Responsibility Accounting UIAMS, Panjab University Chandigarh Session 16 th September, 2013
Responsibility AccountingUIAMS, Panjab UniversityChandigarhSession 16th September, 2013
Relating to the responsibilities of individual managers.To evaluate managers on controllable items.An accounting system that provides information . . . Responsibility Accounting
DecentralizationIs the systematic effort to delegate to the lowest levels all the authority except that which can be exercised at central points.
Decision Making is Pushed DownDecentralization
DecentralizationPromotes better decision making.Allows upper-level management to concentrate on strategic decisions.Improves productivity.Develops lower-level managers.Improves performance evaluation.Advantages
Benefits of decentralizationReduces workload of the executiveFast decision makingFacilitates product diversificationGives opportunity of learning to each employee
DisadvantagesConflictCost increases because of duplicacy of workDisadvantage related to profit centres
Responsibility AccountingResponsibility accounting is used to measure the performance of people and departments to foster goal congruence.
CostResponsibility ReportsResponsibility Reports Prepared for each individual who has control over revenue or expense items
Responsibility Reports Prepare budgets for each responsibility center. Prepare timely performance reports comparing actual amounts with budgeted amounts. Measure performance of each responsibility center.
Responsibility CentersA subunit in an organization whose manager is held accountable for specified financial results.
Responsibility Centers Cost Center Segment has control over the incurrence of costs.The Paint Departmentin an automobile plant.The ReservationsDepartment of an airline.Revenue Center Segment is responsible for the revenue of a unit
Responsibility Centers 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.
A division of alarge corporation
Measuring Managerial Performance
Return on Investment Return on investment is the ratio of income to the investment used to generate the income.
ROI = Net IncomeInvestmentROI = MarginTurnoverReturn on Investment
Improving R0IThree ways to improve ROI Increase Sales Reduce Expenses Reduce Investment
ROI - A Major DrawbackAs division manager,I wouldnt invest inthat project becauseit would lower my pay!Gee . . .I thought we weresupposed to do what was best for the company!
Performance ReportsShow the budgeted and actual amounts, and the variances between these amounts, of key financial results appropriate for the type of responsibility center.
Performance Reports
Ch. 10
Raw-Material Inventoryxxx
Direct-Material Price VariancexxxRaw-material InventoryWork-in-Process InventoryWork-in-Process Inventory
Accounts PayablexxxActual quantity atStandard quantityStandard quantity
To record the purchase of raw material and the incurrence of anstandard costat standard priceat standard price
unfavorable price variance.
Work-in-Process Inventoryxxx
Direct-Material Quantity Variancexxx
Raw-Material InventoryxxxDirect-Material Price VarianceDirect-Material Quantity VarianceDirect-Labor Rate Variance
To record the use of direct material in production and the incurrenceUnfavorableFavorableUnfavorableFavorableUnfavorableFavorable
of an unfavorable quantity variancevariancevariancevariancevariancevariancevariance
Work-in-Process Inventoryxxx
Direct-Labor Rate Variancexxx
Direct-Labor Efficiency Variancexxx
Wages PayablexxxAccount PayableRaw-material InventoryWages Payable
To record the usage of direct labor, the incurrance of an unfavorableActual quantity atActual quantity atActual quantity at
direct-labor rate variance and the incurrence of a favorable direct-laboractual coststandard costactual cost
efficiency variance
Cost of Goods Soldxxx
Direct-Labor Efficiency Variancexxx
Direct-Labor Rate VariancexxxCost of Goods SoldDirect-Labor Efficiency Variance
Direct-Material Price VariancexxxUnfavorableFavorableUnfavorableFavorable
Direct-Material Quantity Variancexxxvariancevariancevariancevariance
Disposition of Variances
Sheet2
Normal Costing
Manufacturing OverheadWork-in-Process Inventory
ActualAppliedApplied
overheadoverhead:overhead:
Actual hoursActual hours
xx
PredeterminedPredetermined
overhead rateoverhead rate
Difference lies in the quantity of hours used.Standard Costing
Manufacturing OverheadWork-in-Process Inventory
ActualAppliedApplied
overheadoverhead:overhead:
StandardStandard
allowed hoursallowed hours
xx
PredeterminedPredetermined
overhead rateoverhead rate
Sheet3
BudgetedPlannedPredetermined
OverheadMonthly ActivityOverhead Rate
Variable . . . . . . .$60,000* . . . . . . . . .8,000machine hours. . . . . . . . .$7.50per process hour
Fixed . . . . . . . . .14,000* . . . . . . . . .8,000machine hours. . . . . . . . .1.75per process hour
Total . . . . . . . . .$74,000. . . . . . . . .8,000machine hours. . . . . . . . .$9.25per process hour
* From the flexible budget for planned activity of 8,000 machine hours
Sheet1
Variable costs:
Indirect material:
Wax
Plastic wrap
Paper products
Misc. supplies
Indirect labor:
Maintenance
Janitorial
Utilities:
Electricity
Natural gas
Water
Total variable cost
Fixed costs:
Indirect labor:
Inspection
Production supervisor
Set up
Depreciation:
Equipment
Insurance
Property taxes
Total fixed cost
Total overhead cost
Sheet4
Normal Costing
Manufacturing OverheadWork-in-Process Inventory
ActualAppliedApplied
overheadoverhead:overhead:
Actual hoursActual hours
xx
PredeterminedPredetermined
overhead rateoverhead rate
Standard Costing
Manufacturing OverheadWork-in-Process Inventory
ActualAppliedApplied
overheadoverhead:overhead:
StandardStandard
allowed hoursallowed hours
xx
PredeterminedPredetermined
overhead rateoverhead rate
Disposition of Variances
Manufacturing OverheadCost of Goods Sold
ActualAppliedBalance (1)Balance (2)
overheadoverhead:ActualApplied
Standardoverheadoverhead
allowed hoursgreater thangreater than
xAppliedActual
Predeterminedoverheadoverhead
overhead rate
Balance (1)Balance (2)
Balance (2)Balance (1)
Sheet5
Flexible Budget*Actual Results*Variance
FebruaryYear to DateFebruaryYear to DateFebruaryYear to Date
Company . . . . . . . . . . . . . . . . . . . . . .$30,660$64,567$30,716$64,570$56 F$ 3 F
Maui Division . . . . . . . . . . . . . . . . . .$18,400$38,620$18,470$38,630$70 F$10 F
Oahu Division . . . . . . . . . . . . . . . . . .$12,260$25,947$12,246$25,94014 U7 U
Total profit . . . . . . . . . . . . . . . . . . . .$30,660$64,567$30,716$64,570$56 F$ 3 F
Oahu Division
Waimea Beach Resort . . . . . . . . . . .$6,050$12,700$6,060$12,740$10 F$40 F
Diamond Head Lodge. . . . . . . . . . .$2,100$4,500$2,050$4,43050 U70 U
Waikiki Sands Hotel . . . . . . . . . . . . .$4,110$8,747$4,136$8,77026 F23 F
Total profit . . . . . . . . . . . . . . . . . . . .$12,260$25,947$12,246$25,940$14 U$ 7 U
Waikiki Sands Hotel
Grounds and Maintenance . . . . . . . .($45)($90)($44)($90)$ 1 F
Housekeeping and Custodial . . . . . .$(40)$(90)$(41)$(90)1 U
Recreational Services . . . . . . . . . . . .$40$85$41$881 F$ 3 F
Hospitality . . . . . . . . . . . . . . . . . . . .$2,800$6,000$2,840$6,03040 F30 F
Food and Beverage . . . . . . . . . . . . .$1,355$2,842$1,340$2,83215 F10 U
Total profit . . . . . . . . . . . . . . . . . . . .$4,110$8,747$4,136$8,770$26 F$23 F
Food and Beverage Department
Banquets and Catering . . . . . . . . . . .$600$1,260$605$1,265$ 5 F$ 5 F
Restaurants . . . . . . . . . . . . . . . . . . .$1,785$3,750$1,760$3,74025 U10 U
Kitchen. . . . . . . . . . . . . . . . . . . . . . .$(1,030)$(2,168)$(1,025)$(2,173)5 F5 U
Total profit . . . . . . . . . . . . . . . . . . . .$1,355$2,842$1,340$2,832$15 U$10 U
Kitchen
Kitchen staff wages . . . . . . . . . . . . .($80)($168)($78)($169)$ 2 F$ 1 U
Food . . . . . . . . . . . . . . . . . . . . . . . .$(675)$(1,420)$(678)$(1,421)3 U1 U
Paper products. . . . . . . . . . . . . . . . .$(120)$(250)$(115)$(248)5 F2 F
Variable overhead. . . . . . . . . . . . . . .$(70)$(150)$(71)$(154)1 U4 U
Fixed overhead. . . . . . . . . . . . . . . . .$(85)$(180)$(83)$(181)2 F1 U
Total expense . . . . . . . . . . . . . . . . . .($1,030)($2,168)($1,025)($2,173)$ 5 F$ 5 U
*Numbers without parentheses denote profit; numbers with parentheses denote expenses; numbers in thousands.
F denotes favorable variance; U denotes unfavorable variance.
Cost AllocationThe process of assigning the costs in the cost pool to the cost objects is called cost allocation or cost distribution.
Cost Allocation BasesAn allocation base is a measure of activity, physical characteristic, or economic characteristic that is associated with the responsibility centers, which are the cost objects in the allocation process.
Behavioral Effects of Responsibility Accounting
Segmented ReportingSegmented reporting refers to the preparation of accounting reports by segment and for the organization as a whole.A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data.
Segmented ReportingDivisionsUnitsAloha Hotels and ResortsOahu DivisionMaui DivisionWaikiki Sands HotelDiamond Head LodgeWaimea Beach Resort
Segmented Reporting
THANK U!
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