Ma Ppt Final

8/2/2019 Ma Ppt Final

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SHAIK.SURESH (20085)

SUSHMITA (20087)UTPAL MANE (20088)



Relating to theresponsibilities of

individual managers.

To evaluatemanagers on

controllable items.

An accounting system thatprovides information . . .

WHAT IS RESPONSIBILITY

ACCOUNTING ?



Decision Making is Pushed Down

Supervisor Supervisor

Middle

Management

Supervisor Supervisor

Middle

Management

Top

Management

DECENTRALIZATION



ADVANTAGES OF DECENTRALIZATION

Promotes betterdecision making.

Allows upper-level management toconcentrate on strategic decisions.

Improvesproductivity.

Developslower-levelmanagers.

Improvesperformanceevaluation.

Advantages



DISADVANTAGES OF DECENTRALIZATION

Upper level management loses some control.

Lack of goal setting.

Duplication of effort.



Responsibility Reports

Responsibility

ReportsPrepared for eachindividual who has

control over

revenue or expenseitems



RESPONSIBILITY

REPORTS

Prepare budgets foreach responsibility center.

Prepare timely performance reportscomparing actual amounts with budgeted amounts.

Measure performance ofeach responsibility center.





A responsibility center is the point in an organization where the

control over revenue or expense is located, e.g. division,

department or a single machine.

Examples:

A specific store in a chain of grocery stores.

A work-station in a production line manufacturing automobile

batteries

The payroll data processing center within a firm.



It is like a small business, and its manager is asked to run

that small business and preserve the interests of the largerorganization.

Goals for the center should be specific and measurable, and

should promote the long terms interests of the organization

and should be compatible with other responsibility center

activities.



Example: A courier service (DHL)

Courier operations dispatch trucks to pick up or delivershipments from local terminals.

It could be sent to one or more central terminals andthen sorted and redirected. Success of this service would depend on:

Service commitment to customers (on time, without damage)and controlling costs

Let us suppose that each terminal is treated as aresponsibility center.

How should the company measure the performance ofeach terminal, its mangers, and its employees?



To focus on efficiency: It could measure no. of parcels pickedup, sorted or delivered, per route, per employee, per vehicle, perhour or per shift.

To focus on customer service: It could measure each group’s

contribution to customers proportion of the time the terminal metits deadlines, when terminals are required to sort shipments, whatthe sorting error rate was.

It could also measure customer service : no. of complaintsoperations group receives, average time taken by the operationgroup to respond to complaints, and no. of complaints of poor, orimpolite service.

Measuring the performance of thecourier-terminal responsibility center



TYPES OF RESPONSIBILITY

CENTERS

Responsibility

Centers

CostCenter

ProfitCenter

InvestmentCenter



Responsibility centers whose employees control costs,

but do not control their revenues or investment level.

A cost center is evaluated by means of performance

reports (i.e., comparison of actual with standard).

Examples: Production department in a

manufacturing unit,a dry cleaning business



Input OutputProcess

Control only this



Prod. 1 Prod. 2 Prod. 3 Prod. 4 Total

Units made 245,000 385,000 636,000 1,250,000

Units per batch 500 2,500 1,500 5,000

No. of batches 490 154 424 250

Cost per unit $ 5.40 $3.20 $4.25 $1.45

Cost per batch $325.00 $680.00 $400.00 $135.00

Unit-related costs

(245,000x$5.40)

$1,323,000 $1,232,000 $2,703,000 $1,812,500 $7,070,500

Batch-related costs

(490x$325)

159,250 104,720 169,600 33,750 467,320

Prod.-sustaining

costs

125,000 168,000 256,000 355,000 904,000

Facility costs 1,450,000

Total cost center

costs

$9,891,820

MORTON CARPETS – BUDGETED COST



Prod. 1 Prod. 2 Prod. 3 Prod. 4 Total

Units made2,945,000

345,000 675,000 950,000

Units per batch 600 2,300 1,800 6,000

No. of batches 492 150 375 159

Cost per unit $ 5.43 $3.18 $4.33 $1.40

Cost per batch $335.00 $670.00 $387 $144.00

Unit-related costs $1061,850 $1,097,100 $2,922,750 $1,330,000 $6,951,700

Batch-related costs 164,820 100,500 145,125 22,896 433,341

Prod.-sustaining

costs

133,000 163,000 259,000 362,000 917,,000

Facility costs 1,650,000

Total cost center

costs

$9,952,041



Budget Actual VarianceUnrelated costs

Product 1 1,323,000.00 1,601,850.00 278,850.00

Product 2 1,232,000.00 1,097,100.00 -134,900.00Product 3 2,703,000.00 2,922,750.00 219,750.00Product 4 1,812,500.00 1,330,000.00 -482,500.00

Total 7,070,500.00 6,951,700.00 -118,800.00Batch related costs

Product 1 159,250.00 164,820.00 5,570.00

Product 2 104,720.00 100,500.00 -4,220.00Product 3 169,600.00 145,125.00 -24,475.00Product 4 33,750.00 22,896.00 -10,854.00

Total 467,320.00 433,341.00 -33,979.00Prod. sus. Costs

Product 1 125,000.00 133,000.00 8,000.00

Product 2 168,000.00 163,000.00 -5,000.00Product 3 256,000.00 259,000.00 3,000.00Product 4 355,000.00 362,000.00 7,000.00

Total 904,000.00 917,000.00 13,000.00Fac. Sus. Costs 1,450,000.00 1,650,000.00 200,000.00

Total 9,891,820.00 9,952,041.00 60,221.00

Variance Analysi s



Engineered: Those costs that can be reasonablyassociated with a cost center – direct labor, direct

materials, telephone/electricity consumed, officesupplies.

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



Motivation of staff who feel committed to the cost centre

Improved monitoring of cost and expenditure

Improved management information on profit ability

Improved monitoring of investment returns



In practice, it may be difficult to allocate costs to aparticular division / centre

Cost centres may add to pressures and stress on staff

Senior managers may be unable to recognise whethera cost centre is running effectively / ineffectively



PROFIT CENTERS

Responsibility ofgenerating revenue andcontrolling costs.

Profit center evaluation

techniques include:Comparison of current year

income with a target or budget.

Relative performanceevaluation compares the center

with other similar profitcenters.



CONT…

If performance is poor, it may reflect poor conditions

that no one in the organization could control as well aspoor local conditions.

For this reason, organizations should not evaluate

performance only based on costs and profits, but

Perform detailed evaluations that include quality,

material use, labor use, and service measures that the

local unit can control.



Profit Centers

NEG, a diversified entertainment company,has two profit centers: the Theme Park

Division and the Movie Production Division.

Theme Park

Division

Movie Production

DivisionRevenues $6,000,000 $2,500,000

Operating expenses 2,495,000 405,000



Charging Service Department Coststo Production Divisions

Purchasing Department: $400,000

(Activity base: number of purchase requisitions)Theme Park Division 25,000 purchase requisitions

Movie Production Division: 15,000 purchase requisitions

Total 40,000

$400,000

40,000 purchase requisitions

$10 per purchase

requisition=

Profit Centers




Payroll Accounting: $255,000

(Activity base: number of payroll checks)

$255,000

15,000 payroll checks= $17 per payroll check

Theme Park Division 12,000 payroll checks

Movie Production Division: 3,000 payroll checks

Total 15,000

Profit Centers




Legal Department: $250,000

(Activity base: number of payroll checks)

$250,000

1,000 hours= $250 per hour

Theme Park Division 100 billed hours

Movie Production Division: 900 billed hours

Total 1,000

Profit Centers





Purchasing $250,000 $150,000

Payroll accounting 204,000 51,000

12,000 payroll

checks x $17 per

payroll check

3,000 payroll

checks x $17 per

payroll check

Nova Entertainment Group

Service Department Charges to NEG DivisionsFor the Year Ended December 31, 2006

Theme Movie

Park Production

Service Department Division Division

Profit Centers



Purchasing $250,000 $150,000


Legal 25,000 225,000



Theme Movie

Park Production


Profit Centers

100 hours x $250

per hour

900 hours x $250

per hour



Purchasing $250,000 $150,000


Legal 25,000 225,000

Total service department charges $479,000 $426,000



Theme Movie

Park Production


Profit Centers




Divisional Income StatementsFor the Year Ended December 31, 2006

Theme Park Division Movie Production Division

Income from operations before

service department charges.

Revenues $6,000,000 $2,500,000


Income from operations $3,505,000 $2,095,000




Divisional Income StatementsFor the Year Ended December 31, 2006

Theme Park Division Movie Production Division

Revenues $6,000,000 $2,500,000


Income from operations $3,505,000 $2,095,000Less service dept. charges:

Purchasing $ 250,000 $ 150,000


Legal 25,000 225,000Total service department

charges $ 479,000 $ 426,000

Income from operations $3,026,000 $1,669,000



PROFIT CENTRE ADVANTAGES

Improves quality of decision Improves speed of decision

Ensures better and safer delegation of authority

Ensures better motivation and evokes commitment

Enhance profit consciousness with every expensemode



Loss of overall control of company

Profit centre could be working towards different or

non- company agendas



USES OF COST AND PROFIT CENTRES

They allow the business to compare performance between departments

/ across products / brands ,etc.

This allows the business to make decisions about underperforming

areas

If a profit centre is identified as doing well businesses may want to

focus on the reasons behind this



CONT….

They allow a more focused study of a firms finances

Benchmarking can take place

Responsibility for a profit / cost centre will motivatethe individual responsible

By placing responsibility with the person involved inthe activity the finances may be run more efficiently

than would be the case if a more remote, senior manager controlled it.



WHY OPERATE COST AND PROFIT CENTRES

Financial reasons – they allow to manage and control money. They

allow the business to identify which areas are most profitable

Organisational reasons – helps with the organisation of departments

and resources

Motivational reasons – motivates managers and workers



WHAT IS AN INVESTMENTS

CENTER?

Investment Center

A segment whose managerhas control over costs,

revenues, and investments in

operating assets.



Investment CenterA Systems Perspective

Input OutputProcess

Control these

Investment Center



EVALUATION OF INVESTMENT

CENTER…:

An investment center isevaluated by means of theReturn on Investment (ROI) orthe Residual Income (RI) it isable to generate.



RETURN ON

INVESTMENT :

Return on investment is the ratio of income to the investmentused to generate the income.

ROI =

Net Income

Investment



ROI =Net IncomeInvestment

ROI = Net IncomeSales

×Sales

Investment

Margin Turnover

RETURN ON

INVESTMENT



RETURN ON

INVESTMENT

Cola Company reports the following:

Net Income $ 30,000Sales $ 500,000

Investment $ 200,000

Let’s calculate ROI.



ROI = 6% × 2.5 = 15%

RETURN ON

INVESTMENT


×Sales

Investment

ROI = $30,000$500,000

×$500,000$200,000



IMPROVING R0I

Three ways to improve ROI

Increase

Sales

ReduceExpenses

Reduce

Investment



IMPROVING R0I

Cola Company’s manager was able to increase sales to

$600,000 which increased net income to $42,000.

There was no change in investment.

Let’s calculate the new ROI.



Cola Company increased ROI from 15% to 21%.

ROI = 7% × 3 = 21%


×Sales

Investment

ROI = $42,000$600,000

×$600,000$200,000

IMPROVING R0I



ROI - A MAJOR

DRAWBACK

As division manager at Cola Company,your compensation package includesa salary plus bonus based on your division’s ROI -- the higher your ROI, the bigger your bonus.

The company requires an ROI of 20% on all newinvestments -- your division has been producing anROI of 30%.

You have an opportunity to invest in a new projectthat will produce an ROI of 25%.

As division manager would youinvest in this project?



ROI - A MAJOR DRAWBACK

As division manager,I wouldn’t invest in that project because

it would lower my pay!

I thought we weresupposed to do what

was best for the

company!



THANK YOU ONE & ALL

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Ma Ppt Final