RESPONSIBILITY ACCOUNTING

Class Announcements  Service Learning Assignment:  Service Learning Placements/Projects discussed in class  Service Learning Placements will be posted on Thursday February 6 th at 12:00 pm at SCHW 396 (First Come First Serve Basis)  Schedule a meeting with Danika Leblanc ( prior to contacting your organization  See Service Learning Project on-line  Next class – Transfer Pricing (changed in schedule)  Assignment #2 due February 10, available on-line  Midterm February 19 th (Wednesday)  Business Banquet - April 2nd – 5:45-8pm, Catering - Gabrieau's Bistro; Keynote Speaker - Annette Verschuren, Past President of Home Depot for Canada and Asia

StFX Students: What does innovation mean to you? The StFX Extension Department is conducting a study to assess the feasibility of establishing an Innovation Centre at StFX. What could this mean for StFX students? Join us for a focus group discussion: Friday, February 7th, 1:00 – 2:30 PM StFX Bloomfield Council Chambers For more information, contact Mark MacIsaac at /

Class Objectives 1. Understanding responsibility in budgeting 2. Consider the responsibility according to responsibility centre 3. Understanding the concept of controllability

Responsibility Accounting  Responsibility centre—a part, segment, or subunit of an organization whose manager is accountable for a specified set of activities.  To promote better alignment of individual and company goals  Responsibility accounting—a system that measures the plans, budgets, actions, and actual results of each responsibility centre.  Early warning of issues/problems  Performance evaluation  Strategy evaluation

Responsibility: Controllability  Controllability is the degree of influence that a manager has over costs, revenues, or related items for which she/he is being held responsible.  Controllability is difficult to pinpoint Few costs are rarely under sole influence Time span influences controllability  Responsibility accounting focuses on information sharing, not in laying blame on a particular manager but gather information to enable future improvement.  Responsibility is more far reaching than control

Responsibility: Centres 1. Cost—accountable for costs only 2. Revenue—accountable for revenues only 3. Profit—accountable for revenues and costs 4. Investment—accountable for investments, revenues, and costs

Responsibility: Performance Measures  Four common measures of economic performance: 1. Return on investment 2. Residual income 3. Economic value added 4. Return on sales  Selecting subunit operating income as a metric is inappropriate because it obviously differs simply on the differing size of the subunits.

Responsibility: Return on Investment (ROI)  ROI is an accounting measure of income divided by an accounting measure of investment.

Responsibility: ROI (cont’d)  Most popular metric for two reasons: 1. Blends all the ingredients of profitability (revenues, costs, and investment) into a single percentage 2. May be compared to other ROI’s both inside and outside the firm  Also called the accounting rate of return (ARR) or the accrual accounting rate of return (AARR)  Goal congruence is a problem with ROI  Profitable subunits may reject projects that from the viewpoint of the company as a whole should be accepted

Responsibility: ROI (cont’d)  ROI may be decomposed into its two components as follows:  ROI = Return on Sales X Investment Turnover  This is known as the DuPont Method of Profitability Analysis

Responsibility: Residual Income  Residual income (RI) is an accounting measure of income minus a dollar amount for required return on an accounting measure of investment.  RI = Income – (RRR X Investment)  RRR = Required Rate of Return  Required rate of return times the investment is the imputed cost of the investment.  Imputed costs are cost recognized in some situations, but not in the financial accounting records.  RI promotes goal congruence between manager and company  A project evaluated on RI, manager will choose a new project only it has a positive RI which is congruent with company goals

Responsibility: Economic Value Added (EVA)  EVA is a specific type of residual income calculation that has recently gained popularity.  Weighted average cost of capital equals the after-tax average cost of all long-term funds in use.  Allows for incorporation of the cost of capital into decisions at the divisional level.

Responsibility: Return on Sales (ROS)  Return on sales is simply income divided by sales.  Simple to compute, and widely understood.  Measures how effectively costs are managed  Does not consider investment

Class Objectives - Revisited 1. Understanding responsibility in budgeting 2. Consider the responsibility according to responsibility centre 3. Understanding the concept of controllability