Responsibility Accounting.ppt

Responsibility Accounting Chapter 9 Responsibility Accounting Decentralization Decentralization Responsibility Reports Management by Exception and the Degree of Summarization Management by Exception and the Degree of Summarization To be of maximum benefit, responsibility reports should . . . Be timely. Be issued regularly. Be understandable. Compare budgetedand actual amounts. Responsibility Centers 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. A responsibility center may be divided into three categories cost profit investment Profit Center A part of the business that has control over both revenues and expenses, but no control over investment funds. Investment Center A profit center where management also makes capital investment decisions. Measuring Managerial Performance Return on Investment Return on investment is the ratio of income to the investment used to generate the income. Return on Investment Return on Investment Cola Company reports the following:  Net Income $ 30,000 Sales $ 500,000 Investment $ 200,000 Return on Investment Improving R0I Three ways to improve ROI 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. Improving R0I ROI - A Major Drawback As division manager at Cola Company,your compensation package includesa salary plus bonus based on your division’sROI -- the higher your ROI, the bigger your bonus. The company requires an ROI of 20% on all new investments -- your division has been producing an ROI of 30%. You have an opportunity to invest in a new project that will produce an ROI of 25%. ROI - A Major Drawback Residual Income Residual Income Cola Company has an opportunity to invest $100,000 in a project that willearn $25,000. Cola Company has a 20 percent desired ROI and a 30 percent