Chapter 12 Responsibility Accounting Quality Control and Environmental

Learning Objective 1 12 -

Responsibility Accounting Responsibility accounting is used to measure the performance of people and departments to foster goal congruence. 12 -3

Learning Objective 2 12 -

Responsibility Centers A subunit in an organization whose manager is held accountable for specified financial results. 12 -5

Responsibility Centers Cost Center Segment has control over the incurrence of costs. The Paint Department in an automobile plant. Revenue Center Segment is responsible for the revenue of a unit. The Reservations Department of an airline. 12 -6

Responsibility Centers Profit Center Segment has control over both costs and revenues. Company-owned restaurant in a fast-food chain. Investment Center Segment has control over profits and invested capital. A division of a large corporation. 12 -7

Learning Objective 3 12 -

Performance Reports Show the budgeted and actual amounts, and the variances between these amounts, of key financial results appropriate for the type of responsibility center. 12 -9

Performance Reports 12 -10

Learning Objective 4 12 -

Cost Allocation The process of assigning the costs in the cost pool to the cost objects is called cost allocation or cost distribution. 12 -12

Cost Allocation Bases An allocation base is a measure of activity, physical characteristic, or economic characteristic that is associated with the responsibility centers, which are the cost objects in the allocation process. 12 -13

Activity-Based Responsibility Accounting Traditional responsibility-accounting systems tend to focus on the financial performance measures of cost, revenue, and profit for subunits of the organization. Activity-based costing systems associate costs with the activities that drive those costs. In activitybased responsibility accounting attention is directed not only to costs incurred but also to the activity creating the cost. 12 -14

Behavioral Effects of Responsibility Accounting Controllability Information versus Blame Motivating Desired Behavior 12 -15

Learning Objective 5 12 -

Segmented Reporting A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data. Segmented reporting refers to the preparation of accounting reports by segment and for the organization as a whole. 12 -17

Segmented Reporting Aloha Hotels and Resorts Maui Division Waimea Beach Resort Divisions • Oahu Division Diamond Head Lodge Waikiki Sands Hotel • Units 12 -18

Segmented Reporting 12 -19

Key Features of Segmented Reporting Contribution format. Controllable versus uncontrollable expenses. Segmented income statement. 12 -20

Customer Profitability Analysis and Activity-Based Costing Let’s see, I need. . . Special credit terms, Small order lots, Special packing, Great field service, and JIT delivery. Customer We can handle that - but we need to quote a price that reflects the value of these services. Company Sales Rep 12 -21

Learning Objective 6 12 -

Total Quality Management Design Grade Conformance Quality 12 -23

Cost of Quality costs include the follows: – Prevention costs, – Appraisal costs, – Internal failure costs, and – External failure costs. 12 -24

Cost of Quality The opportunity cost of lost sales and decreased market share can represent a significant hidden cost. 12 -25

Learning Objective 7 12 -

Changing Views of Optimal Product Quality Costs Traditional View Total quality costs Failure costs Prevention and appraisal costs 0% 100% Percentage of defective products Minimum 12 -27

Changing Views of Optimal Product Quality Costs Contemporary View Total quality costs Failure costs Prevention and appraisal costs 0% 100% Percentage of defective products Minimum 12 -28

Identifying Quality Control Problems Poor reception/ static on line Pareto Diagram Too easily moves out of transmission range Power declines too rapidly Faulty casing (easily broken) 12 -29

ISO 9000 Standards The International Standards Organization (ISO), require that a manufacturer have a well-defined quality control system in place, and that the target level of product quality be maintained. Sustain quality of product. Effective quality control system in place. Provide purchaser confidence in the product. 12 -30

Learning Objective 8 12 -

Environmental Cost Management Private environmental costs are assumed by a company. Social environmental costs are assumed by the public. 12 -32

Environmental Cost Management Visible private environmental costs are measurable and clearly identified environmental issues. Hidden private environmental costs are caused by environmental issues but have not been so identified by the accounting system. 12 -33

Environmental Cost Strategies End-of-pipe Process improvement Prevention 12 -34

End of Chapter 12 12 -35