SUBMITTED TO: SUBMITTED BY:MS. KRITI HEENA (13BCM1055) JAPTINDER(13BCM1059) HARRY (13BCM1054) HARKARAN(13BCM1051) HIMANSHU(13BCM1056) HARMAN(13BCM1052)

Responsibility accounting is a system of control where responsibility is assigned for the control of costs. The persons are made responsible for the control of costs. Proper authority is given to the persons so that they are able to keep up their performance.

In case the performance is not according to the

predetermined standards then the person who are assigned this duty will be personally responsible for it . In responsibility accounting the emphasis is on men rather than on systems.

“ Responsibility accounting is that type of management accounting that collects and reports both planned actual accounting information in terms of responsibility centres.”

Acc. To Anthony & Reece “ Responsibility accounting is a system of

accounting that recognises various decision centres throughout an organisation and traces costs to the individual managers who are primarily responsible for making decisions about the costs in question”

Acc. To Charles T. Horngren

Inputs and OutputsPlanned and Actual informationIdentification of Responsibility CentresRelationship between organisation structure

and responsibility accounting system.Performance reportingParticipative managementTransfer pricing policyManagement by exception

The Responsibility is the unit in the organisation that has control over costs, revenues or investment funds

It is an organisation unit for which a manager is made responsible

The centre’s manager and supervisor establish specific and measurable goals for the responsibility centres

The goals should promote the long term interest of the organisation

There are four basic types of responsibility centres. These centers indicate the degree of responsibility the manager has for the performance of the center

Cost or Expenses centre Profit centre Revenue centre Investment centre

Prime concern of the REVENUE CENTER – “TOPLINE”

1. Revenue Center -

Inputs (Money directly spent on achieving sales i.e. Mktg. Exp.)

Output (Sales Generated in money terms)

RC’sTASK

• RC has no authority to decide price.

• RC is charged with cost of Marketing and not with cost of goods produced

• No formal relationship possible between I & O

• Performance Measure for the RC can be Revenue Budgets.

Generate Sales

e.g. Marketing center

A Revenue Center is responsible for selling an agreed amount of products or services.

It's manager is usually responsible to maximize revenue given the selling price (or quantity) and given the budget for personnel and expenses.

Decision Rights – Promotion Mix –

Performance Measures – Maximize total sales for a given promotion budget Actual sales in comparison with budgeted sales

Typically used when – RC manager has thorough knowledge about market Promotion plays significant role in generating sales RC manager can establish optimal promotion mix He can set optimal quantity and appropriate rewards

Responsibility centers whose employees control costs, but

Do not control their revenues or investment level.Examples: Production department in a

manufacturing unit, a dry cleaning businessTwo types of costs:

Engineered: those costs that can be reasonably associated with a cost center – direct labor, direct materials, telephone/electricity consumed, office supplies.

Discretionary: where a direct relationship between a cost unit and expenses cannot be reasonably made; Management allocates them on a discretionary basis (e.g. depreciation expenses for machines utilized).

e.g. Manufacturing a product

Can be established scientifically

Cost varies with even small fluctuations in volume

Control is easier. Control starts with planning & ends with finished task.

Financial Performance measure suffice the purpose of evaluation.

e.g. R&D Project

Can not be established scientifically

Costs varies with bigger volume changes

Review of task is the only control measure for cost control. Control is exercised during planning stage itself, by way of establishment of budget

Financial as well as non financial Performance measure need to be considered

Decision Rights – Input Mix – Labor, Material, Supplies

Performance Measures – Minimize total cost for a fixed output Maximize output for a given “cost budget”

Typically used when – RC manager can measure output & quality of output knows cost functions, optimal input mix can set optimal quantity and appropriate rewards

Inputs (Money spent on production)

Output (Physical units Produced)

RC’sTASK

2. Expenses Center –

Engineered expenses are those expenses which are arrived at with reasonable reliability.e.g. Material cost , labor cost.

• Performance Measure for the RC is std.cost: -

Std Cost of doing actual activity = Std. cost of unit activity * Quantum of Actual activity• One can establish relationship between I & O , hence performance measurement is relatively easy

2.1)Engineered Exp. Center e.g. Production Department

Inputs (Money spent on production)

Output (Physical units Produced)

RC’sTASK

2. Expenses Center –

Discretionary expenses are those expenses which can not be established with perfect accuracy

2.2) Discretionary Expenses Center -e.g. R&D, Advt. Dept, a Movie Project

Inputs (Money spent onR & D)

Output (Product Development)

RC’sTASK

• Difficult to estimate Input (hence called MANAGED costs)• Output can not be measured in monetary terms.

• Performance Measure for the RC is Budgeted Input and Actual Input.

• Difficult to establish optimal relationship between I and O

Profit is most comprehensive measure of performanceFunction/Activity having highest influence on Bottom

Line suits best for Profit Center.Can be a Business Division or any of the functional

unitDemands highest freedom/autonomy than any other

RCs’

Inputs (Money spent for earning profits)

Output (Money-profit Earned out of sales)

RC’sTASK

Relationship can be established

Decision Rights – Input Mix – Labor, Material, Supplies Product Mix Selling Price

Performance Measures – Actual Profits Actual Profit in comparison with budgeted

profitsTypically used when –

RC manager has knowledge about correct price/quantity

RC manager has knowledge to select optimal product mix

• Improves quality of decision – RC Mgr are closest to the point of decision• Improves speed of decision – less intervention by HQ

• HQ is relieved of day-to-day decisions making process – can concentrate on more strategic decisions• Provides training ground for general mgt. as RC’s acts as mini Cos’.• Enhances profit consciousness with every expense made.

(mktg. mgr. will tend to authorize promotional expenditure which increases the sales).• Provides best performance indicators of Co’s individual component.• Since output is clear cut evident, it evokes competition.

• Ensures better and safer delegation of authority.• Ensures better motivation and evokes commitment.

• Caliber of RC mgr. may hamper the decision.

• Incase of more integrated company there may be problems of cost sharing, transfer pricing, sharing credit for revenue.• Divisionalisation may impose additional cost of admn/support units.• Functional set up may not have competent of GM to manage RC.• Functional units once cooperated may now be in competition with one another- (as profit of one is loss to another).• May encourage short term motive at the expense of Co’s overall goal.• Optimization of RC’s profit not necessarily mean optimization of company’s profits.

• Decentralization makes top mgt. to rely more on MC reports

4. Investment Centers –

Inputs (Money spent for Starting & running the business)

Output (Money/net profit Earned on account of investment)

RC’sTASK

• Objective – Make sound investment decision

• It compares Business units profits with assets employed to earn that profit i.e. efficiency of assets employed. • It satisfies both the goals of business organizations i.e. to earn the profit and

to achieve optimal relationship in profits earned and assets employed

Decision Rights – Input Mix – Labor, Material, SuppliesProduct MixSelling PriceCapital Investment

Performance Measures – Actual ROI Actual Residual Income i.e. EVAActual ROI & RI in comparison with budgeted ROI & RI

Typically used when – RC manager has knowledge about correct price/quantity RC manager has knowledge to select optimal product

mix RC manager has knowledge about investment

opportunities

Return on Investment-

Relating the profits of a firm with the investment made.

1. Return on Assets - ROA

2. Return on Capital Employed - ROCE

3. Return on Shareholder’s Equity - ROE

ROI can be computed in many different ways depending upon the need and relevance.

Net Profit

1) Return on Assets = --------------- * 100

AssetsROI terminology would change depending on what Assets base one takes for computation; it can be -

Total Assets,

Fixed Assets,

Gross Assets,

Net Assets,

Tangible Assets or

Employed Assets

Net Profit

2) Return on Capital Employed = ------------------------- * 100

Capital Employed

Capital implies the long term funds

supplied by creditors & owners Alternatively it can be

Net Working Capital + Fixed Assets

Net Profit

3) Return on Shareholders’ Equity = ---------------- * 100 Equity Capital

Equity includes the preferential capital, however the ordinary shareholder bears the entire risk.

Net Worth represents the equity capital plus the reserves and surpluses the portion solely represented by equity holders’.

Net Profit- Pref. Divi.

Return on Shareholders’ Equity = ------------------- * 100 Net Worth

As lender require certain interest on their money, owners too expect certain rate of return on their funds. (taken together both termed as cost of capital).

Hence no "real" money is made or value is created until the operating profits exceed the rupee return required by the owner and the lenders. Increase in EVA, Increase in Market Value of the firm

Economic Value Added

• EVA is another of the way to relate profits to assets employed. • Economic Value Added = Net Profit – Capital Charge

Capital Charge = Capital Employed * Cost of Capital

• EVA=Net profit – (Cost of Capital * Capital Employed)

• This is nothing but Residual Income which adds to the value of the firm

1. EVA is Profitability measure in money term. Can not be used for comparison with other Business Unit or Industries.

1. ROI is a ratio. Simple & easy to understand, Meaningful in absolute sense. Being a common denominator of industries it can used for comparison.

2. EVA provides an effective measure than ROI. EVA Stresses upon recovery of cost of capital. And welcomes every rupee earned over and above COC.

2. Different ROI % provides different incentives across BUs’

(e.g. BU having current ROI of 30 will be discouraged to go for additional investment giving 25% ROI, even though the ROI is greater than Cost of Capital OR

BU mgr can improve its ROI by just disposing the assets which give lesser ROI than current one)

3. EVA enables to use different rates of interest for different types of assets involving different risks. e.g. low rate for inventory investment whereas higher rate for fixed investment.

3. ROI does not allow different treatment for different kind of assets i.e. it treats all assets/investments at par.

4. EVA has got strong & positive correlation with market value of the firm.

4. It is difficult to define an explicit relationship between ROI and Market value of the firm. (ROI not necessarily indicate the market value of the firm.)

(shareholders worth maximization may not be suitable measure for RC’s performance evaluation

Because it is consolidated effect of entire company)