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Responsibility Accounting From Online Class PDF
Responsibility Accounting From Online Class PDF
Centralized Structure
- Organizational structure in which decision making is made strictly at the top management level
- Difficult to be dynamic and responsive to outside threats
- Top management is responsible for everything
- Their focus is on short term operations
Decentralized Structure
Sub-optimization
- The practice of focusing efforts on 1 component of a whole and improving that 1 component
and ignoring the impact on other components and a whole
- What is good for 1 segment may not be good to another
Goal Congruence
- A situation where the goals of each part of the organization are aligned with the overall goals
set by top management
- Segments goals should be consistent with goals of top management
Responsibility Centers
1) Cost Center
- Manager is accountable only for costs
- Accounting and human resource departments
- Not expected to generate revenues
2) Revenue Center
- Accountable for revenues only
- Agencies of airline or Insurance companies
- Performance is measured based on sales
3) Profit Center
- Accountable for both costs and revenue
- Branch of a fast-food chain
4) Investment Center
- Accountable for costs, revenue and proper utilization of the assets of his segment
- Different types of businesses of 1 company
1) Variance Analysis
- A comparison between actual and expected results
- According to management by exception principle, we must investigate only significant variances
- Can be used for all responsibility centers
Residual Income
- Amount of income generated in excess of the minimum income for the investment
- More of an absolute value than a ratio
= Income – Minimum Income
= Income – (Assets*Minimum rate of return)
- If the ROI of an investment is less than the expected ROI of the division but greater than the
minimum rate of return, the investment will be considered desirable for top management.
- Accepting the project will
Decrease the division’s ROI then division manager will reject the investment
Increase the division’s residual income then division manager will accept the
investment
- Goal Congruence is attained if RI is the evaluation basis
- A variation of RI from the point of view of the capital providers of the entity
= Operating profit after tax – (Assets – operating liabilities) * WACC
Balance Scorecard
- Concerned with the processes that generate and bring the customer value proposition
- It emphasizes on all the activities required for the company to excel at creating the value
expected by the customers both productively and efficiently
Velocity
Speed of production
How many units can be produced in a period of time
Productivity
o The ratio of output to input in manufacturing an item
Transfer Pricing
2019 2018
Assets 2,000,000 2,800,000
ROI
Operating Income/Average Assets = 0.25
600,000 2,400,000
Sample Case: CMN Inc, a subsidiary of Universal Corporation has shown the
following information: (use Du pont equation)
Asset Turnover 5x
Profit Margin 2%
5*2% = 10%
Problem: You are a manager of Justin Corp with average invested capital of
2,000,000. You boast 1 product division’s ROI of 20%, which is higher than the
company’s required rate of return of only 12%. It is believed that any investment
with a return of 12% must be engaged in. The company evaluates its subordinate
managers using ROI.
A new Project requiring 500,000 of investment is available and can give the
division an additional ROI of 15% and gives the company an additional income of
75,000 (500,000*15%)
Answer:
As a subordinate manager, we would want to increase the ROI since that is
our evaluation basis. IF we do nothing else, we still have ROI of 20%. Since
investment is 2,000,000. We need Income of 400,000 to get ROI of 20%
(400,000/2,000,000) = 20%
2019 2018
Income 120,000 200,000
Assets 700,000 800,000
Answer
EVA = Operating profit after tax-(Total Assets - operating liabilities) *WACC
= 8000(1-.3)-((40,000-4000)*10%)
= 5600-(36,000*10%)
= 2000
Problem: Myles finance manager has decided to use delivery
performance measures for performance evaluation. She requested the
production manager to submit data that will be used for the evaluation.
The production manager submitted the following data, typical of the
time involved to complete orders:
Days
Waiting time from orders being placed to start of production 6
Waiting Time from start of production to completion 2
Process Time 7
Move Time 4
Inspection Time 1
Answer
Delivery Cycle Time is 20 days
Manufacturing Cycle time is 14 days (excluding waiting time to be
placed into production), only 7 days is spent on actual processing
Market Price 84
Variable Distribution costs from outside sales 9
Variable Manufacturing cost 36
Fixed Manufacturing cost 18
Bacolod’s Fitting Segment wants to purchase 4500 parts either from Forging or a
comparable part in the marketplace that sells for 72 pesos.
The Fitting segment’s management feels that if forging segment’s part is used, a price
discount is justified, since they both belong to the same corporation