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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

Copyright © 2012 The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin

Responsibility Accounting Responsibility Accounting and Transfer Pricingand Transfer Pricing

Chapter 22

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Responsibility CentersResponsibility Centers

Large complex businesses are

divided into responsibility

centers enabling managers to have a

smaller effective span of control.

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The accounting system provides informationabout resources used and outputs achieved.The accounting system provides informationabout resources used and outputs achieved.

The Need for Information The Need for Information About Responsibility Center About Responsibility Center PerformancePerformance

This information is used to:

Plan and allocate resources.

Control operations.

Evaluate the performanceof center managers.

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Cost Center A business section

that has control over the incurrence

of costs, but no control over revenues or

investment funds.

Cost Centers, Profit Centers, Cost Centers, Profit Centers, and Investments Centersand Investments Centers

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Cost Centers, Profit Centers, Cost Centers, Profit Centers, and Investments Centersand Investments Centers

Profit Center A part of the

business that has control over both

costs and revenues, but no control over investment funds.

Revenues

SalesInterestOther

Costs

Mfg. costsCommissionsSalariesOther

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Cost Centers, Profit Centers, Cost Centers, Profit Centers, and Investments Centersand Investments Centers

Investment Center A profit center

where management also makes capital

investment decisions.

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CostCenter

Cost controlQuantity and qualityof services

ProfitCenter

InvestmentCenter

Return on assets (ROA) Residual income (RI)

Evaluation Measures

Profitability

Cost Centers, Profit Centers, Cost Centers, Profit Centers, and Investments Centersand Investments Centers

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Prepare budgets for each responsibility center.

Prepare timely performance reportscomparing actual amounts with budgeted amounts.

Measure performance ofeach responsibility center.

Responsibility Accounting Responsibility Accounting SystemsSystems

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Responsibility Accounting Responsibility Accounting SystemsSystems To be of maximum benefit,

responsibility reports should . . .Be timely.Be issued regularly.Be understandable.Compare budgeted

and actual amounts.

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Two guidelines should be followed in allocating costs to the various parts

of a business . . .According to cost behavior patterns:

Fixed or variable.

According to whether the costs are directly traceable to the centers involved.

Assigning Revenue and Costs Assigning Revenue and Costs to Responsibility Centersto Responsibility Centers

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Income StatementContribution Margin Format

Television DivisionSales 300,000$Variable COGS 120,000$Other variable costs 30,000 Total variable costs 150,000$Contribution margin 150,000$Traceable fixed costs 90,000 Responsibility margin 60,000$

Responsibility margin is the Television Division’s contribution

to overall operations.

Responsibility margin is the Television Division’s contribution

to overall operations.

Contribution Margin Contribution Margin Responsibility Reports Responsibility Reports

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No computer division means . . .

No computerdivision manager.

Traceable Fixed CostsTraceable Fixed Costs

Traceable fixed costs Traceable fixed costs would disappearover time if the center itself disappeared.

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Common fixed costs Common fixed costs arise because of arise because of overall operation of the company and overall operation of the company and

are not due to the existence of a are not due to the existence of a particular center. particular center.

We still have aWe still have acompany president.company president.

Common Fixed CostsCommon Fixed Costs

No computer No computer division means . . .division means . . .

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Income StatementCompany Television Computer

Sales 500,000$ 300,000$ 200,000$ Variable costs (230,000) (150,000) (80,000) CM 270,000$ 150,000$ 120,000$ Traceable FC (170,000) (90,000) (80,000) Responsibility margin 100,000$ 60,000$ 40,000$

Common costs (25,000) Net income 75,000$

Common costs arise because of overall Common costs arise because of overall operating activities and are not due to the operating activities and are not due to the

existence of a particular division.existence of a particular division.

Common costs arise because of overall Common costs arise because of overall operating activities and are not due to the operating activities and are not due to the

existence of a particular division.existence of a particular division.

Contribution Margin Contribution Margin Responsibility Reports Responsibility Reports

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TimeTime

Pro

fits

Pro

fits

Responsibility MarginResponsibility Margin

Responsibility margin is the best gauge best gauge of the long-run profitability

of a business center.

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Battery Division Auto Division

Batteries

Transfer PricesTransfer Prices

The amount charged when one divisionsells goods or services to another division.

The amount charged when one divisionsells goods or services to another division.

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Many companies use the external market value of goods transferredas the transfer price.

Transfer PricesTransfer Prices

Transfer prices have no direct effect uponthe company’s overall net income.

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Transfer prices have no direct effectupon the company’s overall net income.

When the external market value of goods

transferred is unavailable . . .

Transfer PricesTransfer Prices

Negotiatedtransfer

price

Cost-plustransfer

price

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End of Chapter 22End of Chapter 22