RESPONSIBILITY

ACCOUNTING
6.53

- Cost Accounting: Foundations and Evolutions by Kinney and Raiborn

- Managerial Accounting 13th Edition by Garrison, Noreen, and Brewer
 AUTHORITY STRUCTURES

CENTRALIZED DECENTRALIZED
- top management retains the majority of - decision-making authority is delegated to
decision-making authority subunit managers

▪ Responsibility Accounting
- retains full authority and responsibility for the
organization’s activities ▪ Cost Allocations

▪ Transfer Pricing

2
ADVANTAGES AND DISADVANTAGES

3
A company usually determines the appropriate
degree of decentralization based on a
combination of the ff:
• managers’ personal characteristics,
• nature of decisions required for organizational growth, and
• types of organizational activities in which the company is
engaged.

7/1/20XX Pitch deck title 4

RESPONSIBILITY ACCOUNTING SYSTEMS

Facilitates Provides info Produces

decentralization about the Responsibility
to flow performance, Reports tailored for
information from efficiency and planning,
units to top effectiveness of controlling and
management subunits decision making
TYPES OF RESPONSIBILITY CENTERS
The COST OBJECTIVE or the general classifications of manager’s or units’ scope of authority
and type of financial responsibility
BUSINESS MODEL
 COST CENTER
Admin Departments

has the authority only specifically evaluated can generate

to incur costs on the basis of how revenues, but the
well costs are revenues are either
controlled not under the
manager’s control or
not effectively
measurable

7/1/20XX Pitch deck title 8

 REVENUE CENTER
Revenue and Limited Cost Center

strictly responsible for has no control over pure revenue centers

the generation of setting selling prices do not exist
revenues or budgeting costs

7/1/20XX Pitch deck title 9

 PROFIT CENTER

responsible for has the ability to has a goal of

generating obtain resources at maximizing the
revenues and the most economical center’s profit
managing expenses prices
related to current
activity

7/1/20XX Pitch deck title 10

 INVESTMENT CENTER

has the authority to independent, has INDEPENDENCE

acquire, use, and freestanding divisions that grants the
dispose of plant or opportunity
assets to earn the corporate subsidiaries to make decisions
highest feasible rate about all matters
of return affecting their
organizational units

7/1/20XX Pitch deck title 11

“ Losing sight of the organizational goals while working to achieve an
independent responsibility center’s conflicting goal results in
suboptimization or the pursuit of goals and objectives that are
in the interests of individual managers and/or their segments rather
than in the company’s best interests.
EVALUATING INVESTMENT CENTER
RETURN ON INVESTMENTS
EVALUATING INVESTMENT CENTER
RETURN ON INVESTMENTS
 EVALUATING INVESTMENT CENTER
RESIDUAL INCOME
The profit earned that exceeds an amount “charged” for funds committed to the center. The “charged” amount is equal to
a specified target rate of return multiplied by the asset base and is comparable to an imputed rate of interest on the
divisional assets used.
 EVALUATING INVESTMENT CENTER
ECONOMIC VALUE ADDED (EVA)
EVA measures the profit produced above the cost of capital. However, EVA applies the
target rate of return to the market value of the capital invested rather than the book

EVA = After Tax Profits (Cost of Capital % Market Value of Invested Capital)
BALANCED SCORECARD (BSC)
Integrated set of performance measures that are derived from and support the company’s strategy
PERFORMANCE MEASURES FROM
FOUR PERSPECTIVES
TRANSFER PRICING
The price charged when one segment provides goods and services to another segment within a
company
“ A pseudo-profit center is created when one responsibility center uses a
transfer price to artificially “sell” goods or services to another
responsibility center: the selling center has artificial revenues and
profits, and the buying center has an artifi cially infl ated product or
service cost
 REASONS FOR TRANSFER PRICES:

To promote goal To make To “transform” a To motivate

congruence performance cost center into a managers and
evaluation profit center make them more
among entrepreneurial
segments more
comparable
 TRANSFER PRICING METHODS

MARKET-BASED COST-BASED NEGOTIATED DUAL TRANSFER

TRANSFER TRANSFER TRANSFER PRICES PRICING
PRICES PRICES
Cost-based transfer prices are commonly used for low-cost and low-volume
services such as temporary maintenance and temporary office staff assistance.

Market-based transfer prices are used to eliminate the problems of defining “cost”

Market price is believed to be an objective, arm’s-length measure of value

Negotiated transfer prices are often set through a process of bargaining between the
selling and purchasing values. Often used for services because their value—as shown
through expertise, reliability, convenience, or responsiveness—is often qualitative and can
be assessed only judgmentally from the perspective of the parties involved.

Dual pricing provides different transfer prices for the selling and buying segments by
allowing the seller to record the transfer of goods or services at a market or negotiated
market price and the purchaser to record the transfer at a cost-based amount. However, an
internal reconciliation is needed to adjust revenues and costs when company external
financial statements are prepared.
QUICK TEST
TRUE/FALSE

1. Decentralization is a transfer of authority from the bottom to the top of an organization.

2. Decentralization is a transfer of authority from the top to the bottom of an organization.
3. Decentralization can result in a lack of goal congruence among departments.
4. Decentralization increases the time required for decision-making.
5. Decentralization can lead to greater job enrichment and satisfaction.
6. Decentralization reduces the need for effective communication among an organization’s departments.
7. Decentralization means that a unit manager has the authority to make all decisions concerning that specific unit.
8. A responsibility accounting system should include all revenues and costs of a center.
9. A responsibility accounting system should include the revenues and costs under a division manager’s control.
10. Responsibility reports reflect the flow of information from operational units to top management.
11. Responsibility reports at lower levels of the organization are less detailed than reports at the higher levels.
12. A manager of a cost center is evaluated solely on the basis of how well costs are controlled.
13. When management by exception is employed, favorable variances should not be investigated.
14. When management by exception is employed, both favorable and unfavorable variances should be investigated.
15. The manager of a revenue center has the authority to establish selling prices of product.
16. A profit center is typically an independent organizational unit.
17. The manager of a profit center has the ability to set selling prices.
18. The manager of an investment center is responsible for generating revenue as well as controlling expenses
19. Suboptimization occurs when a manager of a cost center focuses on the goals of the cost center rather than on the goals of the
organization as a whole.
20. An administrative department provides services that benefit other internal units of an organization.
7/1/20XX Pitch deck title 33