ADVANCED MANAGEMENT
ACCOUNTING
PPT 14 -1
Responsibility Accounting
PPT 14 -2
Learning Objectives
Define responsibility accounting
and describe the four types of
responsibility centers
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Responsibility Accounting
Responsibility accounting is a system that measures the
results of each responsibility center and compares those
results with some measure of expected or budgeted
outcome.
There are four major types of responsibility
centers:
 Cost center
 Revenue center
 Profit center
 Investment center
PPT 14 -4
10-5
Responsibility Accounting
Cost
Center
Cost, profit,
and investment
centers are all
known as
responsibility
centers.
Profit
Center
Investment
Center
Responsibility
Center
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10-6
Cost Center
A segment whose manager has
control over costs, but not over
revenues or investment funds.
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10-7
Profit Center
A segment whose
manager has control
over both costs and
revenues,
but no control over
investment funds.
Revenues
Sales
Interest
Other
Costs
Mfg. costs
Commissions
Salaries
Other
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10-8
Investment Center
Corporate Headquarters
A segment
whose manager
has control over
costs, revenues,
and investments
in operating
assets.
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10-9
Responsibility Centers
Investment
Centers
Operations
Vice President
Salty Snacks
Product Manger
Bottling Plant
Manager
Beverages
Product Manager
Warehouse
Manager
Superior Foods Corporation
Corporate Headquarters
President and CEO
Finance
Chief FInancial Officer
Legal
General Counsel
Personnel
Vice President
Confections
Product Manager
Distribution
Manager
Cost
Centers
Superior Foods Corporation provides an example of the
various kinds of responsibility centers that exist in an
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organization.
10-10
Responsibility Centers
Superior Foods Corporation
Corporate Headquarters
President and CEO
Operations
Vice President
Salty Snacks
Product Manger
Bottling Plant
Manager
Beverages
Product Manager
Warehouse
Manager
Finance
Chief FInancial Officer
Legal
General Counsel
Personnel
Vice President
Confections
Product Manager
Distribution
Manager
Profit
Centers
Superior Foods Corporation provides an example of the
various kinds of responsibility centers that exist in an
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organization.
10-11
Responsibility Centers
Superior Foods Corporation
Corporate Headquarters
President and CEO
Operations
Vice President
Salty Snacks
Product Manger
Bottling Plant
Manager
Beverages
Product Manager
Warehouse
Manager
Finance
Chief FInancial Officer
Legal
General Counsel
Personnel
Vice President
Confections
Product Manager
Distribution
Manager
Cost
Centers
Superior Foods Corporation provides an example of the
various kinds of responsibility centers that exist in an
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organization.
Management Hubs
 Profit Centers.
Subunit that has responsibility for
generating revenue as well as for controlling
costs.
 Cost Centers.
Subunit that has responsibility for
controlling costs but does not sell product.
i.e. service departments.
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Profit Center
 Organize business into subunits, profit
center & cost centers.
 Track variable costs to profit centers.
Control escalators
 Allocate asset use to subunits.
 Evaluate on contribution margin and
amount of capital invested.
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Word List
 Cost Behavior
 Variable Costs.
Variable Costs per
unit are constant.
 Fixed Costs.
Fixed costs per unit
vary with
production level.
 Mixed Costs.
Semi-variable costs
change in total with
changes in
production level,
but not
proportionately.
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Terms to Recognize
 Cost volume profit
analysis
Profit = Sales (S) –
Variable Costs (VC) –
Fixed Costs (FC)
 Contribution Margin
Sales -- Variable Costs
Contribution Margin
Ratio
(Sales – Variable
Costs)÷ Sales
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Cost-Volume-Profit Diagnostics
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Breakevent Point
 Sales (in dollars) = Fixed Costs / Contribution
margin ratio
 Sales (units) = Fixed Costs / Contribution
margin per unit
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Cost or
Revenue
($)
Quantity Produced
Break-Even Diagram
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Break Even Quantity
Break Even Quantity
Profit / Loss
Corridor
Variable
Costs
Cost or
Revenue
($)
Fixed Cost
Fixed Cost
Quantity Produced
Break-Even Diagram
PPT 14 -19
Break Even Quantity
Increased Fixed Costs
Break Even Quantity
Break-Even Diagram
Profit / Loss
Corridor
Variable
Costs
Cost or
Revenue
($)
Fixed Cost
Quantity Produced
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Vocabulary
Differential costs and
revenue
The additional cost
or revenue incurred
when one alternative
is chosen over
another.
 Opportunity Costs.
The benefit given
up by selecting one
alternative over
another. i.e. Interest
on stored grain.
Sunk cost.
Costs that are
already incurred &
not reversible.
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Responsibility Accounting Model
The responsibility accounting model is defined
by four essential elements:
 assigning responsibility
 establishing performance measures or
benchmarks
 evaluating performance
 assigning rewards
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Types of Responsibility Accounting
Management accounting offers the following
three types of responsibility accounting
systems.
 Functional-based
 Activity-based
 Strategic-based
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Functional-Based
Responsibility Accounting System
A functional-based responsibility accounting
system assigns responsibility to organizational
units and expresses performance measures in
financial terms.
It is the responsibility accounting system
that was developed when most firms were
operating in relatively stable
environments.
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Elements of a Functional-Based
Responsibility Accounting System
Organizational
Unit
Individual
in Charge
Responsibility
is Defined
Operating
Efficiency
Financial
Outcomes
Unit
Budgets
Standard
Costing
Static
Standards
Performance Measures
are Established
Currently
Attainable
Standards
PPT 14 -25
Elements of a Functional-Based
Responsibility Accounting System
Controllable
Costs
Financial
Efficiency
Performance
is Measured
Actual versus
Standard
Financial
Measures
Promotions
Profit
Sharing
Bonuses
Individuals are Rewarded
Based on
Financial Performance
Salary
Increases
PPT 14 -26
Activity-Based
Responsibility Accounting System
An activity-based responsibility accounting
system assigns responsibility to processes and
uses both financial and nonfinancial measures
of performance.
It is the responsibility accounting system
developed for those firms operating in
continuous improvement environments.
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Elements of an Activity-Based
Responsibility Accounting System
Process
Team
Responsibility
is Defined
Value
Chain
Financial
Optimal
Dynamic
Performance Measures
are Established
ProcessOriented
ValueAdded
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Elements of an Activity-Based
Responsibility Accounting System
Quality
Improvement
Time
Reductions
Performance
is Measured
Cost
Reductions
Trend
Measures
Promotions
Bonuses
Gainsharing
Individuals are Rewarded
Based on Multidimensional
Performance
Salary
Increases
PPT 14 -29
Strategic-Based
Responsibility Accounting System
A strategic-based responsibility accounting system
(Balanced Scorecard) translates the mission and
strategy of an organization into operational
objectives and measures for four different
perspectives:
 The financial perspective
 The customer perspective
 The process perspective
 The infrastructure (learning and growth)
perspective
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Strategy
Strategy specifies how an organization matches its
own capabilities with the opportunities in the
marketplace to accomplish its objectives
A thorough understanding of the industry is critical
to implementing a successful strategy
PPT 14 -31
Elements of a Strategic-Based
Responsibility Accounting System
Customer
Financial
Responsibility
is Defined
Process
Communicate
Strategy
Alignment of
Objectives
Infrastructure
Performance Measures
are Established
Balanced
Measures
Link to
Strategy
PPT 14 -32
Elements of a Strategic-Based
Responsibility Accounting System
Customer
Measures
Financial
Measures
Performance
is Measured
Process
Measures
Infrastructure
Measures
Promotions
Bonuses
Gainsharing
Individuals are Rewarded
Based on Multidimensional
Performance
Salary
Increases
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End of Week
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