Responsibility Accounting 1 Responsibility Accounting Responsibility centres denote

Responsibility Accounting 1

Responsibility Accounting • Responsibility centres denote any organisation unit that is headed by a responsible manager. • Responsibility centres exist to accomplish one or more purpose (objectives). • The individual objectives help in achieving the overall goal. (Should be efficient and effective) • The goods and services produced by a responsibility centre may be used internally or by the outside world. • Measurability and Controllability 2

Types of Responsibility centres • Cost centres • Expense Centres • Revenue Centres • Profit Centres • Investment Centres 3

Cost centres • Output can be measured and specify the amount of input • Managers are held responsible for cost incurred in the centres. • Efficiency is measured by the amount of input consumed. • Managers are not responsible for volume variances. 4

Expense Centres • Centres that produce outputs that are not measurable in financial terms. • No strong relation exits between resources and results • Examples: G&A department • Performance evaluation on the basis of the inter and intra firm comparison of expenses. 5

Revenue Centres • Generally a revenue centre acquires finished goods and is responsible for selling and distributing them. • If pricing is not within its control, then the manager is held responsible for the volume and mix variances. • If pricing is within its control, then it can be made responsible for gross revenue. • They are not profit centres because the expenses are incomplete. 6

Profit Centres • In this case managers have almost complete operational decision-making. • They are evaluated on the basis of profit generated. • Principal functions manufacturing and marketing are performed. • It sells majority of its output to the outside world. 7

Profit Centres Profitability can be measured in five ways: • Contribution margin • Divisional profit • Controllable divisional profit • Income before income tax • Net income 8

Profit Centres Transfer Price • Market price • Marginal Cost • Incremental Cost plus fixed fee • Full cost • Negotiated market-based price 9

Investment Centres • Centers whose managers control revenue, costs, and the level of investments. • They can be evaluated on the basis of ROI • Use of Dupont analysis 10

Case Study for the next class • Birch Paper Company 11