Accounting by Meigs & Meigs
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Transcript of Accounting by Meigs & Meigs
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Responsibility Accounting and Transfer Pricing
Chapter
21
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Responsibility CentersResponsibility Centers
Large complex businesses are
divided into responsibility
centers enabling managers to have a
smaller effective span of control.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The accounting system provides information about resources used and outputs achieved. The accounting system provides information about resources used and outputs achieved.
The Need for Information About Responsibility Center PerformanceThe Need for Information About
Responsibility Center Performance
This information is used to:Plan and allocate resources.
Control operations.
Evaluate the performanceof center managers.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Cost
Cost Centers, Profit Centers, and Investments Centers
Cost Centers, Profit Centers, and Investments Centers
Cost Center A business section
that has control over the incurrence
of costs, but no control over revenues or
investment funds.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Cost Centers, Profit Centers, and Investments Centers
Cost Centers, Profit Centers, and Investments Centers
Profit Center A part of the
business that has control over both
costs and revenues, but no control over investment funds.
RevenuesSalesInterestOther
CostsMfg. costsCommissionsSalariesOther
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Corporate HeadquartersCorporate Headquarters
Cost Centers, Profit Centers, and Investments Centers
Cost Centers, Profit Centers, and Investments Centers
Investment Center
A profit center where management also makes capital
investment decisions.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
CostCenter
Cost controlQuantity and qualityof services
ProfitCenter
InvestmentCenter
Return on assets (ROA) Residual income (RI)
Evaluation Measures
Profitability
Cost Centers, Profit Centers, and Investments Centers
Cost Centers, Profit Centers, and Investments Centers
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
An accounting system thatprovides information . . .
Responsibility Accounting SystemsResponsibility Accounting Systems
Relating to theresponsibilities of
individual managers.
To evaluatemanagers on
controllable items.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Prepare budgets for each responsibility center.
Prepare timely performance reportscomparing actual amounts with budgeted amounts.
Measure performance ofeach responsibility center.
Responsibility Accounting SystemsResponsibility Accounting Systems
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Successful implementation of responsibility accounting may use organization charts with
clear lines of authority and clearly defined levels of responsibility.
Successful implementation of responsibility accounting may use organization charts with
clear lines of authority and clearly defined levels of responsibility.
Vice Presidentof F ina nce
D epa rtm ent Ma na ger
Store Ma na ger
V ice Presidentof O pera tions
V ice Presidentof Ma rketing
President
B oa rd of D irectors
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Amount of detail varies according to level in organization.
A department manager receives detailed reports.
A store manager receives summarized information from each department.
Responsibility Accounting SystemsResponsibility Accounting Systems
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The vice president of operations receives summarized information
from each store.
Management by exception:
Upper-level management does not receive operating
detail unless problems arise.
Amount of detail varies according to level in organization.
Responsibility Accounting SystemsResponsibility Accounting Systems
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Responsibility Accounting SystemsResponsibility Accounting Systems
To be of maximum benefit, responsibility reports should . . .Be timely.Be issued regularly.Be understandable.Compare budgeted
and actual amounts.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
$$$$$$ ServiceDepartment
Assigning Revenue and Costs to Business Centers
Assigning Revenue and Costs to Business Centers
Revenue is easily and automatically assigned to specific departments using point of sale entries from cash registers.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Assigning Revenue and Costs to Business Centers
Assigning Revenue and Costs to Business Centers
Two guidelines should be followed in allocating costs to the various parts
of a business . . . According to cost behavior patterns:
Fixed or variable.According to whether the costs are
directly traceable to the centers involved.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Profit Center ReportingProfit Center Reporting
Webber, Inc. has two divisions.
Computer Division Television Division
Webber, Inc.
Let’s look more closely at the Television Division’s income statement.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Income StatementContribution Margin Format
Television DivisionSales 300,000$Variable COGS 120,000$Other variable costs 30,000 Total variable costs 150,000$Contribution margin 150,000$Traceable fixed costs 90,000 Responsibility margin 60,000$
Cost of goodssold consists of variable manu-facturing costs.
Profit Center ReportingProfit Center Reporting
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Income StatementContribution Margin Format
Television DivisionSales 300,000$Variable COGS 120,000$Other variable costs 30,000 Total variable costs 150,000$Contribution margin 150,000$Traceable fixed costs 90,000 Responsibility margin 60,000$
Fixed andvariable costsare listed in
separatesections.
Profit Center ReportingProfit Center Reporting
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Income StatementContribution Margin Format
Television DivisionSales 300,000$Variable COGS 120,000$Other variable costs 30,000 Total variable costs 150,000$Contribution margin 150,000$Traceable fixed costs 90,000 Responsibility margin 60,000$
Responsibility marginis the Television
Division’s contributionto overall operations.
Profit Center ReportingProfit Center Reporting
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
No computer No computer division means . . .division means . . .
No computerNo computerdivision manager.division manager.
Traceable Fixed CostsTraceable Fixed Costs
Traceable fixed costs Traceable fixed costs would disappear over time if the center itself disappeared.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Common fixed costs Common fixed costs arise because of arise because of overall operation of the company and are not overall operation of the company and are not due to the existence of a particular center.due to the existence of a particular center.
No computer No computer division but . . .division but . . .
We still have aWe still have acompany president.company president.
Common Fixed CostsCommon Fixed Costs
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Let’s see how the TelevisionDivision fits into Webber, Inc.
Profit Center ReportingProfit Center Reporting
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Income StatementCompany Television Computer
Sales 500,000$ 300,000$ 200,000$ Variable costs (230,000) (150,000) (80,000) CM 270,000$ 150,000$ 120,000$ Traceable FC (170,000) (90,000) (80,000) Responsibility margin 100,000$ 60,000$ 40,000$
Common costs (25,000) Net income 75,000$
Common costs arise because of overall Common costs arise because of overall operating activities and are not due to the operating activities and are not due to the
existence of a particular division.existence of a particular division.
Profit Center ReportingProfit Center Reporting
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Let’s see how this works!Let’s see how this works!Let’s see how this works!Let’s see how this works!
Traceable Costs Can Become Common Costs
Traceable Costs Can Become Common Costs
Fixed costs that are traceable on one level can become common if the business is
divided into smaller smaller parts.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Income StatementTelevision Division Color
Black and White
Sales 300,000$ 200,000$ 100,000$ Variable costs (150,000) (95,000) (55,000) CM 150,000$ 105,000$ 45,000$ Traceable FC (80,000) (45,000) (35,000) Responsibility margin 70,000$ 60,000$ 10,000$
Common costs 10,000 Net income 60,000$
Profit Center ReportingProfit Center Reporting
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Income StatementTelevision Division Color
Black and White
Sales 300,000$ 200,000$ 100,000$ Variable costs (150,000) (95,000) (55,000) CM 150,000$ 105,000$ 45,000$ Traceable FC (80,000) (45,000) (35,000) Responsibility margin 70,000$ 60,000$ 10,000$
Common costs 10,000 Net income 60,000$
45,000$ To Color35,000 To B & W10,000 Common90,000$ TV Division
$90,000 cost directly tracedto the Television Division.
Profit Center ReportingProfit Center Reporting
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
TimeTime
Pro
fits
Pro
fits
Responsibility MarginResponsibility Margin
Responsibility margin is the best gauge best gauge of the long-run profitability of a business center.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Home Appliance CompanyIncome Statement
Laundry Division Washers Dryers
Sales 300,000$ 200,000$ 100,000$ Variable costs (150,000) (95,000) (55,000) CM 150,000$ 105,000$ 45,000$ Traceable FC (95,000) (45,000) (50,000) Responsibility margin 55,000$ 60,000$ (5,000)$
Common costs (10,000) Net income 45,000$
The Dryer Division is unprofitable becausethe responsibility margin is negative.
When is a BusinessCenter Unprofitable?When is a Business
Center Unprofitable?
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The key issue is controllability.
Evaluating BusinessCenter Managers
Evaluating BusinessCenter Managers
Managers should be evaluated on the portion of responsibility margin they control.
Common fixed costs can not be traced to theDryer Division or the Washer Division, so theyare excluded from the responsibility margin.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Arguments Against Allocating Common Fixed Costs
Arguments Against Allocating Common Fixed Costs
Common fixed costs would not change even if a business center were eliminated.
Common fixed costs are not under the direct control of the center’s managers.
Allocation of common fixed costs may imply changes in profitability that are unrelated to the center’s performance.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Let’s change topics!
Transfer PricesTransfer Prices
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The amount charged when one division sells goods or services to another division.
The amount charged when one division sells goods or services to another division.
Battery Division Auto Division
Batteries
Transfer PricesTransfer Prices
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A higher transferprice for batteries
means . . .
. . . greaterprofits for the
Battery Division.
Auto DivisionBattery Division
Transfer PricesTransfer Prices
The transfer price affects the profit measure for both buying and selling divisions.
The transfer price affects the profit measure for both buying and selling divisions.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
. . . lowerprofits for theAuto Division.
Auto DivisionBattery Division
A higher transferprice for batteries
means . . .
Transfer PricesTransfer Prices
The transfer price affects the profit measure for both buying and selling divisions.
The transfer price affects the profit measure for both buying and selling divisions.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Many companies use the externalmarket value of goods transferred
as the transfer price.
Transfer PricesTransfer Prices
Transfer prices have no direct effect uponthe company’s overall net income.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Transfer prices have no direct effect uponthe company’s overall net income.
When the external market value of goods
transferred is unavailable . . .
Transfer PricesTransfer Prices
Negotiatedtransfer
price
Cost-plustransfer
price
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Product Quality PersonnelNumber of defective parts Number of sick days takenNumber of customer returns Employee turnoverNumber of customer complaints Number of grievances filed
Marketing Efficiency and CapacityNumber of new customers Cycle time (manufacturing)Number of sales calls initiated Occupancy rates (hotels)Market share Passenger miles (airlines)Number of product stockouts Patient days (hospitals)
Transactions processed (banks)
Nonfinancial Performance Measures
Nonfinancial Performance Measures
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
This information isfar less detailed than
the responsibilitycenter information
developed for management.
This information isfar less detailed than
the responsibilitycenter information
developed for management.
Segment Reporting inFinancial Statements
Segment Reporting inFinancial Statements
Companies engaged in different lines of business are required to report certain
information about each segment.
Revenue. Operating profits or losses. Identifiable segment assets. Depreciation and amortization. Capital expenditures.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
End of Chapter 21End of Chapter 21