ADVANCED MANAGEMENT ACCOUNTING PPT 14 1 Responsibility Accounting

ADVANCED MANAGEMENT ACCOUNTING PPT 14 -1

Responsibility Accounting PPT 14 -2

Learning Objectives Define responsibility accounting and describe the four types of responsibility centers PPT 14 -3

Responsibility Accounting Responsibility accounting is a system that measures the results of each responsibility center and compares those results with some measure of expected or budgeted outcome. There are four major types of responsibility centers: v Cost center v Revenue center v Profit center v Investment center PPT 14 -4

10 -5 Responsibility Accounting Cost Center Cost, profit, and investment centers are all known as responsibility centers. Profit Center Investment Center Responsibility Center PPT 14 -5

10 -6 Cost Center A segment whose manager has control over costs, but not over revenues or investment funds. PPT 14 -6

10 -7 Profit Center A segment whose manager has control over both costs and revenues, but no control over investment funds. Revenues Sales Interest Other Costs Mfg. costs Commissions Salaries Other PPT 14 -7

10 -8 Investment Center Corporate Headquarters A segment whose manager has control over costs, revenues, and investments in operating assets. PPT 14 -8

10 -9 Responsibility Centers Investment Centers Cost Centers Superior Foods Corporation provides an example of the various kinds of responsibility centers that exist in an PPT 14 -9 organization.

10 -10 Responsibility Centers Profit Centers Superior Foods Corporation provides an example of the various kinds of responsibility centers that exist in an PPT 14 -10 organization.

10 -11 Responsibility Centers Cost Centers Superior Foods Corporation provides an example of the various kinds of responsibility centers that exist in an PPT 14 -11 organization.

Management Hubs l Profit Centers. v. Subunit that has responsibility for generating revenue as well as for controlling costs. l Cost Centers. v. Subunit that has responsibility for controlling costs but does not sell product. i. e. service departments. PPT 14 -12

Profit Center l Organize business into subunits, profit center & cost centers. l Track variable costs to profit centers. v. Control escalators l Allocate asset use to subunits. l Evaluate on contribution margin and amount of capital invested. PPT 14 -13

Word List l Cost Behavior l Variable Costs. v. Variable Costs per unit are constant. l Fixed Costs. v. Fixed costs per unit vary with production level. l Mixed Costs. v. Semi-variable costs change in total with changes in production level, but not proportionately. PPT 14 -14

Terms to Recognize l Cost volume profit analysis v. Profit = Sales (S) – Variable Costs (VC) – Fixed Costs (FC) l Contribution Margin v. Sales -- Variable Costs v. Contribution Margin Ratio (Sales – Variable Costs)÷ Sales PPT 14 -15

Cost-Volume-Profit Diagnostics PPT 14 -16

Breakevent Point l Sales (in dollars) = Fixed Costs / Contribution margin ratio l Sales (units) = Fixed Costs / Contribution margin per unit PPT 14 -17

Cost or Revenue ($) Quantity Produced Break-Even Diagram PPT 14 -18

Total Break Even Quantity Cost or Revenue e enu ev R l ta Profit / Loss Corridor To Variable Costs Cost ($) Fixed Cost Quantity Produced Break-Even Diagram PPT 14 -19

Break-Even Diagram Cost or Revenue Break Even Quantity Increased Fixed Costs e enu ev R l ta Profit / Loss Corridor To Variable Costs ost C l a t To Cost Total ($) Fixed Cost Quantity Produced PPT 14 -20

Vocabulary l. Differential costs and revenue v. The additional cost or revenue incurred when one alternative is chosen over another. l Opportunity Costs. v. The benefit given up by selecting one alternative over another. i. e. Interest on stored grain. l. Sunk cost. v. Costs that are already incurred & not reversible. PPT 14 -21

Responsibility Accounting Model The responsibility accounting model is defined by four essential elements: v assigning responsibility v establishing performance measures or benchmarks v evaluating performance v assigning rewards PPT 14 -22

Types of Responsibility Accounting Management accounting offers the following three types of responsibility accounting systems. v Functional-based v Activity-based v Strategic-based PPT 14 -23

Functional-Based Responsibility Accounting System A functional-based responsibility accounting system assigns responsibility to organizational units and expresses performance measures in financial terms. It is the responsibility accounting system that was developed when most firms were operating in relatively stable environments. PPT 14 -24

Elements of a Functional-Based Responsibility Accounting System Individual in Charge Operating Efficiency Unit Budgets Static Standards Responsibility is Defined Performance Measures are Established Organizational Unit Financial Outcomes Standard Costing Currently Attainable Standards PPT 14 -25

Elements of a Functional-Based Responsibility Accounting System Financial Efficiency Actual versus Standard Promotions Profit Sharing Performance is Measured Individuals are Rewarded Based on Financial Performance Controllable Costs Financial Measures Bonuses Salary Increases PPT 14 -26

Activity-Based Responsibility Accounting System An activity-based responsibility accounting system assigns responsibility to processes and uses both financial and nonfinancial measures of performance. It is the responsibility accounting system developed for those firms operating in continuous improvement environments. PPT 14 -27

Elements of an Activity-Based Responsibility Accounting System Process Team Value Chain Optimal Process. Oriented Responsibility is Defined Performance Measures are Established Financial Dynamic Value. Added PPT 14 -28

Elements of an Activity-Based Responsibility Accounting System Time Reductions Cost Reductions Promotions Gainsharing Performance is Measured Individuals are Rewarded Based on Multidimensional Performance Quality Improvement Trend Measures Bonuses Salary Increases PPT 14 -29

Strategic-Based Responsibility Accounting System A strategic-based responsibility accounting system (Balanced Scorecard) translates the mission and strategy of an organization into operational objectives and measures for four different perspectives: v The financial perspective v The customer perspective v The process perspective v The infrastructure (learning and growth) perspective PPT 14 -30

Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives A thorough understanding of the industry is critical to implementing a successful strategy PPT 14 -31

Elements of a Strategic-Based Responsibility Accounting System Customer Financial Process Communicate Strategy Alignment of Objectives Responsibility is Defined Performance Measures are Established Infrastructure Balanced Measures Link to Strategy PPT 14 -32

Elements of a Strategic-Based Responsibility Accounting System Financial Measures Process Measures Promotions Gainsharing Performance is Measured Individuals are Rewarded Based on Multidimensional Performance Customer Measures Infrastructure Measures Bonuses Salary Increases PPT 14 -33

End of Week PPT 14 -34