Chapter 13: Responsibility
Accounting, Support
Department Cost Allocations,
and Transfer Pricing
Cost Accounting Principles, 9e
Raiborn ● Kinney
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accessible website, in whole or in part.
Learning Objectives
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Which factors determine whether a firm should be
decentralized or centralized?
How are decentralization and responsibility accounting
related?
What are the four primary types of responsibility
centers, and what distinguishes them from each other?
How are revenue variances computed?
Why and how are support department costs allocated to
operating departments?
What types of transfer prices are used in organizations,
and why are such prices used?
What difficulties can be encountered by multinational
companies using transfer prices?
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accessible website, in whole or in part.
Degree of centralization
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Centralization – a single individual (usually the
company owner or president) makes all major
decisions and retains full authority and
responsibility for the organization’s activities
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Decentralization – a transfer of authority,
responsibility, and decision-making rights from
the top to the bottom of the organizational
structure
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accessible website, in whole or in part.
Decentralization Continuum
Factor
Age of firm
Size of firm
Stage of product
development
Growth rate
Impact on profits
of incorrect decisions
Management’s
confidence in
subordinates
Degree of control
Centralized
Decentralized
Young
Small
Mature
Large
Stable
Slow
Growth
Rapid
High
Low
Low
Tight
High
Moderate/loose
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accessible website, in whole or in part.
Decentralization Continuum
Factor
Geographic
diversity
Cost of communications
Ability to resolve
conflicts
Level of employee
motivation
Level of organizational
flexibility
Response time to
changes
Centralized
Decentralized
Local
Low
Widespread
High
Easy
Difficult
Low
Moderate to high
Low
High
Slow
Rapid
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accessible website, in whole or in part.
Advantages of Decentralization
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Personnel
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train and screen aspiring managers
develop leadership qualities, problem-solving
abilities, and decision-making skills
compare managers’ results
increase job satisfaction and job enrichment
Effective means of achieving organizational
goals
Reduces decision-making time
Allows management by exception
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Disadvantages of Decentralization
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Lack of goal congruence
Suboptimization
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pursuing the subunit manager’s goals instead of the
company’s goals
Requires more effective communication skills
Managers must relinquish control
Expensive
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train managers in decision-making skills
absorb cost of poor decisions
requires a sophisticated planning and reporting system
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accessible website, in whole or in part.
Responsibility Reports
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Monetary and nonmonetary
Adjusted for the planning, controlling,
and decision-making needs of each unit
manager
Separates costs as controllable or
noncontrollable by the unit manager
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accessible website, in whole or in part.
Nonmonetary Measures
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Capacity measures
Target ROI
Desired/actual market
share
Throughput
Defects
Backorders
Complaints
On-time delivery
Manufacturing cycle
efficiency
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Reduction of non-valueadded time
Employee suggestions
received/implemented
Unplanned production
interruptions
Schedule changes
Engineering changes
Safety violations
Absenteeism
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accessible website, in whole or in part.
Control Process Steps
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Plan
Gather actual data
Compare
Exert managerial influence
Compare
Plan
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accessible website, in whole or in part.
Responsibility Accounting
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Upward flow of information
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From operations to top management
Unit level reports are detailed
Upper-level reports are summarized
Encourages management by exception
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Major deviations are highlighted
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accessible website, in whole or in part.
Responsibility Accounting
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Disadvantages of responsibility
accounting:
Important details may not be visible at
upper management levels
 Managers might “promote” their unit while
“blaming” their competitor units
 Could lead to lack of goal congruence
 Departmental interdependencies might not
be visible
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accessible website, in whole or in part.
Responsibility Centers
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Responsibility accounting systems
identify, measure, and report on
activities in responsibility centers
Cost center
 Revenue center
 Profit center
 Investment center
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accessible website, in whole or in part.
Service Cost Allocation Methods
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Direct method
Step method
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Benefits-provided ranking
Algebraic method
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Simultaneous equations
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accessible website, in whole or in part.
Transfer Pricing
Internal charges for the exchange of goods
or services within the organization
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Promote goal congruence
Ensure optimal resource allocation
Promote operational efficiency
Make performance evaluation among segments more
comparable
Transform a cost center into a pseudo-profit center
For internal use only
 Eliminated on external financial reports
Encourage managers to be entrepreneurial
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accessible website, in whole or in part.
Transfer Pricing Systems
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May cause disagreement among managers
Adds costs and takes time
May not work for all departments
May cause underutilization or overutilization
of services
May cause dysfunctional organizational
behavior
Causes a need for year-end entries to
eliminate transfer prices
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accessible website, in whole or in part.
Multinational Transfer Pricing
Internal Objectives
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Better goal
congruence
Better performance
evaluations
More motivated
managers
Better cash
management
External Objectives
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Fewer taxes and tariffs
Fewer foreign
exchange risks
Better competitive
positions
Better relations with
government
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accessible website, in whole or in part.
Multinational Transfer Pricing
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Develop guidelines that are followed on a
consistent basis
Set transfer prices that reflect an arm’slength transaction
Be prepared for transfer pricing audits
Consider Advance Pricing Agreements—
binding contracts between a company and
taxing authorities that set an acceptable
transfer pricing methodology
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accessible website, in whole or in part.
Questions
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What are some advantages and
disadvantages of decentralization?
What are the four types of responsibility
centers?
Why are transfer prices used?
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Potential Ethical Issues
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Managers who make decisions to benefit themselves
but not always the firm
Burying important details in responsibility reports
Allocating costs using “ability-to-bear” criterion
Shifting support department costs to inappropriate
departments
Not allowing managers to buy or sell externally in a
transfer pricing situation
Using transfer pricing to shift costs to low- or no-tax
locations
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.