manager's performance evaluated on directly under manager's control. can beused at every level of mangmnt in which the following conditions exist.
1.Costs and revenues can be directly associated with the specific level of management responsibility.
2.The costs and revenues can be controlled by employees at the level of responsibility with which they are associated.
3.Budget data can be developed for evaluating the manager's effectiveness in controlling the costs and revenues.
**valuable in a decentralized company**
*applies to profit / not-for-profit entities.*
Responsibility accounting differs from budgeting in 2
1.distinction made btwn controllable and noncontrollable items.
2.Perfrmnce rprts either emphasize or include only items controllable by the individual manager.
Cost over which a manager has control
In general, costs incurred directly by a level of responsibility are controllable at that level. Incontrast, costs incurred indirectly and allocated to a responsibility level arenoncontrollable costs at that level.
Responsibility reporting system
Preparation of report for ea level of rspnsblty in co's org chart
Three basic types of responsibility centers
Cost centers Profit centers Investment centers
incurs costs & expenses but does not dirctly generate revenues
either production departments or service departments
Incurs costs & exp & generates revenues.
Ex: Iindividual departments of a retail store, such asclothing, furniture, and automotive products, and branch offices of banks.
Incurs costs, exp & gen rev -has control over decisions regarding the assets available for use.
ex:.Utility Duke Energy
Direct fixed costs
relate to1cntr & are incurred for the sole bnft of that
cntr.Ex:sal estblshd by the prft cntr manager for sprvsr prsnel
also called traceable costs. Most DFC are controllable by the profit center manager.
Indirect Fixed costs
co's overall oprting actvtes are incrd 4 bnfit of more thn 1PC
Allocates IFC2profit cntrs on type of equitable basis.
ex: property taxes on sq ft of floor space used by ea cntr.
Also calld cmn costs. not controllable by the prft cntr mnge.
Responsibility report 4profit cntr shows bdgtd & actual controllable revenues and costs.
In the report: 1Controllable fixed costs are deducted from contribution margin.
2The excess of contribution margin over controllable fixed costs is identified as controllable margin.
3Noncontrollable fixed costs are not reported.
Return on Investmen (ROI)
Controllable Margin ÷ Average Opertaing Assets
Controllable M=CM-Controllable fixed costs
CM % = CM ÷ Sales
ROI two judgmental factors:
1.Caluation of operating assets. 2.Margin (income) measure.