Title: Libby, Libby and Short
1Activity- and Strategy-Based Responsibility
Accounting ??????
CHAPTER
2Objectives
- 1. Define responsibility accounting, and describe
four types of responsibility centers. - 2. Compare and contrast functional-based,
activity-based, and strategic-based
responsibility accounting systems. - 3. Discuss methods of evaluating and rewarding
managerial performance. - 4. Explain process value analysis.
- 5. Describe activity performance measurement.
31. Responsibility Accounting
394
- Responsibility accounting is a system that
measures the results of each responsibility
center according to the information managers need
to operate their centers.
41) Types of Responsibility Centers
Cost center???? A responsibility center in
which a manager is responsible only for
costs. Revenue center???? A responsibility
center in which a manager is responsible only for
sales.
5ACCOUNTING INFORMATION USED TO MEASURE PERFORMANCE
Capital Cost Sales
Investment Other
Cost center x Revenue center Direct
cost x only Profit center x x Investment
center x x x x 394
6Types of Responsibility Centers
Profit center???? A responsibility center in
which a manager is responsible for both revenues
and costs. Investment center???? A
responsibility center in which a manager is
responsible for revenues, costs, and investments.
72) Investment center performance measuring
397
Return on Investment
ROI
8Margin and Turnover
Margin x Turnover
ROI
9Advantages of ROI
- 1. It encourages managers to focus on the
relationship among sales, expenses, and
investments. - 2. It encourages managers to focus on cost
efficiency. - 3. It encourages managers to focus on operating
asset efficiency.
10Disadvantages of ROI
- It can produce a narrow focus on divisional
profitability at the expense of profitability for
the overall firm. - It encourages managers to focus on the short run
at the expense of the long run.
113) Economic Value Added
- Economic value added (EVA) is after-tax operating
profit minus the total annual cost of capital.
EVA After-tax operating income (Weighted
average cost of capital Total capital employed)
12Cost of Capital
- There are two steps involved in computing cost of
capital - 1. Determine the weighted average cost of capital
(a percentage figure) - 2. Determine the total dollar amount of capital
employed
13?Weighted Average Cost of Capital
Amount Percent x After-Tax Cost
Weighted Cost
Bonds 2,000,000 0.25 0.009(1 0.4)
.054 0.0135 Equity 6,000,000 0.75 0.06 0.06
.120 0.0900 Total 8,000,000 0.1035
14Behavioral Aspects of EVA
A number of companies have discovered that EVA
helps to encourage the right kind of behavior
from their divisions?? in a way that emphasis on
operating income alone cannot. The underlying
reason is EVAs reliance on the true cost of
capital.
15Behavioral Aspects of EVA
- In many companies, the responsibility for
investment decisions rests with corporate
management. As a result, the cost of capital is
considered a corporate expense. If a division
builds inventories and investment, the cost of
financing that investment is passed along to the
overall income statement and does not show up as
a reduction from the divisions operating income.
164)Transfer Pricing????
- ??????????The value of a transferred good is
revenue to the selling division and cost to the
buying division. This value is called transfer
pricing.
17Transfer Pricing
Transfer pricing affects both transferring
divisions and the firm as a whole through its
impact on--
- (1) divisional performance measures ????
- (2) firm-wide profits ??????
- (3) divisional autonomy ?????
18The Transfer Pricing Illustration
Tyson Manufacturers produces small appliances.
The Small Parts Division produces parts used by
the Small Motors Division. The parts also are
sold to other manufacturers and wholesalers.
19The Transfer Pricing Illustration
The Small Motors Division is operating at 70
percent capacity. A request is received for
100,000 units of a certain model at 30 per unit.
A component for this motor can be supplied by
the Small Parts Division. The transfer price is
8 despite the Small Parts Division only
experiencing a cost of 5 per unit.
20The Transfer Pricing Illustration
Using the 8 transfer price, the total cost is
31 per unit, calculated as follows
21The Transfer Pricing Illustration
The Small Motors Division is operating at 70
percent capacity, so the 10 fixed cost is not
relevant. Recalculating the cost--
Direct materials 10 Transferred-in
component 8 Direct labor 2 Variable overhead
1 Total cost 21
The Small Motors Division can pay the Small Parts
Division 8 per unit and still make a substantial
contribution to the overall profitability of the
Division.
22Negotiated Transfer Prices
23Negotiated Transfer Prices
In this case, negotiated transfer prices may be a
practical alternative. Opportunity costs can be
used to define the boundaries of the negotiation
set.
24Disadvantages of Negotiated Transfer Prices
- A division manager who has private information
may take advantage of another divisional manager. - Performance measures may be distorted by the
negotiated skills of managers. - Negotiation can consume considerable time and
resources.
25Despite the disadvantages, negotiated price
transfer prices offer some hope of complying with
the three criteria of goal congruence, autonomy,
and accurate performance evaluation.
26?Opportunity Cost Approach??
This approach identifies the minimum and maximum
price that a selling division would be willing to
accept and the maximum price that a buying
division would be willing to pay.
The minimum transfer price is the transfer price
that would leave the selling division no worse
off if the goods were sold to an internal
division than if the good were sold to an
external party (floor).
The maximum transfer price is the transfer price
that would leave the buying division no worse off
if an input were purchased from an internal
division than if the good were purchased
externally (ceiling).
272. Responsibility Accounting model
The responsibility accounting model is defined by
four essential elements
- Assigning responsibility????
- Establishing performance measures or benchmarks
?????? - Evaluating performance ????
- Assigning rewards ????
pp.2823
28Types of Responsibility Accounting
Management accounting offers the following three
types of responsibility accounting systems.
- Functional-based?????
- Activity-based ?????
- Strategic-based ?????
291) Functional-Based Responsibility Accounting
System
- A functional-based responsibility accounting
system assigns responsibility to organizational
units(????) and expresses(??) performance
measures(????) in financial terms(??????).
It was developed when most firms were operating
in relatively stable(???) environments.
30Elements of Functional-Based Responsibility
Accounting
Responsibility is Defined
31Incentive Pay for Managers
- Why would managers not provide good service?
There are three reasons - 1. They may have low ability
- 2. They may prefer not to work as hard as needed
- 3. They may prefer to spend company resources on
perquisites
32Incentive Pay for Managers
Perquisites are a type of fringe benefit given to
managers over and above a salary.
- A nice office
- Use of a company car or jet
- Expense accounts
- Paid country club memberships
332) Activity-Based Responsibility Accounting System
- An activity-based responsibility accounting
system assigns responsibility to processes and
uses both financial and nonfinancial measures of
performance. (????????)
It is the responsibility accounting system
developed for those firms operating in continuous
improvement environments (???????).
34Elements of an Activity-Based Responsibility
Accounting System (p285 )
Responsibility is Defined
353) Strategy-Based Responsibility Accounting System
A strategic-based responsibility accounting
system (Balanced Scorecard) translates the
mission and strategy of an organization into
operational objectives and measures for four
different perspectives
The financial perspective The customer
perspective The process perspective The
infrastructure (learning and growth) perspective
36288
Elements of an Activity-Based Responsibility
Accounting System
Responsibility Is Defined
373. Activity-Based Management (ABM)
- Activity-based management (ABM) is a systemwide,
integrated approach that focuses managements
attention on activities with the objective of
improving customer value and the profit achieved
by providing this value.
Activity-based management encompasses both
product costing and process value analysis.
38Activity-Based Management ????
Cost Dimension
Resources
391) Process Value Analysis
- Process value analysis is fundamental to
activity-based responsibility accounting, focuses
on accountability for activities rather than
costs, and emphasizes the maximization of
systemwide performance instead of individual
performance.
- Process value analysis is concerned with
- Driver analysis
- Activity analysis
- Activity performance measurement
402) Activity Analysis
Activity analysis is the process of identifying,
describing, and evaluating the activities an
organization performs.
Activity analysis should produce four outcomes
- What activities are done.
- How many people perform the activities.
- The time and resources are required to perform
the activities. - An assessment of the value of the activities to
the organization.
41Those activities necessary to remain in business
are called value-added activities.
Value-Added Activities
42Activities needed to comply with the reporting
requirements, such as the SEC, are value-added by
a mandate.
Value-Added Activities
43- A discretionary activity is classified as
value-added provided it simultaneously satisfies
three conditions
The activity produces a change of state. The
change of state was not achievable by preceding
activities. The activity enables other activities
to be performed.
Value-Added Activities
44All activities other than those essential to
remain in business are referred to as
nonvalue-added activities.
Nonvalue-Added Activities
45- Scheduling ????
- Moving ??
- Waiting ??
- Inspecting ??
- Storing ??
Nonvalue-Added Activities
46Activity Analysis
Activity Analysis Can Reduce Costs in Four Ways
- Activity elimination
- Activity selection
- Activity reduction
- Activity sharing
47Measures of Activity Performance
48Measures of Activity Performance
- Financial measures of activity efficiency include
- Value and nonvalue-added activity cost reports
- Trends in activity cost reports
- Kaizen standard setting
- Benchmarking
- Life-cycle costing
49Value- and Nonvalue-Added Cost Reporting
- Activity Activity Driver SQ AQ SP
- Welding Welding hours 10,000 8,000 40
- Rework Rework hours 0 10,000 9
- Setups Setup hours 0 6,000 60
- Inspection Number of inspections 0 4,000 15
50Value- and Nonvalue-Added Cost Reporting
Activity Activity Driver SQ AQ SP Welding Welding
hours 10,000 8,000 40 Rework Rework
hours 0 10,000 9 Setups Setup hours 0 6,000 60 Ins
pection Number of inspections 0 4,000 15
51Formulas
Value-added costs SQ x SP Nonvalue-added costs
(AQ SQ)SP Where SQ The value-added output
level of an activity SP The standard price per
unit of activity output measure AQ
The actual quantity used of flexible resources
or the practical activity capacity acquired for
committed resources
52Value- and Nonvalue-Added Cost Report
Value-Added Nonvalue-
Actual Activity Costs
Added Costs Costs
- Welding 400,000 - 80,000 320,000
- Rework 0 90,000 90,000
- Setups 0 360,000 360,000
- Inspection 0 60,000
60,000 - Total 400,000 430,000 830,000
53Trend Report Nonvalue-Added Costs
Nonvalue-Added Costs
Activity 2003
2004 Change
- Welding -80,000 50,000 30,000
- Rework 90,000 70,000 20,000
- Setups 360,000 200,000 160,000
- Inspection 60,000 35,000 25,000
- Total 430,000 355,000 235,000
54Chapter Thirteen
The End