Resposibility accounting

14,177 views

Published on

Account for managers

Published in: Business, Technology
0 Comments
8 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
14,177
On SlideShare
0
From Embeds
0
Number of Embeds
7
Actions
Shares
0
Downloads
820
Comments
0
Likes
8
Embeds 0
No embeds

No notes for slide
  • 2
  • 4
  • 5
  • 6
  • 4
  • Resposibility accounting

    1. 1. 22-1 Chapter RESPONSIBILITY 22 ACCOUNTING AND TRANSFER PRICINGMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    2. 2. 22-2 Responsibility Centers Responsibility Centers Large complex businesses are divided into responsibility centers enabling managers to have a smaller effective span of control.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    3. 3. The Need for Information About The Need for Information About 22-3 Responsibility Center Performance Responsibility Center Performance The accounting system provides information about resources used and outputs achieved. This information is used to:  Plan and allocate resources.  Control operations.  Evaluate the performance of center managers.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    4. 4. Cost Centers, Profit Centers, and Cost Centers, Profit Centers, and 22-4 Investments Centers Investments Centers Cost Center A business section that has control over the incurrence of costs, but no control over revenues or investment funds.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    5. 5. Cost Centers, Profit Centers, and Cost Centers, Profit Centers, and 22-5 Investments Centers Investments Centers Profit Center Revenues A part of the business Sales Interest that has control over Other both costs and Costs Mfg. costs revenues, but no Commissions control over Salaries Other investment funds.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    6. 6. Cost Centers, Profit Centers, and Cost Centers, Profit Centers, and 22-6 Investments Centers Investments Centers Investment Center A profit center where management also makes capital investment decisions. Corporate HeadquartersMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    7. 7. Cost Centers, Profit Centers, and Cost Centers, Profit Centers, and 22-7 Investments Centers Investments Centers Evaluation Measures Cost control Cost Quantity and quality Center of services Profit Profitability Center Investment Return on assets (ROA) Center Residual income (RI)McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    8. 8. 22-8 Responsibility Accounting Systems Responsibility Accounting Systems An accounting system that provides information . . . Relating to the To evaluate responsibilities of managers on individual managers. controllable items.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    9. 9. 22-9 Responsibility Accounting Systems Responsibility Accounting Systems  Prepare budgets for  Measure performance ofeach responsibility center. each responsibility center.  Prepare timely performance reports comparing actual amounts with budgeted amounts.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    10. 10. 22-10 Successful implementation of responsibility Successful implementation of responsibility accounting may use organization charts with accounting may use organization charts with clear lines of authority and clearly defined clear lines of authority and clearly defined levels of responsibility. levels of responsibility. B o a r d o f D ir e c to r s P r e s id e n t V ic e P r e s id e n t V ic e P r e s id e n t V ic e P r e s id e n t o f F in a n c e o f O p e r a tio n s o f M a r k e tin g S to re M a n a g e r D e p a rtm e n t M a n a g e rMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    11. 11. 22-11 Responsibility Accounting Systems Responsibility Accounting Systems Amount of detail varies according to level in organization. A department manager A store manager receives receives detailed summarized information reports. from each department.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    12. 12. 22-12 Responsibility Accounting Systems Responsibility Accounting Systems Amount of detail varies according to level in organization. Management by exception: Upper-level management does not receive operating detail unless problems arise. The vice president of operations receives summarized information from each store.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    13. 13. 22-13 Responsibility Accounting Systems Responsibility Accounting Systems To be of maximum benefit, responsibility reports should . . .  Be timely.  Be issued regularly.  Be understandable.  Compare budgeted and actual amounts.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    14. 14. Assigning Revenue and Costs to Assigning Revenue and Costs to 22-14 Business Centers Business Centers Revenue is easily and automatically assigned to specific departments using point of sale entries from cash registers. Service DepartmentMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    15. 15. Assigning Revenue and Costs to Assigning Revenue and Costs to 22-15 Business Centers Business Centers Two guidelines should be followed in allocating costs to the various parts of a business . . .  According to cost behavior patterns: Fixed or variable.  According to whether the costs are directly traceable to the centers involved.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    16. 16. 22-16 Profit Center Reporting Profit Center Reporting Webber, Inc. has two divisions. W e b b e r , In c . C o m p u te r D iv is io n T e le v is io n D iv is io n Let’s look more closely at the Television Division’s income statement.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    17. 17. 22-17 Profit Center Reporting Profit Center Reporting Income Statement Contribution Margin Format Television Division Cost of goods Sales $ 300,000 sold consists of Variable COGS $ 120,000 variable Other variable costs 30,000 manufacturing Total variable costs $ 150,000 costs. Contribution margin $ 150,000 Traceable fixed costs 90,000 Responsibility margin $ 60,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    18. 18. 22-18 Profit Center Reporting Profit Center Reporting Income Statement Contribution Margin Format Television Division Sales $ 300,000 Variable COGS $ 120,000 Fixed and Other variable costs 30,000 variable costs Total variable costs $ 150,000 are listed in Contribution margin $ 150,000 separate Traceable fixed costs 90,000 sections. Responsibility margin $ 60,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    19. 19. 22-19 Profit Center Reporting Profit Center Reporting Income Statement Contribution Margin Format Television Division Sales $ 300,000 Variable COGS $ 120,000 Responsibility margin is the Television Other variable costs 30,000 Division’s contribution Total variable costs $ 150,000 to overall operations. Contribution margin $ 150,000 Traceable fixed costs 90,000 Responsibility margin $ 60,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    20. 20. 22-20 Traceable Fixed Costs Traceable Fixed Costs Traceable fixed costs would disappear over time if the center itself disappeared. No computer No computer division means . . . division manager.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    21. 21. 22-21 Common Fixed Costs Common Fixed Costs Common fixed costs arise because of overall operation of the company and are not due to the existence of a particular No computer center. We still have a division means . . . company president.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    22. 22. 22-22 Profit Center Reporting Profit Center Reporting Let’s see how the Television Division fits into Webber, Inc.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    23. 23. 22-23 Profit Center Reporting Profit Center Reporting Income Statement Company Television Computer Sales $ 500,000 $ 300,000 $ 200,000 Variable costs (230,000) (150,000) (80,000) CM $ 270,000 $ 150,000 $ 120,000 Traceable FC (170,000) (90,000) (80,000) Responsibility margin $ 100,000 $ 60,000 $ 40,000 Common costs (25,000) Net income $ 75,000 Common costs arise because of overall operating activities and are not due to the existence of a particular division.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    24. 24. Traceable Costs Can Become Common Traceable Costs Can Become Common 22-24 Costs Costs Fixed costs that are traceable on one level can become common if the business is divided into smaller parts. Let’s see how this works!McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    25. 25. 22-25 Profit Center Reporting Profit Center Reporting Income Statement Television Division Color HDTV Sales $ 300,000 $ 200,000 $ 100,000 Variable costs (150,000) (95,000) (55,000) CM $ 150,000 $ 105,000 $ 45,000 Traceable FC (80,000) (45,000) (35,000) Responsibility margin $ 70,000 $ 60,000 $ 10,000 Common costs 10,000 Net income $ 60,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    26. 26. 22-26 Profit Center Reporting Profit Center Reporting Income Statement Television Division Color HDTV Sales $ 300,000 $ 200,000 $ 100,000 Variable costs (150,000) (95,000) (55,000) CM $ 150,000 $ 105,000 $ 45,000 Traceable FC (80,000) (45,000) (35,000) Responsibility margin $ 70,000 $ 60,000 $ 10,000 Common costs 10,000 Net income $ 60,000 $ 45,000 To Color 35,000 To HDTV $90,000 cost directly traced 10,000 Common to the Television Division. $ 90,000 TV DivisionMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    27. 27. 22-27 Responsibility Margin Responsibility Margin Responsibility margin is the best gauge of the long-run profitability of a business center. Profits TimeMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    28. 28. When is a Business When is a Business 22-28 Center Unprofitable? Center Unprofitable? Home Appliance Company Income Statement Laundry Division Washers Dryers Sales $ 300,000 $ 200,000 $ 100,000 Variable costs (150,000) (95,000) (55,000) CM $ 150,000 $ 105,000 $ 45,000 Traceable FC (95,000) (45,000) (50,000) Responsibility margin $ 55,000 $ 60,000 $ (5,000) Common costs (10,000) Net income $ 45,000 The Dryer Division is unprofitable because the responsibility margin is negative.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    29. 29. Evaluating Business Evaluating Business 22-29 Center Managers Center Managers Managers should be evaluated on the portion of responsibility margin they control. Common fixed costs can not be traced to the Dryer Division or the Washer Division, so they are excluded from the responsibility margin. The key issue is controllability.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    30. 30. Arguments Against Allocating Common Arguments Against Allocating Common 22-30 Fixed Costs Fixed Costs Common fixed costs would not change even if a business center were eliminated. Common fixed costs are not under the direct control of the center’s managers. Allocation of common fixed costs may imply changes in profitability that are unrelated to the center’s performance.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    31. 31. 22-31 Transfer Prices Transfer Prices The amount charged when one division sells The amount charged when one division sells goods or services to another division. goods or services to another division. Batteries Battery Division Auto DivisionMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    32. 32. 22-32 Transfer Prices Transfer Prices The transfer price affects the profit measure for both buying and selling divisions. A higher transfer price for batteries means . . . . . . greater Battery Division profits for the Auto Division Battery Division.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    33. 33. 22-33 Transfer Prices Transfer Prices The transfer price affects the profit measure for both buying and selling divisions. A higher transfer price for batteries means . . . . . . lower Battery Division profits for the Auto Division Auto Division.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    34. 34. 22-34 Transfer Prices Transfer Prices Many companies use the external market value of goods transferred as the transfer price. Transfer prices have no direct effect upon the company’s overall net income.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    35. 35. 22-35 Transfer Prices Transfer Prices Negotiated transfer price When the external market value of goods transferred is unavailable . . . Transfer prices have no direct effect upon the company’s overall net income. Cost-p trans pricMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    36. 36. 22-36 Nonfinancial Performance Measures Nonfinancial Performance Measures Product Quality Personnel Number of defective parts Number of sick days taken Number of customer returns Employee turnover Number of customer complaints Number of grievances filed Marketing Efficiency and Capacity Number of new customers Cycle time (manufacturing) Number of sales calls initiated Occupancy rates (hotels) Market share Passenger miles (airlines) Number of product stockouts Patient days (hospitals) Transactions processed (banks)McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    37. 37. Overview of Traditional Overview of Traditional 22-37 and Variable Costing and Variable Costing Traditional Variable Costing Costing Direct Materials Product Product Direct Labor Costs Costs Variable Manufacturing Overhead Fixed Manufacturing Overhead Period Period Variable Selling and Administrative Expenses Costs Costs Fixed Selling and Administrative ExpensesMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    38. 38. 22-38 Unit Cost Computations Unit Cost Computations Dana, Inc. produces a single product with the following information available: Number of units produced annually 25,000 Variable costs per unit: Direct materials, direct labor, and variable mfg. overhead $ 10 Selling & administrative expenses $ 3 Fixed costs per year: Manufacturing overhead $ 150,000 Selling & administrative expenses $ 100,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    39. 39. 22-39 Unit Cost Computations Unit Cost Computations Unit product cost is determined as follows: Traditional Variable Costing Costing Direct materials, direct labor, and variable mfg. overhead $ 10 $ 10 Fixed mfg. overhead ($150,000 ÷ 25,000 units) 6 - Unit product cost $ 16 $ 10 Selling and administrative expenses are always treated as period expenses and deducted from revenue.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    40. 40. Income Comparison of Traditional and Income Comparison of Traditional and 22-40 Variable Costing Variable Costing Dana had no beginning inventory, produced 25,000 units and sold 20,000 units this year. Traditional Costing Sales (20,000 × $30) $ 600,000 Less cost of goods sold: Beginning inventory $ - Add COGM (25,000 × $16) 400,000 Goods available for sale 400,000 Ending inventory (5,000 × $16) 80,000 320,000 Gross margin 280,000 Less selling & admin. exp. Variable Fixed Net operating incomeMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    41. 41. Income Comparison of Traditional and Income Comparison of Traditional and 22-41 Variable Costing Variable Costing Dana had no beginning inventory, produced 25,000 units and sold 20,000 units this year. Traditional Costing Sales (20,000 × $30) $ 600,000 Less cost of goods sold: Beginning inventory $ - Add COGM (25,000 × $16) 400,000 Goods available for sale 400,000 Ending inventory (5,000 × $16) 80,000 320,000 Gross margin 280,000 Less selling & admin. exp. Variable (20,000 × $3) $ 60,000 Fixed 100,000 160,000 Net operating income $ 120,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    42. 42. Income Comparison of Traditional and Income Comparison of Traditional and 22-42 Variable Costing Variable Costing Now let’s look at variable costing by Dana, Inc. Variable Variable Costing Sales (20,000 × $30) costs $ 600,000 Less variable expenses: only. Beginning inventory $ - All fixed Add COGM (25,000 × $10) 250,000 manufacturing Goods available for sale 250,000 Less ending inventory (5,000 × $10) 50,000 overhead is Variable cost of goods sold 200,000 expensed. Variable selling & administrative expenses (20,000 × $3) 60,000 260,000 Contribution margin 340,000 Less fixed expenses: Manufacturing overhead $ 150,000 Selling & administrative expenses 100,000 250,000 Net operating income $ 90,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    43. 43. Income Comparison of Absorption and Income Comparison of Absorption and 22-43 Variable Costing Variable Costing Let’s compare the methods. Cost of Goods Ending Period Sold Inventory Expense Total Traditional costing Variable mfg. costs $ 200,000 $ 50,000 $ - $ 250,000 Fixed mfg. costs 120,000 30,000 - 150,000 $ 320,000 $ 80,000 $ - $ 400,000 Variable costing Variable mfg. costs $ 200,000 $ 50,000 $ - $ 250,000 Fixed mfg. costs - - 150,000 150,000 $ 200,000 $ 50,000 $ 150,000 $ 400,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    44. 44. 22-44 Reconciliation Reconciliation We can reconcile the difference between absorption and variable income as follows: Variable costing net operating income $ 90,000 Add: Fixed mfg. overhead costs deferred in inventory (5,000 units × $6 per unit) 30,000 Traditional costing net opearting income $ 120,000 Fixed mfg. overhead $150,000 = = $6.00 per unit Units produced 25,000 unitsMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
    45. 45. 22-45 End of Chapter 22 End of Chapter 22McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

    ×