GROUP 4 – RESPONSIBILITY ACCOUNTING

DECENTRALIZATION IN ORGANIZATION
Decentralization in business is when daily operations and decision-making power are delegated by
top management to middle-and lower-level managers — and sometimes even team members.
Organizations with a decentralized structure allow upper management to focus more on growth
opportunities and major decisions, rather than day-to-day duties. In a decentralized organization,
lower levels in the organizational hierarchy can make decisions. An example of a decentralized
organization is a fast-food franchise chain. Each franchised restaurant in the chain is responsible
for its own operation.

RESPONSIBILITY ACCOUNTING
Responsibility accounting is a kind of management accounting that is accountable for all the
management, budgeting, and internal accounting of a company. The primary objective of this
accounting is to support all the Planning, costing, and responsibility centres of a company.
For example, if Mr X, a unit manager, plans his department's budget, he is accountable for keeping
it under control. Mr X will have all of the necessary information about his department's costs

COST CENTER
A cost center is a role or department that costs the business money but does not generate revenue
on its own. They are often administrative, service and support roles. These positions cannot be
eliminated to cut costs because they are vital to a smoothly operating organization.
Cost centers can be individual roles, like janitors or human resource personnel, or full departments,
like IT departments or warranty departments. The size of a cost center and how many cost centers
there are will vary due to company size and industry. Cost centers are listed as separate units in
the business so that the resources they use can be easily monitored. Managers are responsible for
ensuring that the centers run efficiently and stay within budget.

TYPES OF COST CENTERS

There are six major types of cost centers that do not generate profits on their own but are all
important to the core functions of the business.
1. Impersonal cost center
Impersonal cost centers deal with equipment, machinery or locations. They may focus on
locations, equipment, production or machines. For example, a research and development
department have a budget to find innovative solutions to consumer problems or design new
products.
2. Operation cost center
Operation cost centers are concerned with people or machines engaged in similar activities. For
example, IT departments make sure that hardware, software and networks are all working
correctly, properly updated and secure.
3. Personal cost centers
Personal cost centers deal with a particular person or group of people. For example, a company’s
HR department works across departments to deal with employee needs and recruitment.
4. Product cost center
Product cost centers deal with a specific product or manufacturing area. For example, a publishing
company may have a production department responsible for the actual printing of its books,
newspapers or magazines. A manufacturer might have assembly, painting or welding shops.
5. Process cost center
Process cost centers focus on a specific process or event. For example, customer service
departments handle customer complaints, improve customer experience and manage any
warranties or rebates that might be available.
6. Service cost center
Service cost centers provide services to the company. For example, a janitorial staff maintains
clean, orderly facilities so that employees can be healthy, safe and productive.
For example, a small company might have a cost center that is simply an office manager or
bookkeeper who manages office administration and bookkeeping. Alternatively, a multinational
corporation might have separate cost centers such as human resources (HR), accounting
department and administrative staff.

PROFIT CENTER
In accounting, a profit center is a type of responsibility center. A responsibility center is an
organizational subunit the manager of which is responsible for certain financial and non-financial
performance measures. Furthermore, for accounting purposes, consider a responsibility center –
in this case a profit center – a distinct entity within the context of the larger organization.
In a profit center, the manager is responsible for the revenues generated by the subunit. In addition,
they are responsible for the costs and expenses incurred by the subunit in the course of normal
business operations. As a result, the manager of a profit center is responsible for the profits of the
subunit. Their primary goal is to maximize the subunit’s net income; however, the manager of a
profit center is not responsible for long-term capital investment costs. Peter Drucker coined the
term "profit center" in 1945.

INVESTMENT CENTER
An investment center is a business unit within an entity that has responsibility for its own revenue,
expenses, and assets, and whose financial results are based on all three factors. It is considered to
be any aspect of a business that can be segregated for reporting purposes as a separate operating
entity, usually in the form of a division or subsidiary. An investment center typically has its own
financial statements, comprised of at least an income statement and balance sheet. Management
evaluates an investment center based on its return on those assets (and offsetting liabilities)
invested specifically in the investment center.
An investment center is the most complex type of reporting entity, so it is not sufficient to measure
its performance simply based on its sales, costs, or profits. Instead, the best approach is to measure
its return on investment, which compares the asset base of an investment center to the profits
generated. Cost centers and profits centers do not use this measurement, because they are not
responsible for the assets used in their operations.

ADVANTAGES OF INVESTMENT CENTERS

The investment center concept is most useful in situations where there is a large investment by a
business unit in fixed assets and/or working capital. In this case, it is essential to monitor how
efficiently and effectively these assets are deployed.

DISADVANTAGES OF INVESTMENT CENTERS

The return on investment (ROI) percentage at the core of the investment center concept is subject
to manipulation, since the manager of a business unit can increase ROI by artificially drawing
down asset usage to levels that are harmful to the long-term prospects of the business
PROBLEMS
PROBLEM 1
The Quezon City Division of Luzonian Company is treated as an investment center for
performance measurement purposes. Selected financial information for such division for last year
is given below:
Net Sales P 200,000
Cost of goods sold 176,250
General and administrative expenses 3,750
Average working capital 31,250
Average plant and equipment 68,750
Desired rate of return 15%.

Questions:
1. What was the Quezon City Division's return on investment for last year?
2. What was the Quezon City Division's residual income for last year?

ANSWERS:
1. Net sales P 200,000
Less: Cost of goods sold 176,250
Gross income 23,750
Less: general and administrative expenses 3,750
Operating income 20,000
÷ Investment (P31,250 + 68,750) 100,000
Return on Investment 20%

2. Actual operating income P 20,000

Less: Desired income (P100,000 x 15%) 15,000
Residual Income P 5,000
PROBLEM 2
A TQM team at Banilad Corp has recorded the following average times for the production:
Wait time: 3.0 days
Inspection: 0.4 days
Process: 0.2 days
Move: 0.5 days
Queue: 9.3 days

What is the Delivery Time Cycle?

ANSWER
DTC = 3.0 days + (0.4 days + 0.2 days + 0.5 days + 9.3 days) = 13.4 days

PROBLEM 3
Mara is a manager of the Home Care Division of Care Corporation. As a manager of an investment
center, Mara's performance is measured using the residual income method.
For the coming year, Mara wants to achieve a residual income target of P100,000 using an imputed
interest charge of 20%. Other forecasted figures for the coming year are as follows:

Working capital P 90,000

Plant & equipment 860,0000
Costs & expenses 1,210,000

Questions:
1. How much should revenues be next year to achieve the residual income target?
2. By what percent would the division's ROI next year exceed the desired rate of return?
ANSWERS:

1. Residual income target P 100,000

Add: Desired income (P 90,000 + 860,000) x 20% 190,000
Budgeted Income P 290,000
Add: Budgeted costs 1,210,000
Budgeted Revenue P 1,500,000

2. Return on Investment = Income / investment

= P290,000 / (P90,000 + 860,000)
= 30.53%
Less: Desired rate of return = 20.00%
Excess of ROI over DRR = 10.53%

PROBLEM 4
The Ladies Belt Division of Leather Goods Corp. is classified as an investment center. For the
month of November, it had the following operating statistics:
Sales 675,000
Cost of Goods Sold 400,000
Operating Expenses 237,500
Total Assets 750,000
Weighted average cost of capital 4%
Leather Goods’ Corp’s average stockholder’s equity is 300,000.

1. What is its return on investment?

ROI = Operating Income/Investment or Assets = (675,000-400,000-237,500)/750,000 = 5%
2. Sales P675,000
Less: costs and expenses (400,000+237,500) 637,500
Actual Income 37,500
Less: Desired Income or imputed charge
On investment (750,000x4%) 30,000
Residual Income P 7,500