RESPOSIBILITY ACCOUNTING

-Is a system of accounting in which costs are Responsibility Centers

assigned to various managerial levels according
to where control of the costs is deemed to rest,
with managers being held responsible for the
difference between actual and budgeted results.
- involves the assigning and delegating to
responsible organizational the duty to control
costs and expenses, generating revenues and
profit , and acceptable returns on investments
and evaluating their performance based on
established standards through verifiable and
timely reports.
Centralization and Decentralization
Centralization happens when decision rests
exclusively to top management.
- top management makes most decisions and
controls most activities of the organizational
segments from the firm’s central office.
Decentralization is in place when the power to
make decision is entrusted to operating
managers; this is the model used in designing
and managing autonomous responsibility
centers
- there is employee empowerment; top
management grants subordinate managers a
significant degree of autonomy and
independence in operating and making decisions
relating to their sphere of responsibility.
Note: a responsibility accounting system works best in a
decentralized organization.
 Cost center – a responsibility center where
a manager has control over the incurrence
of costs but not over revenues or
investments.
Example: Maintenance Department
 Revenue center – the manager has control
over revenues.
Example: sales department
 Profit center – the manager has control
over both costs and revenues.
Example: a branch
 Investment center – the manager has
control over both costs and revenues, as
well as over investment in plant and
equipment, receivable, inventory, and
other assets.
 Service center – usually operated as a cost
center. It exists primarily and sometimes
solely to provide specialized support to
the other segments or subunits of the
organization.
Performance Evaluation Models
- is done within the concept of controllability or
authority.
- a manager should be evaluated only on
matters that he controls.

Goal congruence occurs when units of

organization have incentives to perform for a Center managers Evaluation models
common interest. The purpose of a responsibility
Cost managers Cost variance analysis
system is to motivate management performance
that adheres to company over-all objectives. Revenue center Revenue variance
managers analysis
Sub optimization occurs when one segment of a
company takes action that is in its own best Profit center Segment margin
interest but is detrimental to the firm as a whole. managers analysis
Investment center Return on investment ROI = ROSX Asset turnover
managers (ROI); Residual income
Where,
model, Economic
Value Added (Du Pont Return on Sales (ROS) = Net income
Model), Equity spread, sales
total shareholders Asset turn over = Sales
Investment
return and the market
value added.
3 ways of improving ROI:
 Increase in sales
 Reduced operating expenses
 Reduced operating assets

Residual income - is the difference between

operating income and the minimum peso
return required on a company’s operating
assets.
Segment margin is determined as follows: RI =Operating income - (Minimum rate of return X
Operating assets)
Sales xx
Less: Variable costs (xx)
Contribution Margin xx
Less: Avoidable Fixed cost (xx)
Segment margin xx
Less: Unavoidable Fixed cost (xx)
PROFIT XX
Economic Value Added (EVA)- After tax
version of residual income model. It represents
Return on Investment (ROI) model:
the business unit’s true economic profit.
It is sometimes referred to as return on asset
(ROA). It is computed as follows:
After tax operating income xx
ROI = operating income Less desired income (xx)
Investment Economic Value Added xx

Where, operating income refers to earnings
before interest and taxes.
And investment includes all assets acquired to
generate operating income.
Where, after tax operating income is equal to
EBIT X (1-Tax rate)
And desired income is equal to
After tax WACC x [ total asset - current liabilities ]

Other way to compute ROI/ ROA: DuPont

technique
Return on equity is equal to profit divided by
average shareholders’ equity.
Total shareholders’ return equals the change in
the stock price plus the dividends per share
divided by the initial stock price.
The market value added is the difference
between the market value of the equity (market
price x shares outstanding) and the equity
supplied by the shareholders.

Transfer pricing
- occurs when two or more affiliated companies
transact with one another in an arm’s length
nature involving goods or services in the
ordinary course of business operations.

May be based on:

 Market based pricing
 Cost based pricing
 Negotiated pricing
 Arbitrary pricing
 Dual pricing

Transfer pricing policy normally set by top

management.
When capacities are considered, transfer price
may be computed as the sum of the incremental
cost plus the opportunity costs from the
alternative use of capacity.
 A. The following data were taken from the records of COMBO Corporation, a division of great food
corporation for the year ended December 31, 2023.
Sales P12,000,000
Variable cost and expenses (8,000,000)
Contribution margin 4,000,000
Direct fixed cost and expenses (1,000,000)
Segment margin P3,000,000

The company used an average asset of P8,000,000 in 2023. The cost of capital is 12%.
Required:
Determine the following for 2023:
1. Return on Sales = 25%
2. Assets turnover = 1,5 x
3. Return on Investment = 37.5 %
4. Residual income = 2,040,000

B. Colors Corporation operates two (2) autonomous divisions. Green Company and Blue Company. The
divisions reported the following data with respect to their 2022 operations.

GREEN BLUE
Net Sales P 40M P400M
Segment operating income 5M 30M
Average assets 25 M 160M
Average assets life in years 5 5
Cost of Capital 12% 12%

Required:
1. Return on Investment 20% 18.75%
2. Residual Income 2,000,000 10,800,000

C. 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 P675,000
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 stockholders’ equity is P300,000. It is subject to an Income tax rate of
40%.
Required:
1. Return of Investment = 5%
2. Residual income = P7,500

D. The following year- end data pertain to ADAN Corporation:

 Earnings before interest and taxes P 800,000
Current assets 800,000
Non- current assets 3, 200,000
Current liabilities 400,000
Non-current liabilities 1,000,000
Adan Corporation pays an income tax rate of 30%. Its weighted average cost of capital is 10%. What is
Adan Corporation’s Economic Added (EVA)? P200,000

E. The following information pertains to the product produced by the Men’s Belt Division of Leather
Goods Corporation:
Per Unit
Selling price P150
Manufacturing costs:
Prime costs 75
Variable factory overhead 15
Fixed factory overhead (Total is P80,000) 8
Selling and administrative costs:
Variable 18
Fixed cost (Total is P60,000) 6

During the period, the Division produced 10,000 units and sold 9,000 units, both as budgeted. There
was no beginning and ending work- in process inventories, and there was no beginning finished goods
inventory during the period.

There was no difference between the total budgeted and actual fixed costs. Variable manufacturing costs vary
with the production while variable selling costs vary with sales. Central administration costs are allocated to
the different divisions of the company. For this period, central administration cost allocated to Men’s Belt
Division amounted to P150,000.

Requirement:
1. Men’s Belt Division contribution margin
2. Operating income during the period