RESPONSIBILITY ACCOUNTING Next class: Chapter 18 p

Goal Congruence  Goal congruence results when the managers of subunits throughout an organization have a common set of objectives.  Behavioral congruence is when an individual behaves in the best interests of the organization regardless of his or her own goals.  Responsibility accounting refers to the various concepts and tools used to measure performance of people and departments and/or to foster goal or behavioral congruence.

Decentralization in Organizations Benefits of Decentralization Top management freed to concentrate on strategy. Top management freed to concentrate on strategy. Lower-level managers gain experience in decision-making. Lower-level managers gain experience in decision-making. Decision-making authority leads to job satisfaction. Decision-making authority leads to job satisfaction. Lower-level decision often based on better information. Lower-level decision often based on better information. Lower level managers can respond quickly to customers.

Decentralization in Organizations Disadvantages of Decentralization Lower-level managers may make decisions without seeing the “big picture.” Lower-level managers may make decisions without seeing the “big picture.” May be a lack of coordination among autonomous managers. May be a lack of coordination among autonomous managers. Lower-level manager’s objectives may not be those of the organization. Lower-level manager’s objectives may not be those of the organization. May be difficult to spread innovative ideas in the organization. May be difficult to spread innovative ideas in the organization.

Responsibility Centers  Responsibility center  a set of activities assigned to a manager, a group of managers or a group of employees  Responsibility accounting  identifying what parts of the organization have primary responsibility for each objective, development of measures of achievement and objective  When organizations use a single index to provide a broad assessment of operations, they frequently use a financial number because it is a measure that describes the primary objectives of shareowners in profit-seeking organizations  Types (classified by financial responsibility)  Cost, Expense, Revenue, Profit, Investment

Responsibility Centers  A responsibility center is an organizational unit for which a manager is made responsible  The manager and supervisor establish goals for their responsibility center  Be specific and measurable so as to provide employees with focus  Promote the long-term interests of the larger organization  Promote the coordination of each responsibility center’s activities with the efforts of all the others

Responsibility Center Types  Underlying the accounting classifications of responsibility centers is the concept of controllability: the manager of a responsibility center should be held responsible only for the revenues, costs, or investment that responsibility center personnel control  Five types: Cost centre Discretionary Cost centre Revenue centre Profit centre Investment centre

1. Cost Center  A responsibility center in which employees control costs but do not control revenues or investment level  Organizations evaluate the performance of cost center employees by comparing the center’s actual costs with target or standard cost levels for the amount and type of work done  If management evaluates cost center performance only on the center’s ability to control costs, its members may ignore unmeasured attributes of performance

2. Discretionary Cost Centre  A responsibility for costs when the input-output relationship is not well specified  Managers typically are evaluated on bases other than costs however there usually penalties for exceeding the budget

3. Revenue Center  A responsibility center whose members control revenues but control neither the manufacturing or acquisition cost of the product or service they sell nor the level of investment made in the responsibility center  Some revenue centers control price, the mix of stock carried, and promotional activities  In general, focusing only on revenues causes organization members to increase the use of activities that create costs in order to promote higher revenue levels

4. Profit Center  A responsibility center where managers and other employees control both the revenues and the costs of the product or service they deliver  A profit center is like an independent business, except that senior management, not the responsibility center manager, controls the level of investment in the responsibility center  Most units of chain operations are treated as profit centers

5. Investment Center  A responsibility center in which the manager and other employees control revenues, costs, and the level of investment in the responsibility center

Responsibility and Behavior  Does it provide information or place blame? – focus is information not blame  Is there really cost or revenue controllability? – report recognize certain results that are beyond his or her control  How can desired behavior be motivated? – motivate actions that are considered desirable.

Charley’s Family Steak House: Variance Analysis