Responsibility accounting
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Benefits of managing decentralised organizations:
– management concentrates on strategic decisions and coordination of activities
of the whole organisation
– better information for decision-taking at a level where the problem exists
– improved management of managers' knowledge, they learn as the
organisation grows and responsibilities change
– greater elasticity in decentralised organisations
– decentralisation allows for more effective assessment of managers
Need to develop managerial control
– control is aimed at ensuring fulfillment of goals set by the management
Accounting based on responsibility centers - provides
information needed for managerial control
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Responsibility centers (1)
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Responsibility center (pl. centrum odpowiedzialności)
– organisational unit, which is responsible for management of
particular (selected) group of activities and which is headed
by a manager with a delineated set of competences and
responsibilities
Conditions for effective managerial control:
– organisational structure with specific units
– specified set of skills and responsibilities required for the unit
managers
– precisely described relationships between employers and
employees

Types of responsibility centers:
– for costs, for profit, for investment
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Responsibility centers (2)
Cost center
Profit center
Investment
center
Responsibility
centers
3
Cost center
 Cost center (pl. Centrum kosztów )
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– lowest scope of responsibility
– managers are responsible for incurring costs
– managers have a right to take decisions that have an impact
on the level of costs and need information required to control
the process of the implementation of decisions and costs
Identification of responsibility centers:
–
–
–
–
–
spatial
organisational
informational
subjective
decisional
Assessment of cost centers:
– minimalisation of total costs for the fixed level of activities
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Cost center - problems
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Responsibility of cost centers:
– taking decisions which ensure implementation of activities as
well as conformity of controlled costs to a plan (budget,
standards)
– explaining existing deviations, also due to reasons beyond
cost center's control
Limitations of cost control:
–
–
–
–
–
in a short-term there is a low possibility to change costs
subjective assessment, which costs are controlled
impact of external economic variables
impact of unpredictable events
problem of interdependencies between responsibility centers
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Profit center
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Profit center (pl. Centrum zysków)
– greater need for management than for cost centers
– managers responsible for originating costs and generating
income (profits)
– specifying profit centers is based on the same criteria as
specifying cost centers
– profit centers may include one, few or tens of cost center(s)
– if a profit center provides services to other profit centers in a
company in order to price the internal services transfer
prices (internal prices) are used
Assessment of profit centers:
– based on income (profit)
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Profit center - problems
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Set correct transfer prices inside the company
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Allocated common costs to responsibility centers
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Profit centers concentrating only on its profits often ignore
activities which impact results of other responsibility centers
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Investment center
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Investment center (pl. Centra inwestycyjne)
–
–
–
–
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possesses the largest scope of responsibility
managers are responsible for profits, costs and assets
investment centers may include one or more profit centers
for investment decision-taking ex-ante information about costs
and profits as well as information about inflows and outflows of
various alternatives are necessary
Assessment of investment centers:
– Return on Investment (ROI)
– Residual Income (RI)
– Economic value added (EVA®)
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Investment centers - problems
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Choice of measure used for assessment
– necessity to include costs and profits common with other
centers as well as services present among centers
– necessary to include effectiveness investment processes
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Difficulty in comparing cost centers of different sizes
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Return of Investment - ROI
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Return on Investment – ROI (pl. Stopa zwrotu z aktywów)
ROI =
Income from operations
Average assets of operational unit
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Calculation of ROI
Cost of products sold and
services rendered
Sales
Sales, administrative and
managerial costs
Operational costs
Income from
operations
Return
on sales
Other operational
revenues – other
operational costs
Sales
ROI
Cash and cash equivalent
Liabilities
Short-term
assets
Return
on assets
Operational
assets
Inventory and other shortterm assets
Long-term assets
Legal assets
Long-term assets
Other long-term assets
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How to calculate ROI?
ROI =
=
Income from operations
Assets of operational unit
Income from operations
Sales
=
Return on
sales
x
x
Sales
Assets of operational unit
Return on
assets
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Example: How to calculate ROI
Assets of the operational unit
Income from operations
Sales
ROI =
Return on
sales
Return
on assets
$ 100 000
$ 18 000
$ 200 000
Income from operations
Assets of operational unit
=
18 000
200 000
= 200 000
100 000
= 18 000 = 18%
100 000
= 9%
= 2 times
ROI = 9% x 2 = 18%
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Limitations of utilising ROI
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Using ROI to assess activities has its limitations:
– ROI measure is not directly tied to the goal of maximising the
value of the enterprise for its owners
– ROI used as an assessment measure of managers can lead
to incorrect investment decisions
– ROI is a short-term assessment measure
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Residual income
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Residual income – RI (pl. Zysk rezydualny)
– so the surplus of an income from operations – result of
operational activities, which an investment center can
generate over a specific rate of return using available
operational assets
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RI as an assessment measure:
– aim of the investment center: maximising the residual
income
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How to calculate RI?
Revenues from sales
12 000 000
Average value of operational assets
8 000 000
Income from operations
1 200 000
ROI (1 200 000/8 000 000) x 100%
Minimum result from operations (12% x 8 000 000)
15%
960 000
RI (1 200 000 – 960 000)
240 000
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ROI and RI in decision-taking (1)
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Assumption: ALFA Co. can invest 300 000 zł in activating new product line,
which will lead to increase of: sales by 636 000 zł per annum, cost of goods sold
by 500 000 zł, sales costs by 56 000 zł and administrative costs by 40 000 zł.
P/L Statement for ALFA Co.
Sales revenue
Before the
project
Incremental
result from
the project
After the
project
1 200 0000
636 000
12 636 000
Cost of goods sold (COGS)
9 000 000
500 000
9 500 000
Gross income from sales
3 000 000
136 000
3 136 000
Sales costs
1 000 000
56 000
1 056 000
400 000
40 000
440 000
1 600 000
40 000
1640 000
Other operational income
400 000
-
400 000
Other operational costs
800 000
-
800 000
Income from operations
1 200 000
40 000
1 240 000
Administrative costs
Income from sales
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ROI and RI in decision-taking (2)
Before the
project
Incremental
result from
the project
After the
project
Average operating assets
8 000 000
300 000
8 300 000
Income from operations
1 200 000
40 000
1 240 000
15%
13%
14,94%
ROI

Investment in the project decreases the ROI measure, which is
why the ALFA manager, assessed based on ROI, will reject the
project
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ROI and RI in decision-taking (3)
Before the
project
Sales
Incremental
result from
the project
After the
project
12 000 000
600 000
12 600 000
Average operating assets
8 000 000
300 000
8 300 000
Income from operations
1 200 000
40 000
1 240 000
15%
13%
14,94%
Minimal required result from operating activities
960 000
36 000
996 000
RI
240 000
4 000
244 000
ROI
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
Investment in the project increases the RI measure, which means that
the manager assessed based on RI will undertake the project
Limited use of RI: should not be used to assess investment centers of
various sizes, bigger investment centers can show larger RI
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Economic value added - EVA®
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EVA® (ang. economic value added)
– measure that shows the value that the activities of a given investment
center "add" to the value of an enterprise
– shows the aim of activities of an enterprise – maximialisation of its
value
EVA® = Wynik operacyjny – koszt kapitału x zainwestowane środki
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Limitations of applying the EVA®:
– short-term measure based on annual data
– its used can lead to faulty investment decisions taken by managers
interested in short-term benefits
Modifications of EVA®:
– e.g. bonus bank – managers lose motivation to conduct long-term nonincome generating projects
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EVA® in decision-taking (1)
P/L Statement of Gamma Co.
Sales revenue
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2001
2002
12 200 000
20 000 000
Cost of goods sold (COGS)
7 400 000
15 000 000
Gross income from sales
4 800 000
5 000 000
Sales costs
1 200 000
1 000 000
Administrative costs
2 000 000
1 500 000
Income from sales
1 600 000
2 500 000
Other operational income
400 000
400 000
Other operational costs
500 000
400 000
Income from operations
1 500 000
2 500 000
Assets in 2001 - 10 000 000 zł, in 2002 – 20 000 000 zł
Liabilities in 2001 - 3 000 000 zł, in 2002 – 4 000 000 zł
Cost of capital set at 10%
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EVA® in decision-taking (2)
2001
2002
Return on sales
12,29%
12,5%
Return on assets
1,22
1
ROI
15%
12,5%
800 000
900 000
1,5 mln-7mln*10%=0,8 mln
2,5mln-16mln*10%=0,9 mln
EVA ®
Calculation
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Decrease in ROI: worsening of the investment center's
effectiveness?
Increase in EVA®: improvement of the investment center's
effectiveness?
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