Chapter 12

Responsibility Accounting, Quality Control, and Environmental Cost Management

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objective 1

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Responsibility Accounting
Responsibility accounting is used to measure the performance of people and departments to foster goal congruence.

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Learning Objective 2

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Responsibility Centers
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.
Revenue Center
Segment is responsible for the revenue of a unit.

The Paint Department in an automobile plant.

The Reservations Department of an airline.

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Responsibility Centers
Profit Center Segment has control over both costs and revenues.
Investment Center
Segment has control over profits and invested capital.

Company-owned restaurant in a fast-food chain.

A division of a large corporation.

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Learning Objective 3

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Performance Reports
Show 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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Performance Reports
Flexible Budget* February Year to Date Company . . . . . . . . . . . . . . . . . . . . . . Maui Division . . . . . . . . . . . . . . . . . . Oahu Division . . . . . . . . . . . . . . . . . . Total profit . . . . . . . . . . . . . . . . . . . . Oahu Division Waimea Beach Resort . . . . . . . . . . . Diamond Head Lodge. . . . . . . . . . . Waikiki Sands Hotel . . . . . . . . . . . . . Total profit . . . . . . . . . . . . . . . . . . . . Waikiki Sands Hotel Grounds and Maintenance . . . . . . . . Housekeeping and Custodial . . . . . . Recreational Services . . . . . . . . . . . . Hospitality . . . . . . . . . . . . . . . . . . . . Food and Beverage . . . . . . . . . . . . . Total profit . . . . . . . . . . . . . . . . . . . . Food and Beverage Department Banquets and Catering . . . . . . . . . . . Restaurants . . . . . . . . . . . . . . . . . . . Kitchen. . . . . . . . . . . . . . . . . . . . . . . Total profit . . . . . . . . . . . . . . . . . . . . Kitchen Kitchen staff wages . . . . . . . . . . . . . Food . . . . . . . . . . . . . . . . . . . . . . . . Paper products. . . . . . . . . . . . . . . . . Variable overhead. . . . . . . . . . . . . . . Fixed overhead. . . . . . . . . . . . . . . . . Total expense . . . . . . . . . . . . . . . . . . $30,660 $18,400 12,260 $30,660 $6,050 2,100 4,110 $12,260 ($45) (40) 40 2,800 1,355 $4,110 $600 1,785 (1,030) $1,355 ($80) (675) (120) (70) (85) ($1,030) $64,567 $38,620 25,947 $64,567 $12,700 4,500 8,747 $25,947 ($90) (90) 85 6,000 2,842 $8,747 $1,260 3,750 (2,168) $2,842 ($168) (1,420) (250) (150) (180) ($2,168) Actual Results* February Year to Date $30,716 $18,470 12,246 $30,716 $6,060 2,050 4,136 $12,246 ($44) (41) 41 2,840 1,340 $4,136 $605 1,760 (1,025) $1,340 ($78) (678) (115) (71) (83) ($1,025) $64,570 $38,630 25,940 $64,570 $12,740 4,430 8,770 $25,940 ($90) (90) 88 6,030 2,832 $8,770 $1,265 3,740 (2,173) $2,832 ($169) (1,421) (248) (154) (181) ($2,173) Variance February Year to Date $56 F $70 F 14 U $56 F $10 F 50 U 26 F $14 U $1F 1U 1F 40 F 15 F $26 F $5F 25 U 5F $15 U $2F 3U 5F 1U 2F $5F $3F $10 F 7U $3F $40 F 70 U 23 F $7U $3F 30 F 10 U $23 F $5F 10 U 5U $10 U $1U 1U 2F 4U 1U $5U

*Numbers w ithout parentheses denote profit; numbers w ith parentheses denote ex penses; numbers in thousands. F denotes fav orable v ariance; U denotes unfav orable v ariance.

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Learning Objective 4

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Cost Allocation
The process of assigning the costs in the cost pool to the cost objects is called cost allocation or cost distribution.

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Cost Allocation Bases

An 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.

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Activity-Based Responsibility Accounting

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 activitybased responsibility accounting attention is directed not only to costs incurred but also to the activity creating the cost.
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Behavioral Effects of Responsibility Accounting

Controllability

Information versus Blame

Motivating Desired Behavior

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Learning Objective 5

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Segmented Reporting
A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data. Segmented reporting refers to the preparation of accounting reports by segment and for the organization as a whole.
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Segmented Reporting
Aloha Hotels and Resorts

Divisions

Maui Division

Oahu Division

Waimea Beach Resort

Diamond Head Lodge

Waikiki Sands Hotel

Units
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Segmented Reporting

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Key Features of Segmented Reporting

Contribution format. Controllable versus uncontrollable expenses. Segmented income statement.

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Customer Profitability Analysis and Activity-Based Costing

Lets see, I need . . .
Special credit terms, Small order lots, Special packing, Great field service, and JIT delivery.
We can handle that - but we need to quote a price that reflects the value of these services.

Customer

Company Sales Rep

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Learning Objective 6

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Total Quality Management

Design Grade
Quality

Conformance

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Cost of Quality
Quality costs include the follows:
Prevention costs, Appraisal costs, Internal failure costs, and External failure costs.

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Cost of Quality

The opportunity cost of lost sales and decreased market share can represent a significant hidden cost.
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Learning Objective 7

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Changing Views of Optimal Product Quality

Costs

Traditional View
Total quality costs Failure costs

Prevention and appraisal costs Percentage of defective products

0% Minimum

100%

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Changing Views of Optimal Product Quality

Costs

Contemporary View

Total quality costs

Failure costs

Prevention and appraisal costs Percentage of defective products

0% Minimum

100%

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Identifying Quality Control Problems

150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0

Poor reception/ static on line

Pareto Diagram
Too easily moves out of transmission range

Power declines too rapidly Faulty casing (easily broken)

Type of product defect

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ISO 9000 Standards

The International Standards Organization (ISO), require that a manufacturer have a well-defined quality control system in place, and that the target level of product quality be maintained. Sustain quality of product. Effective quality control system in place. Provide purchaser confidence in the product.

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Learning Objective 8

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Environmental Cost Management

Private environmental costs are assumed by a company.

Social environmental costs are assumed by the public.

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Environmental Cost Management

Visible private environmental costs are measurable and clearly identified environmental issues. Hidden private environmental costs are caused by environmental issues but have not been so identified by the accounting system.
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Environmental Cost Strategies

End-of-pipe Process improvement
Prevention

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End of Chapter 12

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