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9-1
Fundamental Managerial Accounting ConceptsThomas P. Edmonds
Bor-Yi Tsay
Philip R. Olds
Copyright © Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinMcGraw-Hill/Irwin
Fifth Edition
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CHAPTER 9Responsibility Accounting
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Learning Objective
LO1
Describe theconcept of
decentralization.
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An accounting system thatprovides information . . .
Responsibility Accounting
Relating to theresponsibilities of
individual managers.
To evaluatemanagers on
controllable items.
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Decentralization
Improves qualityof decisions.
Encourages upper-level management toconcentrate on strategic decisions.
Improvesproductivity.
Developslower-levelmanagers.
Improvesperformanceevaluation.
Advantages
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Decision-Making is Pushed Down
S u p erv isor S u p erv isor
M id d leM a na ge m e nt
S u p erv isor S u p erv is or
M id d leM a na ge m e nt
T opM a na ge m e nt
Decentralizationoften occurs asorganizations
continue to grow.
Decentralization
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Learning Objective
LO2
Describe the differences among
cost, profit, and investment centers.
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Organization ChartCorporate headquarters – Panther Holding CompanyCorporate headquarters – Panther Holding Company
Lumber Lumber manufacturing manufacturing
divisiondivision
HomeHomebuildingbuildingdivisiondivision
Furniture Furniture manufacturingmanufacturing
divisiondivision
Wilson Carpet Wilson Carpet CompanyCompany
Selma Sopha Selma Sopha CorporationCorporation
Tables Tables IncorporatedIncorporated
Sales Sales departmentdepartment
Production Production departmentdepartment
Planning Planning departmentdepartment
Accounting Accounting departmentdepartment
Cutting Cutting departmentdepartment
Assembly Assembly departmentdepartment
Finishing Finishing departmentdepartment
ResponsibilityLevel
1
2
3
4
5
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Responsibility Centers
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Learning Objective
LO3
Prepare and use responsibility reports.
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Responsibility Reports
Prepare budgets for each responsibility center.
Prepare timely performance reportscomparing actual amounts with budgeted amounts.
Measure performance ofeach responsibility center.
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Responsibility Reports
Budget Actual VarianceControllable expenses Administrative dividion expenses 20,400$ 31,100$ (10,700)$ U Company president's salary 9,600 9,200 400 F Wilson Carpet Company 82,100 78,400 3,700 F Selma Sopha Corporation 87,200 116,700 (29,500) U Table Incorporated 48,600 51,250 (2,650) U Total 247,900$ 286,650$ (38,750)$ U
Panther Holding CompanySecond Level: Furniture Manufacturing Division
For the Month Ended January 31, 2009
Budget Actual VarianceControllable expenses Administrative dividion expenses 3,000$ 2,800$ 200$ F Department manager's salary 10,000 11,200 (1,200) U Sales department costs 9,100 8,600 500 F Production department costs 13,500 13,750 (250) U Planning department costs 4,800 7,000 (2,200) U Accounting department costs 8,200 7,900 300 F Total 48,600$ 51,250$ (2,650)$ U
Panther Holding CompanyThird Level: Tables Incorporated
For the Month Ended January 31, 2009
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Budget Actual VarianceControllable expenses Administrative dividion expenses 3,000$ 2,800$ 200$ F Department manager's salary 10,000 11,200 (1,200) U Sales department costs 9,100 8,600 500 F Production department costs 13,500 13,750 (250) U Planning department costs 4,800 7,000 (2,200) U Accounting department costs 8,200 7,900 300 F Total 48,600$ 51,250$ (2,650)$ U
Panther Holding CompanyThird Level: Tables Incorporated
For the Month Ended January 31, 2009
Responsibility Reports
Budget Actual VarianceControllable expenses Administrative staff expense 900$ 1,100$ (200)$ U Supervisory salaries 2,800 2,800 - Cutting department costs 1,400 1,200 200 F Assembly department costs 2,800 2,900 (100) U Finishing department costs 5,600 5,750 (150) U Total 13,500$ 13,750$ (250)$ U
Panther Holding CompanyFourth Level: Production DepartmentFor the Month Ended January 31, 2009
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Responsibility Reports
Budget Actual VarianceControllable expenses Administrative staff expense 900$ 1,100$ (200)$ U Supervisory salaries 2,800 2,800 - Cutting department costs 1,400 1,200 200 F Assembly department costs 2,800 2,900 (100) U Finishing department costs 5,600 5,750 (150) U Total 13,500$ 13,750$ (250)$ U
Panther Holding CompanyFourth Level: Production DepartmentFor the Month Ended January 31, 2009
Budget Actual VarianceControllable expenses Wages expense 3,200$ 3,000$ 200$ F Direct materials 1,100 1,400 (300) U Supplies 400 500 (100) U Small tools 600 650 (50) U Other expenses 300 200 100 F Total 5,600$ 5,750$ (150)$ U
Panther Holding CompanyFifth Level: Finishing Department
For the Month Ended January 31, 2009
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Responsibility Reports
Budget Actual Variance Sales 984,300$ 962,300$ (22,000)$ U Variable expenses Variable product costs 343,100 352,250 (9,150) U Variable selling expenses 105,000 98,000 7,000 F Other variable expenses 42,200 51,100 (8,900) U Total variable expenses 490,300 501,350 (11,050) U Contribution magrin 494,000 460,950 (33,050) U Fixed expenses Fixed product cost 54,100 62,050 (7,950) U Fixed selling expenses 148,000 146,100 1,900 F Other fixed expenses 23,000 25,250 (2,250) U Total fixed expenses 225,100 233,400 (8,300) U Net income 268,900$ 227,550$ (41,350)$ U
Panther Holding CompanyIncome Statement for Internal Use
For the Month Ended January 31, 2009
Panther Income Statement (Contribution Margin Format)
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Learning Objective
LO4
Relate management by exception to
responsibility reports.
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Amount of detail varies according to level in an organization.
Departmentmanager receives detailed reports.
Store manager receives summarized information from each department.
Management by Exception
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The vice president of operations receives summarized information
from each unit.
Management by exception Upper-level management
does not receive operating detail unless problems arise.
Amount of detail varies according to level in an organization.
Management by Exception
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Since the exercise of control may be clouded,managers are usually held responsible for items
over which they have predominant ratherthan absolute control.
I’m in control
Controllability Concept
Managers shouldonly be evaluated on
revenues or coststhey control.
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To be of maximum benefit, responsibility reports should . . .Be timelyBe issued regularlyBe understandableCompare budgeted
and actual amountsof controllable items
Qualitative Reporting Features
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CostCenter
ProfitCenter
InvestmentCenter
Evaluation Measures
Profitability
Return on investment (ROI) Residual income (RI)
Cost controlQuantity and qualityof services
Managerial Performance Measurement
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Learning Objective
LO5
Evaluate investment opportunities using
return on investment.
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Return on Investment Return on investment is the ratio of Return on investment is the ratio of
income to the investment used to income to the investment used to generate the income.generate the income.
ROI = Operating IncomeOperating Assets
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Return on InvestmentPanther Holding Company provides the following
information for the company’s second level investment centers.
Lumber Manufacturing
Division
Home Building Division
Furniture Manufacturing
Division Operating income 60,000$ 46,080$ 81,940$ Operating assets 300,000 256,000 482,000
Let’s calculate ROI.
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Return on Investment
LumberManufacturing
Home Building
Furniture Manufacturing
=
=
=
$60,000$300,000
$46,080$256,000
$81,940$482,000
= 20%
= 18%
= 17%
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Measuring Operating Assets
Using the book value of operating assets to calculate ROI will result in a higher ROI.
Acquisition costLess: Accumulated depreciationBook value
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Learning Objective
LO6
Identify factors that affect return on
investment.
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ROI = Operating IncomeOperating Assets
Margin Turnover
Factors Affecting ROI
ROI = × SalesOperating Assets
Operating IncomeSales
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The Lumber Manufacturing Division reported the following information:
Operating IncomeOperating Income $ 60,000$ 60,000 SalesSales $ 600,000$ 600,000 Operating AssetsOperating Assets $ 300,000$ 300,000
Let’s calculate ROI usingthe expanded equation.
Factors Affecting ROI
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ROI = .10 × 2ROI = .10 × 2 = = 20%20%
Factors Affecting ROI
ROI = $60,000$600,000 × $600,000
$300,000
ROI = × SalesOperating Assets
Operating IncomeSales
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Factors Affecting ROI
Three ways to improve ROI
Increase Sales
Reduce Expenses
Reduce Operating Assets
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The Lumber Manufacturing Division was able to increase sales to $660,000 which increased operating income to $79,200.
There was no change in operating assets.
Let’s calculate the new ROI.
Factors Affecting ROI
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The division’s ROI increased from 20% to 26.4%.
Factors Affecting ROI
ROI = .12 × 2.2 = 26.4%
ROI = $79,200$660,000 × $660,000
$300,000
ROI = × SalesOperating Assets
Operating IncomeSales
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ROI - A Major Drawback As division manager in Lumber Manufacturing,As division manager in Lumber Manufacturing,
your compensation package includesyour compensation package includesa salary plus bonus based on your division’sa salary plus bonus based on your division’sROI -- the higher your ROI, the bigger your bonus.ROI -- the higher your ROI, the bigger your bonus.
The company requires an ROI of 20% on all new The company requires an ROI of 20% on all new investments -- your division has been producing an investments -- your division has been producing an ROI of 30%.ROI of 30%.
You have an opportunity to invest in a new project You have an opportunity to invest in a new project that will produce an ROI of 25%.that will produce an ROI of 25%.
As division manager, would you invest in this project?
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ROI - A Major Drawback
As division manager,I wouldn’t invest in
that project becauseit would lower my pay!
Gee . . .I thought we were
supposed to do what was best for the
company!
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Learning Objective
LO7
Evaluate investment opportunities using
residual income.
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Residual Income Operating Income– Investment charge = Residual income
Operating Assets× Desired ROI = Investment charge
Investment center’scost of acquiring
investment capital
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Residual IncomeThe Lumber Manufacturing Division The Lumber Manufacturing Division
currently earns $60,000 of operating currently earns $60,000 of operating income with the $300,000 of income with the $300,000 of operating assets it controls. operating assets it controls.
Panther has a 18% desired ROI. Panther has a 18% desired ROI.
Let’s calculate residual income.Let’s calculate residual income.
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Residual Income
Panther’s desiredreturn on investment.
Operating income = $60,000– Desired income = 54,000 = Residual income = $ 6,000
Operating assets = $300,000× Desired ROI = 18% = Desired income = $ 54,000
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Residual Income
Residual income encourages managers to make profitable investments that would
be rejected by managers using ROI.
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Responsibility Accounting and the Balanced Scorecard
The balanced scorecard is a holisticapproach to evaluating managers.
BalancedScorecard
Multiplefinancial
measures
Multiplenon-financial
measures
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Learning Objective
LO8
Describe how transfer prices may
be established. (Appendix)
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Transfer Pricing
Goods and services are often transferred internally from one
division (selling division) to another (buying division).
The transfer price can be the subject of considerable
controversy.
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Transfer Pricing
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End of Chapter 9