Evaluating Responsibility Centers

1
Evaluating Responsibility Centers

• Controllability Principle
• the manager of a responsibility center should be
  held responsible only for the revenues, costs, or
  investment that responsibility center personnel
  control
• Exclude Revenues, costs, or investments that
  people outside the responsibility centers
  control

2
Problems with the Controllability Principle

• many revenues and costs are jointly earned or
  incurred
• the activities that create the final product are
  sequential and interdependent
• requires the firm to consider many facets of
  performance

3
Problems with the Controllability Principle
(cont.)

• The organization could prepare accounting
  summaries of the performance to support some
  system of financial control.
• What are the harvesting revenues?
• What costs of production does marketing control?
• How much influence does harvesting and processing
  have on sales?

4
Using Performance Measures to Influence (instead
of evaluate)

• When more costs or revenues are included in
  performance measures, managers are more motivated
  to find actions that can influence incurred costs
  or generated revenues

5
Margin Reports

• Organization units as profit centers.
• Decide how to assign the responsibility for
  jointly earned revenues and jointly incurred
  costs
• How to handle the interactions among the various
  profit center units?

6
Example

• Earls Motors
• New car sales
• Used car sales
• Body shop
• Service department
• Leasing

7
Good or Bad Numbers?

• Past Performance
• Is the performance this period reasonable, given
  past periods?
• Comparable Organizations
• How does performance compare with similar
  organizations?
• Evaluate by using absolute and relative amounts.

8
!!! CAUTION !!!

• Segment margins reflect many assumptions that
  disguise underlying issues.
• Must also consider
• Quality and service that will affect future
  profits
• Subjective revenue and cost allocation
  assumptions
• Transfer pricing issue (most important)