Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 12 Responsibility Accounting, Quality Control, and Environmental Cost Management

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 1

12-3 Responsibility Accounting Responsibility accounting is used to measure the performance of people and departments to foster goal congruence.

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 2

12-5 Responsibility Centers A subunit in an organization whose manager is held accountable for specified financial results.

12-6 Responsibility Centers Cost Center S egment has control over the incurrence of costs. Cost Center S egment has control over the incurrence of costs. The Paint Department in an automobile plant. Revenue Center Segment is responsible for the revenue of a unit. Revenue Center Segment is responsible for the revenue of a unit. The Reservations Department of an airline.

12-7 Responsibility Centers Profit Center Segment has control over both costs and revenues. Profit Center Segment has control over both costs and revenues. Company-owned restaurant in a fast-food chain. Investment Center Segment has control over profits and invested capital. Investment Center Segment has control over profits and invested capital. A division of a large corporation.

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 3

12-9 Performance Reports Show the budgeted and actual amounts, and the variances between these amounts, of key financial results appropriate for the type of responsibility center.

12-10 Performance Reports

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 4

12-12 Cost Allocation The process of assigning the costs in the cost pool to the cost objects is called cost allocation or cost distribution.

12-13 Cost Allocation Bases An allocation base is a measure of activity, physical characteristic, or economic characteristic that is associated with the responsibility centers, which are the cost objects in the allocation process.

12-14 Activity-Based Responsibility Accounting Traditional responsibility-accounting systems tend to focus on the financial performance measures of cost, revenue, and profit for subunits of the organization. Activity-based costing systems associate costs with the activities that drive those costs. In activity- based responsibility accounting attention is directed not only to costs incurred but also to the activity creating the cost.

12-15 Behavioral Effects of Responsibility Accounting Information versus Blame Controllability Motivating Desired Behavior

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 5

12-17 Segmented Reporting Segmented reporting refers to the preparation of accounting reports by segment and for the organization as a whole. A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data.

12-18 Segmented Reporting Divisions Units Aloha Hotels and Resorts Oahu Division Maui Division Waikiki Sands Hotel Diamond Head Lodge Waimea Beach Resort

12-19 Segmented Reporting

12-20 Key Features of Segmented Reporting  Contribution format.  Controllable versus uncontrollable expenses.  Segmented income statement.  Contribution format.  Controllable versus uncontrollable expenses.  Segmented income statement.

12-21 Customer Profitability Analysis and Activity-Based Costing Let’s see, I need... Special credit terms, Small order lots, Special packing, Great field service, and JIT delivery. We can handle that - but we need to quote a price that reflects the value of these services. Company Sales Rep Customer

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 6

12-23 Total Quality Management Quality DesignConformanceGrade

12-24 Cost of Quality Quality costs include the follows: –Prevention costs, –Appraisal costs, –Internal failure costs, and –External failure costs. Quality costs include the follows: –Prevention costs, –Appraisal costs, –Internal failure costs, and –External failure costs.

12-25 Cost of Quality The opportunity cost of lost sales and decreased market share can represent a significant hidden cost.

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 7

12-27 Changing Views of Optimal Product Quality Total quality costs Failure costs Prevention and appraisal costs Minimum 0% Costs 100% Percentage of defective products Traditional View

12-28 Changing Views of Optimal Product Quality Costs 0% Minimum 100% Percentage of defective products Failure costs Prevention and appraisal costs Total quality costs Contemporary View

12-29 Identifying Quality Control Problems Poor reception/ static on line Too easily moves out of transmission range Power declines too rapidly Faulty casing (easily broken) Pareto Diagram

12-30 ISO 9000 Standards The International Standards Organization (ISO), require that a manufacturer have a well-defined quality control system in place, and that the target level of product quality be maintained.  Sustain quality of product.  Effective quality control system in place.  Provide purchaser confidence in the product.

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 8

12-32 Environmental Cost Management Private environmental costs are assumed by a company. Social environmental costs are assumed by the public.

12-33 Environmental Cost Management Visible private environmental costs are measurable and clearly identified environmental issues. Hidden private environmental costs are caused by environmental issues but have not been so identified by the accounting system.

12-34 Environmental Cost Strategies End-of-pipe Process improvement Prevention

12-35 End of Chapter 12