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McGraw-Hill/Irwin 12-1 Responsibility Accounting and Performance Measure

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Page 1: Resp Acct Baru April 13

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Responsibility Accounting and Performance Measure

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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.

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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.

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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.

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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.

23

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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.

33

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