RESPONSIBILITY ACCOUNTING

Class Announcements Service Learning Assignment:

Service Learning Placements/Projects discussed in class  Service Learning Placements will be posted on Thursday February

6th at 12:00 pm at SCHW 396 (First Come First Serve Basis) Schedule a meeting with Danika Leblanc (x2010quu@stfx.ca)

prior to contacting your organization See Service Learning Project on-line

Next class – Transfer Pricing (changed in schedule) Assignment #2 due February 10, available on-line Midterm February 19th (Wednesday) Business Banquet - April 2nd – 5:45-8pm, Catering -

Gabrieau's Bistro; Keynote Speaker - Annette Verschuren, Past President of Home Depot for Canada and Asia

StFX Students: What does innovation mean to you?The StFX Extension Department is conducting a study to assess the

feasibility of establishing an Innovation Centre at StFX.

What could this mean for StFX students?Join us for a focus group

discussion:Friday, February 7th, 1:00 – 2:30 PMStFX Bloomfield Council ChambersFor more information, contact Mark

MacIsaac atmdmacisa@stfx.ca / 902.867.3645

Class Objectives

1. Understanding responsibility in budgeting

2. Consider the responsibility according to responsibility centre

3. Understanding the concept of controllability

Responsibility Accounting

Responsibility centre—a part, segment, or subunit of an organization whose manager is accountable for a specified set of activities. To promote better alignment of individual and

company goals Responsibility accounting—a system that

measures the plans, budgets, actions, and actual results of each responsibility centre. Early warning of issues/problems Performance evaluation Strategy evaluation

Responsibility: Controllability Controllability is the degree of influence that a

manager has over costs, revenues, or related items for which she/he is being held responsible. Controllability is difficult to pinpoint

Few costs are rarely under sole influence Time span influences controllability

Responsibility accounting focuses on information sharing, not in laying blame on a particular manager but gather information to enable future improvement.

Responsibility is more far reaching than control

Responsibility: Centres

1. Cost—accountable for costs only2. Revenue—accountable for revenues

only3. Profit—accountable for revenues and

costs4. Investment—accountable for

investments, revenues, and costs

Responsibility: Performance Measures

Four common measures of economic performance:

1. Return on investment2. Residual income3. Economic value added4. Return on sales

Selecting subunit operating income as a metric is inappropriate because it obviously differs simply on the differing size of the subunits.

Responsibility: Return on Investment (ROI)

IncomeInvestmentROI =

ROI is an accounting measure of income divided by an accounting measure of investment.

Responsibility: ROI (cont’d)

Most popular metric for two reasons:1. Blends all the ingredients of profitability

(revenues, costs, and investment) into a single percentage

2. May be compared to other ROI’s both inside and outside the firm

Also called the accounting rate of return (ARR) or the accrual accounting rate of return (AARR)

Goal congruence is a problem with ROI Profitable subunits may reject projects that from

the viewpoint of the company as a whole should be accepted

Responsibility: ROI (cont’d)

ROI may be decomposed into its two components as follows:

ROI = Return on Sales X Investment Turnover This is known as the DuPont Method of

Profitability Analysis

Income Income RevenuesInvestment Revenues InvestmentX=

Responsibility: Residual Income Residual income (RI) is an accounting measure of

income minus a dollar amount for required return on an accounting measure of investment.

RI = Income – (RRR X Investment) RRR = Required Rate of Return

Required rate of return times the investment is the imputed cost of the investment. Imputed costs are cost recognized in some situations, but not in

the financial accounting records. RI promotes goal congruence between manager and

company A project evaluated on RI, manager will choose a new project

only it has a positive RI which is congruent with company goals

Responsibility: Economic Value Added (EVA)

After-tax Weighted-Average Total CurrentOperating Income Cost of Capital Assets Liabilities ) }EVA {= X (

EVA is a specific type of residual income calculation that has recently gained popularity.

Weighted average cost of capital equals the after-tax average cost of all long-term funds in use.

Allows for incorporation of the cost of capital into decisions at the divisional level.

Responsibility: Return on Sales (ROS) Return on sales is simply income divided

by sales. Simple to compute, and widely understood. Measures how effectively costs are

managed Does not consider investment

Class Objectives - Revisited

1. Understanding responsibility in budgeting

2. Consider the responsibility according to responsibility centre

3. Understanding the concept of controllability