Title: Responsibility accounting
1Responsibility accounting
- Benefits of managing decentralised organizations
- management concentrates on strategic decisions
and coordination of activities of the whole
organisation - better information for decision-taking at a level
where the problem exists - improved management of managers' knowledge, they
learn as the organisation grows and
responsibilities change - greater elasticity in decentralised organisations
- decentralisation allows for more effective
assessment of managers - Need to develop managerial control
- control is aimed at ensuring fulfillment of goals
set by the management - Accounting based on responsibility centers -
provides information needed for managerial
control
2Responsibility centers (1)
- Responsibility center (pl. centrum
odpowiedzialnosci) - organisational unit, which is responsible for
management of particular (selected) group of
activities and which is headed by a manager with
a delineated set of competences and
responsibilities - Conditions for effective managerial control
- organisational structure with specific units
- specified set of skills and responsibilities
required for the unit managers - precisely described relationships between
employers and employees - Types of responsibility centers
- for costs, for profit, for investment
3Responsibility centers (2)
4Cost center
- Cost center (pl. Centrum kosztów )
- lowest scope of responsibility
- managers are responsible for incurring costs
- managers have a right to take decisions that have
an impact on the level of costs and need
information required to control the process of
the implementation of decisions and costs - Identification of responsibility centers
- spatial
- organisational
- informational
- subjective
- decisional
- Assessment of cost centers
- minimalisation of total costs for the fixed level
of activities
5Cost center - problems
- Responsibility of cost centers
- taking decisions which ensure implementation of
activities as well as conformity of controlled
costs to a plan (budget, standards) - explaining existing deviations, also due to
reasons beyond cost center's control - Limitations of cost control
- in a short-term there is a low possibility to
change costs - subjective assessment, which costs are controlled
- impact of external economic variables
- impact of unpredictable events
- problem of interdependencies between
responsibility centers
6Profit center
- Profit center (pl. Centrum zysków)
- greater need for management than for cost centers
- managers responsible for originating costs and
generating income (profits) - specifying profit centers is based on the same
criteria as specifying cost centers - profit centers may include one, few or tens of
cost center(s) - if a profit center provides services to other
profit centers in a company in order to price the
internal services transfer prices (internal
prices) are used - Assessment of profit centers
- based on income (profit)
7Profit center - problems
- Set correct transfer prices inside the company
- Allocated common costs to responsibility centers
- Profit centers concentrating only on its profits
often ignore activities which impact results of
other responsibility centers
8Investment center
- Investment center (pl. Centra inwestycyjne)
- possesses the largest scope of responsibility
- managers are responsible for profits, costs and
assets - investment centers may include one or more profit
centers - for investment decision-taking ex-ante
information about costs and profits as well as
information about inflows and outflows of various
alternatives are necessary - Assessment of investment centers
- Return on Investment (ROI)
- Residual Income (RI)
- Economic value added (EVA)
9Investment centers - problems
- Choice of measure used for assessment
- necessity to include costs and profits common
with other centers as well as services present
among centers - necessary to include effectiveness investment
processes - Difficulty in comparing cost centers of different
sizes
10Return of Investment - ROI
- Return on Investment ROI (pl. Stopa zwrotu z
aktywów)
11Calculation of ROI
12How to calculate ROI?
13Example How to calculate ROI
- Assets of the operational unit 100 000
- Income from operations
18 000 - Sales
200 000
Income from operations Assets of operational unit
18 000 100 000
ROI
18
Return on sales
18 000 200 000
9
Return on assets
200 000 100 000
2 times
ROI 9 x 2 18
14Limitations of utilising ROI
- Using ROI to assess activities has its
limitations - ROI measure is not directly tied to the goal of
maximising the value of the enterprise for its
owners - ROI used as an assessment measure of managers can
lead to incorrect investment decisions - ROI is a short-term assessment measure
15Residual income
- Residual income RI (pl. Zysk rezydualny)
- so the surplus of an income from operations
result of operational activities, which an
investment center can generate over a specific
rate of return using available operational assets - RI as an assessment measure
- aim of the investment center maximising the
residual income
16How to calculate RI?
- Revenues from sales 12 000 000
- Average value of operational assets 8 000 000
- Income from operations 1 200 000
- ROI (1 200 000/8 000 000) x 100 15
- Minimum result from operations (12 x 8 000 000)
960 000 - RI (1 200 000 960 000) 240 000
17ROI and RI in decision-taking (1)
- Assumption ALFA Co. can invest 300 000 zl in
activating new product line, which will lead to
increase of sales by 636 000 zl per annum, cost
of goods sold by 500 000 zl, sales costs by 56
000 zl and administrative costs by 40 000 zl.
P/L Statement for ALFA Co. Before the project Incremental result from the project After the project
Sales revenue 1 200 0000 636 000 12 636 000
Cost of goods sold (COGS) 9 000 000 500 000 9 500 000
Gross income from sales 3 000 000 136 000 3 136 000
Sales costs 1 000 000 56 000 1 056 000
Administrative costs 400 000 40 000 440 000
Income from sales 1 600 000 40 000 1640 000
Other operational income 400 000 - 400 000
Other operational costs 800 000 - 800 000
Income from operations 1 200 000 40 000 1 240 000
18ROI and RI in decision-taking (2)
Before the project Incremental result from the project After the project
Average operating assets 8 000 000 300 000 8 300 000
Income from operations 1 200 000 40 000 1 240 000
ROI 15 13 14,94
- Investment in the project decreases the ROI
measure, which is why the ALFA manager, assessed
based on ROI, will reject the project
19ROI and RI in decision-taking (3)
Before the project Incremental result from the project After the project
Sales 12 000 000 600 000 12 600 000
Average operating assets 8 000 000 300 000 8 300 000
Income from operations 1 200 000 40 000 1 240 000
ROI 15 13 14,94
Minimal required result from operating activities 960 000 36 000 996 000
RI 240 000 4 000 244 000
- Investment in the project increases the RI
measure, which means that the manager assessed
based on RI will undertake the project - Limited use of RI should not be used to assess
investment centers of various sizes, bigger
investment centers can show larger RI
20Economic value added - EVA
- EVA (ang. economic value added)
- measure that shows the value that the activities
of a given investment center "add" to the value
of an enterprise - shows the aim of activities of an enterprise
maximialisation of its value -
EVA Wynik operacyjny koszt kapitalu x
zainwestowane srodki
- Limitations of applying the EVA
- short-term measure based on annual data
- its used can lead to faulty investment decisions
taken by managers interested in short-term
benefits - Modifications of EVA
- e.g. bonus bank managers lose motivation to
conduct long-term non-income generating projects -
21EVA in decision-taking (1)
P/L Statement of Gamma Co. 2001 2002
Sales revenue 12 200 000 20 000 000
Cost of goods sold (COGS) 7 400 000 15 000 000
Gross income from sales 4 800 000 5 000 000
Sales costs 1 200 000 1 000 000
Administrative costs 2 000 000 1 500 000
Income from sales 1 600 000 2 500 000
Other operational income 400 000 400 000
Other operational costs 500 000 400 000
Income from operations 1 500 000 2 500 000
- Assets in 2001 - 10 000 000 zl, in 2002 20 000
000 zl - Liabilities in 2001 - 3 000 000 zl, in 2002 4
000 000 zl - Cost of capital set at 10
22EVA in decision-taking (2)
2001 2002
Return on sales 12,29 12,5
Return on assets 1,22 1
ROI 15 12,5
EVA 800 000 900 000
Calculation 1,5 mln-7mln100,8 mln 2,5mln-16mln100,9 mln
- Decrease in ROI worsening of the investment
center's effectiveness? - Increase in EVA improvement of the investment
center's effectiveness?