Lecture 19 0412 - ORIE 350 Responsibility Accounting...

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ORIE 350 April 12, 2007 Responsibility Accounting
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Definition Responsibility Accounting : accumulating and reporting financial data on the basis of the authority to make the day-to-day decisions about the items.
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Responsibility Accounting Can be used at each level of management where: 1. Revenues and expenses can be directly associated with the specific level of management responsibility. 2. Revenues and expenses are controllable at the level of responsibility with which they are associated. 3. It is practical and possible to develop performance reports to evaluate the manager’s effectiveness at that level.
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Responsibility Accounting Responsibility accounting is especially valuable in a decentralized company, where control is delegated to many managers throughout the corporation. Each manager may be in charge of a business segment . Segment performance reports should emphasize or include only those items which are controllable by the segment manager. A cost is controllable if a manager has the power to incur it within a given period of time.
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Controllable Costs The longer the time span, the more likely the cost will be controllable. Higher in the organization: all costs are controllable. Lower in the organization: fewer costs are controllable. Costs incurred directly at a level of responsibility are considered to be controllable at that level. Costs incurred indirectly and allocated are assumed to be uncontrollable.
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Types of Responsibility Centers 1. Cost center Incurs expenses but does not directly generate revenues Managers are evaluated on their ability to control costs Examples are production departments like an automobile assembly plant (make products, but do not market or sell them)
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Types of Responsibility Centers 1. Profit center Incurs expenses and generates revenues Managers are evaluated on the profitability of these centers, “The manager has P&L responsibility.” Examples are branch office of a bank, manager of a retail store, director of a laboratory. This is not a perfect system, as some of these revenues might be transfers from other budget centers in the corporation. These revenues may be at least slightly artificial as a result.
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Types of Responsibility Centers 1. Investment center Incurs expenses, generates revenues, and also has control over investment funds available for use. Managers are evaluated on two criteria, profitability of the center, and return on the funds invested. Of the two, return on investment (ROI) is often considered to be more important, as it shows the effectiveness of the manager in using the funds at his or her disposal.
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ROI: How defined? Using the controllable margin concept when calculating ROI makes a lot of sense.
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