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RESPONSIBILITY RESPONSIBILITY ACCOUNTINGACCOUNTING

Application of Responsibility AccountingApplication of Responsibility Accounting

Step 1: Identifying what part of the organization have Step 1: Identifying what part of the organization have responsibility for each objectivesresponsibility for each objectives

Step 2: Developing measures of achievement of Step 2: Developing measures of achievement of

objectives objectives

Step 3: Create reports of these measures by Step 3: Create reports of these measures by

Organization’s subunit or responsibility centers. Organization’s subunit or responsibility centers.

RESPONSIBILITY CENTERSRESPONSIBILITY CENTERS

Cost CentersCost Centers

Revenue CentersRevenue Centers

Profit CentersProfit Centers

Inventory CentersInventory Centers

FactorsFactors Cost CenterCost Center Revenue Revenue CenterCenter

Profit CenterProfit Center Investment Investment CenterCenter

Controlled by Controlled by central central managementmanagement

CostsCosts RevenuesRevenues Costs, RevenuesCosts, Revenues Costs, Revenues & Costs, Revenues & significant control significant control over investmentover investment

Not Controlled by central management

Revenues, Investment in inventory & Fixed Assets

Costs, Investment in inventory & Fixed Assets

Investment in inventory & Fixed Assets

Measured by the Measured by the Accounting Accounting SystemSystem

Costs relative to Costs relative to some targetsome target

Revenue relative Revenue relative to some to some targettarget

Profit relative to Profit relative to some targetsome target

Return on investment Return on investment relative to some relative to some targettarget

Not Measured by the Accounting System

Performance on critical success factors other than cost

Performance on critical success factors other than Revenue

Performance on critical success factors other than Profit

Performance on critical success factors other than Return on Investment

Evaluating Evaluating responsibility centerresponsibility center

Budget Actual VariancePresident’s Office $50,000 $52,000 $2,000 UController 25,000 24000 1,000 FProduction Vice President 18,00,000 18,29,000 29,000 USales Vice President 525000 55000 25,000 U Total Controllable Costs $24,00,000 $24,55,000 $55,000 U

President's Responsibility Report

Budget Actual VarianceVice President’s office $10,000 $11,000 $1,000 UCutting department 500,000 4,98,000 2,000 FMachining department 9,90,000 10,00,000 10,000 UAssembly department 3,00,000 3,20,000 20,000 U Total Controllable Costs S18,00,000 $18,29,000 $29,000 U

Product Vice-President’s Responsibility Report

Budget Actual VarianceDirect Material $2,50,00 $2,53,000 $3,000 UDirect Labor 1,00,000 90,000 10,000 FVariable overhead 50,000 52,000 2,000 UFixed overhead 1,00,000 1,03,000 3,000 U Total Controllable Costs $5,00,000 $4,98,000 $2,000 F

Cutting Department Responsibility Report

Advantages of Responsibilities Advantages of Responsibilities AccountingAccounting

It Provides a way to manage an organization It Provides a way to manage an organization that would otherwise be unmanaged.that would otherwise be unmanaged.

Assigning responsibility to lower level managers allows higher level managers Assigning responsibility to lower level managers allows higher level managers to pursue other activity such as long term planning and policy making.to pursue other activity such as long term planning and policy making.

It provides a way to motivate lower level It provides a way to motivate lower level managers & workers.managers & workers.

Disadvantages of Disadvantages of Responsibilities AccountingResponsibilities Accounting

Responsibility Accounting Measurement

Return on Investment (ROI)Return on Investment (ROI)

Net Operating Income

Average Operating Asset

Formula for calculating the ROI

Problems of ROI Problems of ROI

When managers are told to increase ROI, they may not know how to increase ROI

Committed costs, over which managers has no control

Residual Income Calculation of Residual Income

Residual IncomeAverage operating Assets 1,00,000

Net operating income 2000

Minimum required rate of return@15% of average operating asset

15000

Residual Income 5000

Responsibility Accounting Measurement

BUDGET

EVA

EVA

Problem of ROI and RI

Calculation of EVA

Net profit after taxes 184mil

Cost of capital @9% 104mil

EVA 80mil

OR

EVA = (ROI-WACC) x Invested capital

Qualitative measurement Tools of Responsibility Accounting

The Balance scorecard

Control of Quality

Control of cycle time

Control of productivity

Is responsibility Accounting Is responsibility Accounting building incapabilitybuilding incapability

??

Section – I explains why and how Section – I explains why and how management can be related to management can be related to

fragility?fragility?

Section – II Summarizes how they Section – II Summarizes how they are affected by management?are affected by management?

Management and fragility

Fragility to Control Fragility to decision making

Political Fragility Cognitive Fragility

Pragmatic Fragility

Management and fragility

Fragility to decision making

Cognitive Fragility

Pragmatic Fragility

Fragility to make good decisions

Fragility not to obeyed, not to be complied Fragility not to obeyed, not to be complied with.with.

Political FragilityPolitical Fragility

We want to say that the agency theory is based on a only restricted We want to say that the agency theory is based on a only restricted vision of fragility related to lack of will to do. It is not covering vision of fragility related to lack of will to do. It is not covering multitude of situation where the problem is not that the agent does multitude of situation where the problem is not that the agent does not want, but his capacities are fragile. not want, but his capacities are fragile.

The myth of Medusa and the The myth of Medusa and the contradictory approach to managementcontradictory approach to management

Symbolizes

It emphasizes the radical paralysis faced by men in front of contradiction.

It shows necessity of the intervention of someone else in relation between men and contradiction in order to help Convince himself of his own capacity

The mediation of representation is essential in this relation

ImputabilityImputability

Being able to regard oneself as the true author of ones own Being able to regard oneself as the true author of ones own

action. action.

I can say Being able to say

I Can do Being able to do

I can narrateAn acceptable, intelligible interpretation of a fact through narration

Typical Sense Typical Sense

You are capable only when you are recognized by others You are capable only when you are recognized by others as capable. as capable.

ImputabilityImputability You are capable when you feel capable. You are capable when you feel capable.

Relationship between Imputability & Relationship between Imputability & Responsibility AccountingResponsibility Accounting

In responsibility Accounting In responsibility Accounting

Imputability is a relation going from the principal to the agent.

Problems of this ConceptProblems of this Concept

Responsibility for uncontrollable factors raises the Responsibility for uncontrollable factors raises the question of capacityquestion of capacity

It does not specifically help managers to feel capableIt does not specifically help managers to feel capable

Managers are underspecified, selfless and bodiless Managers are underspecified, selfless and bodiless person person

Is responsibility Accounting making the managers a complete incapable

Person

?