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8/8/2019 responsiblity acc.
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By :-Parul WadhwaKunal Juneja
RESPONSIBILITY
ACCOUNTING
BY:PARUL WADHWA
KUNAL JUNEJA
PGDM SEC-A
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RESPONSIBILITY ACCOUNTING
It refers to a contr ol system of management accounting andrepor ting.
The basis of Responsibility Accounting is thecreation/recognition of var ious responsibility/decision centres
in an organization.
It mainly collects and reports planned and actual
accounting information about the inputs andoutputs of responsibility centres.
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In other words, the executive in charge of everyresponsibility centre would have author ity to incur costsrelating to his responsibility centre and accountable to them.
If he does not have the author ity to incur costs he will also not be responsible for their contr ol.
The performance of the managers of the var iousresponsibility centres is judged by assessing how far theyhave been able to monitor those costs which were under their contr ol.
This is done by furnishing the depar tment heads withperformance repor ts fr om time to time.
These repor ts will exclude all appor tioned and policy costsnot subject to their contr ol.
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OBJECTIVES OF RESPONSIBILITY ACCOUNTING
To contr ibute the contr ibution of a division to thetotal organization.
To evaluate the quality of performance.
To motivate, consistent with the goal of theorganization.
Hence responsibility accounting ismeasurement of evaluation of performance.
It focuses on what and not how well the
performance is.
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CENTRE
It is that responsibility centre in which inputs, but not outputs, are measured in monetary terms.
Accounting system records only the cost incurred byt
he cent
re but
t
he revenues earned are excluded. Performance is judged on the basis of the cost
incurred by that depar tment but what is done w.r.t to output is of no consequence.
In other words, the performance in an expense centreis the efficiency of operation in that centre in terms ofthe quantity of inputs used in pr oducing some giveno
ut
put
.
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SUITABILITY:Firstly
,
suitable in this category are centres like legal deptt.,accounting deptt., public relation deptt. and the personneldeptt.
In each of these deptts. Like legal advice(legal deptt.), good
public relation(public relation deptt.), reliable accountingrepor ts(accounting deptt.), and better qualifiedpersonnel(personnel deptt.).
We know their output cannot be measured in monetary
terms. The only measurable performance measure is their efficiency in the use of inputs.
Thus, such divisions can be evaluated only as expense centres.
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Secondly, if a pr oduction centre is pr oducing one
single output, its performance can be measured as
expense centre in terms of efficiency andeffectiveness.
Although, the output cannot be expressed inmonetary terms but the cost per unit would beindicative of the efficiency of the deptt.
Thirdly, an expense centre can also be suitably
employed to measure performance if the
responsibility of deptt. Manager is to pr oduce astated quantity of outputs at the lowest feasible cost.
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DISADVANTAGES
OFEXPENSE CENTRE
I
s not
a useful basi
s fo
r measurement
asit
i
gno
resoutput(revenue)measured in financial terms.
Only monetary measure represents the common denominator to measure the overall output of the responsibility centrepr oducing multi pr oducts like pr oduction deptt. So thereefficiency and effectiveness cannot be measured.
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PROFIT CENTREA pr ofit centre is that segment of activity of a business whichis responsible for both revenues and expenses and disclosesthe pr ofit of a par ticular segment of activity.
It is created as a result of decentralization of operations to
measure the performance of divisional executives.Each pr ofit centre has a pr ofit target and also enjoys author ityto adopt such policies as are necessary to achieve its targets.
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ADVANTAGES OF PROFIT CENTRE
Firstly, it pr ovides a powerful tool for measur ing how
well the pr ofit manager of the pr ofit centre hasperformed.
Secondly, since performance is measured by pr ofit,
therefore the managers will be motivated to takedecisions about inputs and outputs in such a way that the
pr ofit of a pr ofit centre is maximized. Thus it is goodtraining gr ound for general management responsibility.
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Thirdly, top management can safely delegate the
author ity to the divisional managers because the pr ofit centre repor ts pr ovide adequate information about howwell the operating managers are doing their jobs.
Thus, profit centre provides a broader and more
inclusive measurement of performance than theexpense centre.
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DISADVANTAGES OF PROFIT
CENTREy Division may compete with each other and may take decisions
to increase pr ofits at the expenses of other divisions therebyoveremphasizing shor t term results.
y It may adversely affect co-operation between the divisionsand lead to lack of harmony in achieving organizational goalsof the company. Thus it is hard to achieve the objective ofgoal congruence.
y It may lead to reduction in the companys overall totalpr ofits.
y The cost of activities which are common to all divisions maybe greater for decentralized structure than for centralized
st
ruct
ure.It
mayt
hus result
i
n dupli
catio
no
f st
aff acti
viti
es.
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Top management loses contr ol by delegating decision
mar king to divisional managers. There are r isks ofmistakes committed by the divisional managers which thetop management may avoid.
Ser ies of contr ol repor ts prepared for several depar tments
may not be effective form the point of view of topmanagement.
It may under utilize corporate competence.
It leads to complication associated with transfer pr icingpr oblems.
It becomes difficult to identify and define precisely suitablepr ofit centres.
It confuses divisions result with managers performance.
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PROFIT CENTRE EVALUATION Controllable variable costs: These costs are directly
contr olled by the divisional managers and vary accordingto the divisions activity levels ,namely , the divisions
var iable cost of goods sold, and var iable administrativeand mar keting costs.
Controllable contribution margin:
Sales revenue - controllable variable cost=divisionscontrollable contribution margin.
It measures the pr ofitability of the sales of a depar tment.
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Controllable fixed costs: These are those fixed costs of
a per iod that are directly and exclusively related to thedecisions of the management of a division. E.x. divisionalrental charges for equipment and pr oper ty, executivessalary
Controllable segment margin: The excess ofcontr ollable margin over contr ollable fixed costs is thecontr ollable segment margin. This should be compared
wit
hthe prev
ious per
iods resul
ts and pre de
term
inedbudgeted amounts.
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Where a divisional manger of a company isallowed some discretion about the amount ofinvestment under taken by the division,
assessment of results by pr ofit alone (as for apr ofit centre) is clearly inadequate.
The pr ofit earned is related to the amount of
capit
alinves
ted.
Such divisions are called as investment centers for this reason.
INVESTMENT CENTRES
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Investment centres consider not only costs andrevenues but also the assets used in the division.
The essenceo
finves
tmen
tcen
tre analys
is
is
therelationship between the pr ofits and assets used
to generate these pr ofits.
It can be used as a basis for evaluating the
contr ibution of a division, and also for theevaluation of the performance of the divisionalmanager.
There aretw
oways
torela
te
inc
ome
toasse
ts:-
Return on investment(ROI).
Residual income.
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Return on investment(ROI)
ROI or EARNING POWER is the measure of the overall pr ofit andoperational efficiency of a firm or segment.
ROI = Divisional pr ofit / Divisional investment.
The earning power of division depends upon combination of two factors
Pr ofitability on sales.
The pr ofitability of investment, which is revealed by investment turnover.
Earning power = net pr ofit margin X investment turnover.
It employs that the performance of the firm/segment can beimpr oved either by generating more sales volume per rupee ofsales or by increasing the pr ofit margin per rupee of sales.
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Return on investment will be segment return oninvestment(SROI).
SROI= (segment pr ofit contr ibution) / (segment
resource/asset(SR/SA)). SROI can be used for both evaluation of division, as well as the
evaluation of the divisional manager.
There are two var iation of SROI:-
SROI= SPC before interest / segment total assets SROI(net)= SPC after interest / segment net assets.
SROI is useful in evaluating the total earning power of all theassets employed by the segment.
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ADVANTAGES ROI is generally accepted measure of overall
performance.
It is compatible with the common sense that investment are made to achieve the goal of a desired rate of return.
ROI serves as a common base so that a compar ison canbe made between the performance of the different
divisions.
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ROI analysis can pr ovide optimum utilisation of theassets of the firm.
It encourages divisional manager to obtain/retain assetsthat pr ovide satisfactory return on investment and to discard/dispose off assets that are not givingacceptable returns.
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LIMITATIONS
It suffers fr om all the limitation of pr ofit centre analysis.
It suffers fr om operational limitations:- Determination of investment base.
Determination of net income.
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Determination of investment base
The pr oblem of measur ing investment in assets fall into two categor ies:-
Pr oblem of allocation
Pr oblem of valuation
Pr oblem of allocation
these ar ises out of different treatment of assets that areshared/pooled among different divisions. The most common of
such assets are cash, receivables and inventor ies.
Pr oblem of valuation
This pr oblem ar ises due to method used for valuations of assetsof a division.
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Determination of net income There is a pr oblem in income measurement as a rate of return
is to be calculated. These relate to calculation of tax andi
nt
erest
. These items are outside the contr ol of the divisional manager.
The items having a bear ing on net income can be treated indifferent ways. The se creates pr oblems in the measurement
of net income for the ROI analysis.
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Segment residual income The performance of the division is measured in terms of
residual income, which tr ies to overcome the pr oblems of
ROI method. RI= operating income of division imputed capital charge
= Divisional pr ofit (cost of capital x investment base).
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Advantages and limitations of residual income
y This method encourages the investment in the assets, which areearning more than the required rate of return.
y It allows different rates for different divisions/assets .
y Manager are aware of the oppor tunity cost.
y Charging each division with the cost of capital ensures that thedecision taken by the different depar tments are in line with theoverall objectives of the organization.
yLIMITATIONS:y Pr oblem of measur ing the income and investment are present in this method
also.
y Deciding the required rate of return is a difficult task.
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Performance reporting
Responsibility accounting is tailored according to theorganization, makes the following assumptions:-
The areas of responsibility are defined for which the manager should be held responsible.
Managers are responsible only for items over which they canexercise contr ol.
Managers should actively par ticipate in establishment of goalsand budgets against which the performance is to be measured.
Goals should be attainable with efficiency and effectiveness. Performance repor ts should contain significant information
relating to each area of responsibility.
Responsibility managers should try to achieve targets for their
area of responsibility only.