UNIT 14 RESPONSIBILITY ACCOUNTING

 

10-04-2023

UNIT 14 RESPONSIBILITY ACCOUNTING

Eric L. Kohler defines responsibility accounting as “a method of accounting in which costs are identified with persons assigned to their control rather than with products or functions”.

Responsibility accounting, also called “Responsibility reporting” is a system of responsibility reporting and control at each managerial level. It is built around functional activity for which specific managers are accountable.

 

DESIGN OF THE SYSTEM (four fundamental principles or techniques of responsibility accounting)

1) Establishing Responsibility Centers

2) Limits to Controllable Costs

3) Flexible Budgeting

4) Performance Reporting

 

USES OF RESPONSIBILITY ACCOUNTING

i) Performance Evaluation

ii) Delegating Authority:

iii) Motivation

iv) Corrective Action

v) Management by Objectives

vi) Management by Exception

vii) High Morale and Efficiency

 

ESSENTIALS OF SUCCESS OF RESPONSIBILITY ACCOUNTING

1) Support of all levels of management through “Participative budgeting”.

2) The system is based on individual manager’s responsibility. It is the manager who incur costs and should be held accountable for each expenditure

3) Separation of costs into controllable and non-controllable categories.

4) Restructuring the organization along the decision-making lines of authority.

5) An organization plan which establishes objectives and goals to be achieved.

6) The delegation of authority and responsibility for cost incurrence through a system of policies and procedures.

7) Motivation of the individual by developing standards of performance together with incentives.

8) Timely reporting and analysis of difference between goals and performance by

means of a system of records and reports.

 

SEGMENT PERFORMANCE

A segment or division may be either a profit centre having responsibility for both

revenues and operating costs, or an investment centre, having responsibility for

assets in addition to revenues and operating costs.

 

MEASURING SEGMENT PERFORMANCE

The primary purpose of responsibility accounting is to measure the performance of individual divisions. The most popular criteria to be used in measuring the divisional performance is

1) Return on Investment (ROI)

2) Residual Income (RI)

1. Return on Investment.

Return on Investment = Profit/ Capital employed*100

2. Residual Income

Residual income is the profit remaining after deduction of the cost of capital on investment.

The Residual Income may be calculated as follows:

RI = Profit – (Capital Charge × Investment Centre Asset)

TRANSFER PRICING

Transfer price is the price at which the supplying division prices its transfer of output to the user division.

METHODS OF TRANSFER PRICING

(1) Market Price Based and

 (2) Cost - based.

1. Market Price Based

This method consist of the following methods:

a) Market Price

b) Adjusted Market Price, and

c) Negotiated Price

2. Cost Price Based

a) Absorption Cost

b) Cost Plus Profit Margin

c) Marginal Cost

d) Standard Cost

e) Opportunity Cost

Comments

Post a Comment

Popular posts from this blog

UNIT 15 MARGINAL COSTING

  UNIT 15 MARGINAL COSTING SEGREGATION OF MIXED COSTS The elements of cost can be divided into two categories. Fixed and variable costs. For decision making, it becomes necessary to segregate the mixed costs into fixed and variable costs.   Methods of Segregating Mixed Cost 1) Analytical Method : A careful analysis of mixed cost is done to determine how far it varies with production. 2) High Low Method : This technique was developed by J.H. William. In this method, the difference in two production levels i.e. highest and lowest, are compared out of the various levels. 3) Scatter Diagram Method In this method, production and semi-variable cost data are plotted on a graph paper and tentative line of best fit is drawn. 4) Method of Least Square This method is based on econometric technique, in which line of best fit is drawn with the help of linear equations.   CONCEPT OF MARGINAL COST ANDMARGINAL COSTING The elements of costs are material, lab...
Read more

UNIT 16 BREAK EVEN ANALYSIS

Image
  UNIT 16 BREAK EVEN ANALYSIS   The concept of break even analysis is a logical extension of marginal costing. It is based on the same principle of classifying the costs into fixed and variable.   The study of cost-volume-profit relationship is some time called as “break even  analysis.   Break even analysis can be interpreted in two senses – narrow and broad sense. In narrow sense, it refers to determine the level of output where total costs equal to total revenue i.e. no profit, no loss. In the broad sense, it is used to determine the probable profit at any level of output.   BREAK EVEN POINT It is a point where sales revenue equals the costs to make and sell the product and no profit or loss is reported.   Charles T. Horngren define it, “the breakeven point is that point of activity (sales volume) where total revenues and total expenses are equal, it is the point of zero profit and zero loss.”   There are two methods of ca...
Read more