1. Chapter 12
Responsibility Accounting, Operational Performance Measures, and the Balanced Scorecard
Chapter 12: Responsibility Accounting, Operational Performance Measures, and the Balanced Scorecard
McGraw-Hill/Irwin
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. Learning Objective 1
Learning Objective 1. Explain the role of responsibility accounting in fostering goal congruence.
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3. Responsibility Accounting
Responsibility accounting is used to measure the performance of people and departments to foster goal congruence.
Most organizations are divided into smaller units or departments, each of which is assigned particular responsibilities.
Each department is made up of individuals who are responsible for particular tasks or managerial functions.
Goal congruence results when the managers of subunits throughout an organization strive to achieve the goals set by top management.
Responsibility accounting refers to the various concepts and tools used by managerial accountants to measure the performance of people and departments in order to foster goal congruence. (LO1)
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4. Learning Objective 2
Learning Objective 2. Define and give an example of a cost center, a revenue center, a profit center, and an investment center.
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5. Responsibility Centers
A subunit in an organization whose manager is held accountable for specified financial results.
A responsibility center is a subunit in an organization whose manager is held accountable for specified financial results of the subunit’s activities.
There are four common types of responsibility centers. (LO2)
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6. Responsibility Centers
Cost Center
Segment has control over the incurrence of costs.
Revenue Center
Segment
is responsible
for the revenue of a unit.
A cost center is an organizational subunit, such as a department or division, whose manager is held accountable for the costs incurred in the subunit.
The Painting Department in an automobile plant is an example of a cost center.
The manager of a revenue center is held accountable for the revenue attributed to the subunit.
For example, the Reservations Department of an airline and the Sales Department of a manufacturer are revenue centers. (LO2)
The Paint Department
in an automobile plant.
The Reservations
Department of an airline.
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7. Responsibility Centers
Profit Center
Segment has control over both costs and revenues.
Investment Center
Segment has control over profits and invested capital.
A division of a
large corporation.
A profit center is an organizational subunit whose manager is held accountable for profit. Since profit is equal to revenue minus expense, profit- center managers are held accountable for both the revenue and expenses attributed to their subunits.
An example of a profit center is a company-owned restaurant in a fast-food chain.
The manager of an investment center is held accountable for the subunit’s profit and the invested capital used by the subunit to generate its profit.
A division of a large corporation is typically designated as an investment center. (LO2)
Company-owned restaurant in a fast-food chain.
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8. Learning Objective 3
Learning Objective 3. Prepare a performance report and explain the relationships between the performance reports for various responsibility centers.
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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.
A performance report shows the budgeted and actual amounts, and the variances between these amounts, of key financial results appropriate for the type of responsibility center involved.
The data in a performance report help managers use management by exception to control an organization’s operations effectively. (LO3)
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10. Performance Reports
The performance report for Waikiki Sands Hotel shows the relationships between the February performance reports for several of its subunits.
The numbers for the Grounds and Maintenance Department, the Housekeeping and Custodial Department, and the Kitchen are in parentheses.
These subunits are cost centers, so the numbers shown are expenses.
All of the other subunits shown are either profit centers or investment centers.
The numbers for these subunits are profits, so they are not enclosed in parentheses.
The kitchen is the lowest-level subunit shown.
The total expense line from the kitchen performance report is included as one line in the performance report for the Food and Beverage Department.
Also included are the total profit figures for the department’s other two subunits: Banquets and Catering, and Restaurants.
The hierarchy of performance reports starts at the bottom and builds toward the top, just like the organization structure.
Each manager in the organization receives the performance report for his or her own subunit in addition to the performance reports for the major subunits in the next lower level. (LO3)
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11. Learning Objective 4
Learning Objective 4. Use a cost allocation base to allocate costs.
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12. Cost Allocation
The process of assigning the costs in the cost pool to the cost objects is called cost allocation or cost distribution.
An organization will have costs that are a joint result of the activities of several subunits.
A responsibility-accounting system will assign these joint costs to the subunits that cause them to be incurred. A collection of costs to be assigned is called a cost pool.
The responsibility centers, products, or services to which costs are to be assigned are called cost objects.
The process of assigning the costs in the cost pool to the cost objects is called cost allocation or cost distribution. (LO4)
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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.
An allocation base is used to distribute (or allocate) costs to responsibility centers.
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.
The allocation base chosen for a cost pool should reflect some characteristic of the various responsibility centers that is related to the incurrence of costs.
Each cost pool is distributed to each responsibility center in proportion to that center’s relative amount of the allocation base. (LO4)
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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.
Traditional responsibility-accounting systems tend to focus on the financial performance measures of cost, revenue, and profit for the subunits of an organization.
Contemporary cost management systems, however, are beginning to focus more and more on activities.
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. (LO4)
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.
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15. Behavioral Effects of Responsibility Accounting
Controllability
Motivating Desired Behavior
Information versus Blame
Responsibility-accounting systems can influence behavior significantly. Whether the behavioral effects are positive or negative, however, depends on how responsibility accounting is implemented.
When used properly, a responsibility accounting system does not emphasize blame.
The proper focus of a responsibility-accounting system is information.
Performance reports can be used to distinguish between controllable and uncontrollable costs or revenues.
Managerial accountants often use the responsibility-accounting system to motivate actions considered desirable by upper-level management.
Sometimes the responsibility accounting system can solve behavioral problems as well. (LO4)
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16. Learning Objective 5
Learning Objective 5. Prepare a segmented income statement.
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17. Segmented Reporting
A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data.
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.
Segmented reporting refers to the preparation of accounting reports by segment and for the organization as a whole.
Many organizations prepare segmented income statements, which show the income for major segments and for the entire enterprise. (LO5)
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18. Aloha Hotels and Resorts
Segmented Reporting
Divisions
Aloha Hotels and Resorts •
Maui Division
Oahu Division
Waimea Beach Resort
Diamond Head Lodge
Waikiki Sands Hotel
A segmented income statement for Aloha Hotels and Resorts’ Oahu division would show income for Aloha Resorts and Hotels as a whole, then for each division, then for each unit within the Oahu Division. (LO5) •
Units
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19. Segmented Reporting
Segmented income statements are prepared in the contribution format. Three items require special emphasis.
First, the common fixed expenses is not allocated to the company’s two divisions. Included in this figure are such costs as the company president’s salary.
These costs cannot be allocated to the divisions, except in some arbitrary manner.
Second, there are fixed expenses controllable by the segment manager allocated to each unit within the Oahu division, but some of those costs are not allocated.
These are costs that cannot be traced to the division’s three hotels, except on an arbitrary basis. For example, this expense includes the salary of the Oahu Division’s vice president.
This procedure illustrates an important point.
Costs that are traceable to segments at one level in an organization may become common costs at a lower level in the organization.
Third, there are fixed expenses, traceable to the segment, but controllable by others.
A large portion of those expenses cannot be allocated among the three hotels, except arbitrarily.
Therefore, that portion is in the column marked Not Allocated. (LO5)
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20. Key Features of Segmented Reporting
Contribution format.
Controllable versus uncontrollable expenses.
Segmented income statement.
To summarize, there are three important characteristics of segmented reporting:
1. These income statements use the contribution format. The statements subtract variable expenses from sales revenue to obtain the contribution margin.
2. The income statements highlight the costs that can be controlled, or heavily influenced, by each segment manager. This approach is consistent with responsibility accounting.
3. Segmented reporting shows income statements for the company as a whole and for its major segments.
(LO5)
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21. Customer Profitability Analysis and Activity-Based Costing
We can handle
that - but we need
to quote a price that
reflects the value
of these services.
Let’s see, I need . . .
Special credit terms,
Small order lots,
Special packing,
Great field service,
and JIT delivery.
Customer profitability analysis uses the concept of activity-based costing to determine how serving particular customers causes activities to be performed and costs to be incurred.
Suppose, for example, that customer A requests special credit terms, small order lots, special packaging, increased service and JIT delivery.
These services can be provided, but at a cost. (LO5)
Company
Sales Rep
Customer
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22. Learning Objective 6
Learning Objective 6. Describe the operational performance measures appropriate for today’s production environment.
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23. Operational Control Measures in Today’s Manufacturing Environment
Under the philosophy of activity-based management, the goal is to focus on continually improving each activity.
As a result, the emerging operational control measures focus on the key activities in which the organization engages.
In using these measures to control operations, management emphasizes trends over time.
The goal is to continually improve all aspects of the plant’s operations. (LO6)
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24. Operational Performance Measures in Today’s Manufacturing Environment
Raw Material & Scrap Control
Quality
Lead time
Cost of scrap
Total cost
Inventory Control
Average value
Average holding time
Ratio of inventory value to sales revenue
Some of the performance measures relating to raw material and scrap control include the quality of the raw material purchased, the amount of lead time required for delivery, the cost of scrap, and the total cost of the raw material.
Inventory control measures include the average value of inventory, the average amount of time various inventory items are held, and other inventory turnover measures, such as the ratio of inventory value to sales revenue. (LO6)
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25. Operational Performance Measures in Today’s Manufacturing Environment
Machine Performance
Availability
Downtime
Maintenance records
Setup time
Product Quality
Warranty claims
Customer complaints
Defective products
Cost of rework
Production machinery must work when it is needed, which means that routine maintenance schedules must be adhered to scrupulously.
Performance controls in this area include measures of machine downtime and machine availability, and detailed maintenance records.
Setup time also is highlighted as a machinery performance measure.
Various nonfinancial data are vital for assessing a manufacturer’s effectiveness in maintaining product quality.
Typical performance measures include the number of customer complaints, the number of warranty claims, the number of products returned, and the cost of repairing returned products. (LO6)
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26. Operational Performance Measures in Today’s Manufacturing Environment
Production
Manufacturing cycle time
Velocity
Manufacturing cycle efficiency
Delivery
% of on-time deliveries
% of orders filled
Delivery cycle time
World-class manufacturers are striving toward a goal of filling 100 percent of their orders on time.
Common measures of product delivery performance include the percentage of on-time deliveries and the percentage of orders filled.
Another measure is delivery cycle time, the average time between the receipt of a customer order and delivery of the goods.
Delivering goods on time requires that they be produced on time.
Production performance measures include manufacturing cycle time, which is the total amount of production time required per unit.
Velocity is defined as the number of units produced in a given time period. Perhaps an even more important operational measure is the manufacturing cycle efficiency (MCE).
The value of the MCE measure lies in its comparison between value-added time (processing) and non-value-added time (inspection, waiting, and moving). (LO6)
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27. Operational Performance Measures in Today’s Manufacturing Environment
Productivity
Aggregate productivity
Partial productivity
Innovation and Learning
Percentage of sales from new products
Cost savings from process improvements
Global competitiveness has forced virtually all manufacturers to strive for greater productivity.
One financial productivity measure is aggregate (or total) productivity, defined as total output divided by total input.
Another financial measure is a partial (or component) productivity measure, in which total output (in dollars) is divided by the cost of a particular input.
Global competition requires that companies continually improve and innovate.
New products must be developed and introduced to replace those that become obsolete, which can be measured by the percentage of sales from new products.
New processes must continually be developed to make production more efficient.
This can be measured by the cost savings realized from process improvements. (LO6)
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28. Learning Objective 7
Learning 7. Describe the balanced scorecard concept and explain the reasoning behind it.
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29. Balanced Scorecard
The balanced scorecard is a balanced approach to the area of performance evaluation. Employees are evaluated on a series of financial and nonfinancial measures in a variety of areas.
The balanced scorecard is a balanced approach to the area of performance evaluation. Employees are evaluated on a series of financial and nonfinancial measures in a variety of areas.
Financial measures summarize the results of past.
Nonfinancial measures concentrate on current activities, namely, activities that will drive future financial performance. (LO7)
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30. The Balanced Scorecard
Financial
Vision and Strategy
Customer
Internal Operations
Effective management requires a balanced perspective on performance measurement, a viewpoint that some call the balanced scorecard perspective.
Key to understanding the balanced scorecard is the distinction between lead and lag indicators of performance.
Lead indicators guide management to take actions now that will have positive effects on enterprise performance later.
Lag indicators are measures of the final outcomes of earlier management decisions.
To make successful use of the balanced scorecard, the scorecard’s lead and lag measures need to be linked to the organization’s strategy.
The organization’s vision and strategy drive the specification of both goals and metrics in the scorecard’s financial, customer, internal operations, and learning and growth perspectives. (LO7)
Learning and Growth
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31. End of Chapter 12
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