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Chapter21
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RESPONSIBILITYACCOUNTINGHorngren
hasdefinedresponsibilityaccountingasasystemofaccountingthatrecognizes
variousresponsibilitycentres
throughouttheorganizationandreflectstheplansandactionsofeachofthesecentres
byassigningparticularrevenuesandcoststotheonehavingthe
ertinentres onsibilit .
1. Itshouldbeabigcompanywithadivisionalized
organizationalstructureandwhereareasof
res onsibilit arewelldefinedatdifferentlevelsoftheor
anization.
PrerequisitesforResponsibilityAccounting
2.
Thereareclearlysetgoalsandtargetsforeachresponsibilitycentre.
Managersactively
participate
in
establishing
the
budgets
against
which
their
performance
is
. .
4.
Accountingsystemgeneratesdependableinformationforeachresponsibilitycentre.
Themanagersareheldresponsibleonlyforthoseactivitiesoverwhichtheyexercisesignificant
. .
6. Managersmusttrytoattainthegoalsandobjectives.
Goalsforeachareaofres onsibilit shouldbeattainablewithefficient
erformance.
7.
8.
Performancereportingshouldbetimelyandshouldcontainsignificantinformationrelatingtotheresponsibility
centre.
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Aresponsibilitycentreisadivisionoftheorganizationforwhichamanagerisheldresponsible.CIMA,Londonhasdefinedresponsibilitycentreasasegmentofthe
, .
TypesofResponsibilityCentreCostcentre
Itisdefinedby
CIMA,London
as
RevenueCentre Aresponsibility
centreis
a
Profitcentre Accordingto
CIMA,London,
a
Investmentcentre Itisdefinedby
CIMA,London
as
servicelocation,function,activityoritemofe ui mentwhose
whichmanagercontrolsrevenuesbutdoesnotcontroleitherthe
partofabusinessaccountableforcostsandrevenues.Itma
whoseperformanceismeasuredbyitsreturnonca ital
costsmay
be
attributedtocostunits.
costsof
products/servicesorthelevelofinvestmentmade
becalled
abusinesscentre,
businessunit,orstrategicbusiness
employed.
nt eresponsibility
centre.
un t.
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ACCOUNTINGResponsibilitycentres are
Aplanispreparedintheformofbudgetsorstandards
. centre.
Theperformanceoftheresponsibilitycentreis
evaluatedbycomparingactualresultswiththosebudgetedintheregular
Variancesbetweenactualandbudgetedperformance
areanalysed soastofixresponsibility.
.
Correctiveandpreventiveact on sta en,w erever
possible.
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MEASUREMENTOFDIVISIONALPERFORMANCE
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TECHNIQUESOFMEASUREMENTOFDIVISIONALPERFORMANCE
1. Variance Analysis: In this technique, actual performance is
compared with standard or
causes so that responsibility can be established and corrective
action taken.2. Profit: The absolute amount of profit revealed by a
profit centre can also be used as ameasure to judge its
performance.
.profit, most organizations prefer return on investment of a
division as a measure of itsperformance. ROI expresses divisional
profit as a percentage of firms investment in the
division. This is calculated as follows:
4. Residual Income(RI): It may be defined as the profit of a
division less cost of capital.
Added (EVA) method where EVA is profit minus the cost of
invested capital in thedivision. The rate of interest at which cost
of capital is calculated may be notional andnot actual and such a
rate is specified by the top management. Thus residual income
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InthewordsofHansenandMowen
thetransferpricesarethepriceschargedforthegoods
roducedb onedivisionandtransferredtoanother.Thus thetransfer
riceisthe
riceatwhichaproductorserviceisinternallytransferredbetweentwounitsofthesamecompany.
TransferPricingMethods
Variable Totalcostcos
methodmethod
Marketprice
Negotiatedprice
met o met o
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VariableCost
Method: TotalCostMethod:MarketPrice
Method:NegotiatedPrice
Underthismethod,thetransferpriceisfixedattransferor
unitsvariable
cost
issetatfullcostwhichincludesvariablecost,
allocatedfixedcost
andmark
up.
Its
only
Underthemarketpricemethod,the
transferpriceissetat
thecurrent
price
of
the
productinthemarket.
Method:Thesellerandthe
buyerdivisions
negotiatefor
the
price
.transferpriceshould
beusedwhenthetransferordivisionisnotutilizingitsfull
itssimplicityasitiseasytounderstand
andimplementbecausetotalcost
Thismethodcanbeusedonlywhenthere
isareadyoutsidemarketforthe
concernedproductor
betransferredasanyotherpurchasersand
sellersbargaintosettletheprice.Thisisdue
andhas
some
idle
capacity.available
in
the
accountingrecords.the
intermediate
productsbeingtransferred.
inthe
market.
