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TRANSCRIPT
McGraw-Hill/Irwin
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Responsibility Accounting and Performance Measure
McGraw-Hill/Irwin
12-2
Why responsibility accounting?
SME BIG COMPANY
THE OWNER CAN DIRECTLY
MANAGE HIS/HER
COMPANY
THE OWNER NEED OTHERS TO RUN HIS/HER COMPANY
DECENTRALIZATION.
SOME EXAMPLES?
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Responsibility Centers
A subunit in an organization whose manager is held accountable for
specified financial results.
A subunit in an organization whose manager is held accountable for
specified financial results.
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Responsibility Centers
Cost Center Segment has
control over the
incurrence of costs.
Cost Center Segment has
control over the
incurrence of costs.
The Paint Departmentin an automobile plant.
Revenue Center Segment
is responsiblefor the revenue of
a unit.
Revenue Center Segment
is responsiblefor the revenue of
a unit.
The ReservationsDepartment of an airline.
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Responsibility Centers
Profit Center Segment has
control over both costs
and revenues.
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.
Investment Center
Segment has control over profits
and invested capital.
A division of alarge corporation.
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Measuring Management Performance
CoststandardsCoststandards
Contributionincomestatement
Contributionincomestatement
Rate of returnon investedfunds or residual income
Rate of returnon investedfunds or residual income
Evaluation ToolCost
CenterCost
Center
InvestmentCenter
InvestmentCenter
ProfitCenterProfit
Center
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SOME CONSIDERATIONS?
PROCESSINPUT OUTPUT
CAN WE MEASURE IT?
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ADVANTAGES & DISADV. OF RESPONSIBILITY ACCT.
ADVANTAGES HELP OWNER AND TOP
MANAGERS TO RUN AND CONTROL THE COMPANY
CAN BE A TRAINING GROUND FOR THE NEXT TOP MANAGER
DISADVANTAGES MAY CREATE CONLICT
OR COMPETITION AMONG DIVISION MANAGERS
ADMINISTRATIVE COSTS
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Performance Reports
Shows the budgeted and actual amounts, and the variances
between these amounts, of key financial results appropriate for the type of responsibility center.
Shows the budgeted and actual amounts, and the variances
between these amounts, of key financial results appropriate for the type of responsibility center.
McGraw-Hill/Irwin
12-10Activity-Based Responsibility
AccountingTraditional responsibility-accounting systems
tend to focus on the financial performance measures of cost, revenue, and profit for
subunits of the organization.
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
activity-based responsibility accounting attention is directed not only to costs incurred
but also to the activity creating the cost.
Activity-based costing systems associate costs with the activities that drive those costs. In
activity-based responsibility accounting attention is directed not only to costs incurred
but also to the activity creating the cost.
McGraw-Hill/Irwin
12-11Behavioral Effects of
Responsibility Accounting
InformationversusBlame
Controllability
MotivatingDesiredBehavior
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Segmented Reporting
A segment is any part or activity of an organization about which a
manager seeks cost, revenue, or
profit data.
A segment is any part or activity of an organization about which a
manager seeks cost, revenue, or
profit data. The Operating Sectionof a hospital
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U.S. Sales Foreign Sales
System s
U.S. Sales Foreign Sales
Personal
Cell PhoneDivision
Segmented ReportingProduct
Lines•
SalesTerritories
•
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12-14Key Features of Segmented
Reporting
Contribution format.Controllable versus uncontrollable expenses.Segmented income statement.
Contribution format.Controllable versus uncontrollable expenses.Segmented income statement.
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Segmented Income StatementIncome StatementCell Phone
Division Systems PersonalSales 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) Segment margin 70,000 60,000 10,000
Common costs 10,000 Net income 60,000$
ContributionFormat
ContributionFormat
Costs that cannot be controlled by the segment manager are isolated.Costs that cannot be controlled by the segment manager are isolated.
McGraw-Hill/Irwin
12-16Customer 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.
We can handlethat - but we need
to quote a price thatreflects the value of these services.
CompanySales RepCustomer
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Copyright © by Houghton Miffin Company. All rights reserved.
17
DiscussionQ. Name the types of responsibility
centers?
1. Cost Centers2. Discretionary Cost Centers3. Revenue Centers4. Profit Centers5. Investment Centers
A.
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Performance Evaluation
OBJECTIVE 4Prepare performance reports for the various types of responsibility centers, including reports based on the flexible budget for cost centers and variable costing for profit centers.
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Evaluating Cost Center Performance
• Use flexible budgets to identify variances between actual and expected costs.
Evaluating Profit Center Performance• Compare actual results to budgeted income statement.• Use variable costing (contribution method) income
statements to focus on cost variability and the profit center’s contribution to operating income.
• Only show controllable costs.• Show other, nonfinancial performance measures.
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Discussion
Q. What type of Income Statement should be used to evaluate profit centers?
Variable Costing Income StatementA.
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Evaluating Investment Center Performance
OBJECTIVE 5
Use the traditional performance measures of return on investment and residual income to evaluate investment centers.
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Return on Investment (ROI)Traditionally the most common performance measure
ROI
= Operating Income
Average Assets Invested
= Operating Income x Sales
Sales Average Assets Invested
= Profit Margin x Asset Turnover
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Copyright © by Houghton Miffin Company. All rights reserved.
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Other Measures used in conjunction with ROI include:
Revenues Costs Operating Income Revenue growth Market share % changes in ROI
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Residual Income The operating income earned above a minimum desired
return on invested assets.
Residual Income = Operating Income – (Desired ROI x Average Assets Invested)
Residual income eliminates the possibility of missed income opportunities that exist if ROI is used as a performance measure. BUT residual income does not provide a meaningful comparison between investment centers of a different size because residual income shows absolute dollars not a percentage.
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Discussion
Q. What measure of investment center performance is best used to compare managers of different size investment
centers?
ROI, because it provides a ratio. Residual income provides an absolute dollar amount.
A.
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Economic Value Added (EVA)
OBJECTIVE 6
Use economic value added to evaluate investment centers.
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Economic Value Added – the shareholder wealth created by an investment center.
Cost of Capital – the minimum desired rate of return on an investment.
EVA = After Tax Operating Income
– [Cost of Capital x (Total Assets – Current Liabilities)]
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Economic Value Added
Compare EVAs from previous periods, target EVAs, and EVAs from other investment centers.
Affected by decisions on pricing, sales volume, taxes, cost of capital, etc.
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DiscussionQ. Why should multiple performance
measures be used to evaluate investment center performance?
Because any one performance measure tends to emphasize only one particular aspect of performance.
A.
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Performance Incentives
OBJECTIVE 7
Explain how properly linked performance incentives and measures add value for all stakeholders in performance management and evaluation.
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Copyright © by Houghton Miffin Company. All rights reserved.
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Linking Goals, Objectives, Measures and Performance Targets
The links should be causal:
Goal Objective Measure Performance Target
To be a friend of the
environment
To reduce the company’s
environmental risk
Number of products recycled
To recycle at least 10% of products sold
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Copyright © by Houghton Miffin Company. All rights reserved.
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Performance-Based Pay
Responsibility center managers are more likely to achieve their performance targets if their pay depends on it.
Cash bonuses, awards, profit-sharing and stock options are forms of incentive compensation.
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The Coordination of GoalsIncentive plans to coordinate goals
must consider: When to give rewards? Who shall be rewarded? How should the reward be computed? Does the incentive plan address the interest
of all stakeholders?Performance Management and Evaluation
systems should balance and benefit all stakeholders.
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DiscussionQ. What does “an organization will get
what it measures” mean?
If performance measures (and incentives) are based on specific objectives, managers will be motivated to achieve the objectives that are being measured.
A.
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OK, LET’S REVIEW . . .
1. Describe how the balanced scorecard aligns performance with organizational goals and explain the balanced scorecard’s role in the management cycle.
2. Discuss performance measurement and state the issues that affect management’s ability to measure performance.
3. Define responsibility accounting and describe the role responsibility centers play in performance management and evaluation.
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CONTINUING OUR REVIEW . . .
4. Prepare performance reports for the various types of responsibility centers, including reports based on the flexible budget for cost centers and variable costing for profit centers.
5. Use the traditional performance measures of return on investment and residual income to evaluate investment centers.
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AND FINALLY . . .
6. Use economic value added to evaluate investment centers.
7. Explain how properly linked performance incentives and measures add value for all stakeholders in performance management and evaluation.
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Total Quality Management
Quality
Design
ConformanceGrade
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End of Chapter