RESPONSIBILITY ACCOUNTING AND TRANSFER PRICING

Responsibility Centers Large complex businesses are divided into responsibility centers enabling managers to have a smaller effective span of control.

The accounting system provides information about resources used and outputs achieved.The Need for Information About Responsibility Center Performance

This information is used to:Plan and allocate resources.Control operations.Evaluate the performance of center managers.

Cost Centers, Profit Centers, and Investments Centers Cost Center A business section that has control over the incurrence of costs, but no control over revenues or investment funds.

Cost Centers, Profit Centers, and Investments Centers Profit Center A part of the business that has control over both costs and revenues, but no control over investment funds.

Cost Centers, Profit Centers, and Investments Centers Investment Center A profit center where management also makes capital investment decisions.Corporate Headquarters

Cost Centers, Profit Centers, and Investments Centers

An accounting system that provides information . . . Responsibility Accounting Systems

Prepare budgets for each responsibility center. Prepare timely performance reports comparing actual amounts with budgeted amounts. Measure performance of each responsibility center.Responsibility Accounting Systems

Successful implementation of responsibility accounting may use organization charts with clear lines of authority and clearly defined levels of responsibility.

Amount of detail varies according to level in organization.A department manager receives detailed reports.A store manager receives summarized information from each department.Responsibility Accounting Systems

The vice president of operations receives summarized information from each store. Management by exception: Upper-level management does not receive operating detail unless problems arise.Amount of detail varies according to level in organization.Responsibility Accounting Systems

Responsibility Accounting Systems To be of maximum benefit, responsibility reports should . . .Be timely.Be issued regularly.Be understandable.Compare budgeted and actual amounts.

Assigning Revenue and Costs to Business Centers Two guidelines should be followed in allocating costs to the various parts of a business . . .According to cost behavior patterns:Fixed or variable.According to whether the costs are directly traceable to the centers involved.

Profit Center ReportingWebber, Inc. has two divisions.

Cost of goodssold consists of variable manufacturing costs.Profit Center Reporting

Sheet1

Income Statement

Contribution Margin Format

Television Division

Sales300,000.00

Variable COGS120,000.00

Other variable costs30,000.00

Total variable costs150,000.00

Contribution margin150,000.00

Traceable fixed costs90,000.00

Responsibility margin60,000.00

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Fixed andvariable costsare listed inseparatesections.Profit Center Reporting

Sheet1

Income Statement

Contribution Margin Format

Television Division

Sales300,000.00

Variable COGS120,000.00

Other variable costs30,000.00

Total variable costs150,000.00

Contribution margin150,000.00

Traceable fixed costs90,000.00

Responsibility margin60,000.00

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Responsibility margin is the Television Divisions contributionto overall operations.Profit Center Reporting

Sheet1

Income Statement

Contribution Margin Format

Television Division

Sales300,000.00

Variable COGS120,000.00

Other variable costs30,000.00

Total variable costs150,000.00

Contribution margin150,000.00

Traceable fixed costs90,000.00

Responsibility margin60,000.00

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No computer division means . . .No computerdivision manager.Traceable Fixed Costs Traceable fixed costs would disappear over time if the center itself disappeared.

Common fixed costs arise because of overall operation of the company and are not due to the existence of a particular center. We still have acompany president.Common Fixed CostsNo computer division means . . .

Lets see how the TelevisionDivision fits into Webber, Inc.Profit Center Reporting

Common costs arise because of overall operating activities and are not due to the existence of a particular division.Profit Center Reporting

Sheet1

Income Statement

CompanyTelevisionComputer

Sales500,000.00300,000.00200,000.00

Variable costs(230,000.00)(150,000.00)(80,000.00)

CM270,000.00150,000.00120,000.00

Traceable FC(170,000.00)(90,000.00)(80,000.00)

Responsibility margin100,000.0060,000.0040,000.00

Common costs(25,000.00)

Net income75,000.00

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Lets see how this works!Traceable Costs Can Become Common Costs Fixed costs that are traceable on one level can become common if the business is divided into smaller parts.

Profit Center Reporting

Sheet1

Income Statement

Television DivisionColorHDTV

Sales300,000.00200,000.00100,000.00

Variable costs-150,000.00-95,000.00-55,000.00

CM150,000.00105,000.0045,000.00

Traceable FC-80,000.00-45,000.00-35,000.00

Responsibility margin70,000.0060,000.0010,000.00

Common costs10,000.00

Net income60,000.00

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90,000 cost directly traced to the Television Division.Profit Center Reporting

Sheet1

Income Statement

Television DivisionColorHDTV

Sales300,000.00200,000.00100,000.00

Variable costs(150,000.00)(95,000.00)(55,000.00)

CM150,000.00105,000.0045,000.00

Traceable FC(80,000.00)(45,000.00)(35,000.00)

Responsibility margin70,000.0060,000.0010,000.00

Common costs10,000.00

Net income60,000.00

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45,000.00To Color

35,000.00To HDTV

10,000.00Common

90,000.00TV Division

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TimeProfitsResponsibility MarginResponsibility margin is the best gauge of the long-run profitability of a business center.

When is a BusinessCenter Unprofitable?

Sheet1

Home Appliance Company

Income Statement

Laundry DivisionWashersDryers

Sales300,000.00200,000.00100,000.00

Variable costs(150,000.00)(95,000.00)(55,000.00)

CM150,000.00105,000.0045,000.00

Traceable FC(95,000.00)(45,000.00)(50,000.00)

Responsibility margin55,000.0060,000.00(5,000.00)

Common costs(10,000.00)

Net income45,000.00

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Evaluating BusinessCenter ManagersManagers should be evaluated on the portion of responsibility margin they control. Common fixed costs can not be traced to the Dryer Division or the Washer Division, so they are excluded from the responsibility margin.

Arguments Against Allocating Common Fixed CostsCommon fixed costs would not change even if a business center were eliminated.Common fixed costs are not under the direct control of the centers managers.Allocation of common fixed costs may imply changes in profitability that are unrelated to the centers performance.

The amount charged when one division sells goods or services to another division.Battery DivisionAuto DivisionBatteriesTransfer Prices

A higher transfer price for batteries means . . . . . . greaterprofits for theBattery Division.Auto DivisionTransfer Prices The transfer price affects the profit measure for both buying and selling divisions.Battery Division

. . . lower profits for theAuto Division.Auto DivisionA higher transfer price for batteries means . . . Transfer Prices The transfer price affects the profit measure for both buying and selling divisions.Battery Division

Transfer PricesTransfer prices have no direct effect upon the companys overall net income.

Transfer prices have no direct effect upon the companys overall net income.When the external market value of goods transferred is unavailable . . .Transfer Prices

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