bg management accounting chapter 8 4075

Responsibility center is any part of an organization whosemanager has control over and is accountable for cost, profit, or investments... Cost, Profit, and Investments Centers... Evaluat

CHAPTER 8

8.1 Decentralization in Organizations

Lower-level managers gain experience in decision-making.

Lower-level decision often based on better information.

8.1 Decentralization in Organizations

May be a lack of coordination among autonomous managers.

Lower-level managers may make decisions without seeing the

“big picture.”

Lower-level manager’s objectives may not

be those of the organization.

May be difficult to spread innovative ideas

in the organization.

8.2 Responsibility Accounting

• Based on Charles T Horngren

• Based on Anthony and Reece

8.2 Responsibility Accounting

Responsibility center is any part of an organization whose

manager has control over and is accountable for cost, profit, or investments

8.2 Responsibility Accounting

Cost, Profit, and Investments Centers

Cost, Profit, and Investments Centers

8.3 Evaluating Responsibility

Performance

8.3.1 Evaluating cost center

A cost variance is the difference between the actual

amount of the cost and how much a cost should have been, given the actual level of activity

- If the actual cost is greater than what the cost should have been, the variance is labeled as unfavorable

8.3 Evaluating Responsibility

Performance

8.3.2 Evaluating profit center

A profit variance is the difference between the actual total profit and what the total profit should have been, given the actual

- If actual revenue exceeds what the revenue should have been, the variance is labeled favorable

- If actual revenue is less than what the revenue should have been,

8.3 Evaluating Responsibility

Performance

8.3.3 Evaluating investment center

An investment center is responsible for earning an adequate return

on investment The following two sections present two methods for evaluating this aspect of an investment center’s performance

- The first method, is called return on investment (ROI)

- The second method, is called residual income (RI)

Return on Investment (ROI) Formula

ROI = Net operating income

Average operating assets

Residual Income - Another Measure of

Performance

This computation differs from ROI

ROI measures net operating income earned relative to

the investment in average operating assets

Residual income measures net operating income earned less the minimum required return on average

operating assets