets Minimum ROI

    Minimum ROI – usually based on the imputed interest rate which is imposed and set by a higher authority like
    head office (for branches) and holding company (for subsidiaries). This is also called as desired rate of return
    or minimum required rate of return.

    ECONOMIC VALUE-ADDED (EVA) Operating Income after TAX Required Income*

    *Required Income (Total Assets – Current Liabilities) WACC*

    *Weighted Average Cost of Capital – minimum required rate of return. This may also call as hurdle rate, cutoff
    rate, target rate, standard rate or minimum acceptable rate of return.

    IMPORTANT NOTES:

    • If operating income is not given, segment margin can be used.


    • Operating assets includes all assets except marketable securities and investments.

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