1 / 45

RESPONSIBILITY ACCOUNTING AND TRANSFER PRICING

Chapter 22. RESPONSIBILITY ACCOUNTING AND TRANSFER PRICING. Responsibility Centers. Large complex businesses are divided into responsibility centers enabling managers to have a smaller effective span of control . The Need for Information About Responsibility Center Performance.

una
Download Presentation

RESPONSIBILITY ACCOUNTING AND TRANSFER PRICING

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Chapter22 RESPONSIBILITY ACCOUNTING AND TRANSFER PRICING

  2. Responsibility Centers Large complex businesses are divided into responsibility centers enabling managers to have a smaller effectivespan of control.

  3. The Need for Information About Responsibility Center Performance This information is used to: • Plan and allocate resources. • Control operations. • Evaluate the performanceof center managers. The accounting system provides information about resources used and outputs achieved.

  4. Cost Centers, Profit Centers, and Investments Centers Cost Center A business section that has control over the incurrence of costs, but no control over revenues or investment funds.

  5. Revenues Sales Interest Other Costs Mfg. costs Commissions Salaries Other Cost Centers, Profit Centers, and Investments Centers Profit Center A part of the business that has control over bothcosts and revenues, but no control over investment funds.

  6. Cost Centers, Profit Centers, and Investments Centers Investment Center A profit center where management also makes capital investment decisions. Corporate Headquarters

  7. Evaluation Measures Cost control Quantity and qualityof services Cost Center Profit Center Profitability Investment Center Return on assets (ROA) Residual income (RI) Cost Centers, Profit Centers, and Investments Centers

  8. Relating to theresponsibilities ofindividual managers. To evaluatemanagers oncontrollable items. Responsibility Accounting Systems An accounting system thatprovides information . . .

  9. Responsibility Accounting Systems • Prepare budgets for each responsibility center. • Measure performance ofeach responsibility center. • Prepare timely performance reportscomparing actual amounts with budgeted amounts.

  10. Successful implementation of responsibility accounting may use organization charts with clear lines of authority and clearly defined levels of responsibility.

  11. Responsibility Accounting Systems Amount of detail varies according to level in organization. A department manager receives detailedreports. A store manager receives summarized information from each department.

  12. Responsibility Accounting Systems Amount of detail varies according to level in organization. Management by exception: Upper-level management does not receive operating detail unless problems arise. The vice president of operations receives summarized information from each store.

  13. Responsibility Accounting Systems To be of maximum benefit, responsibility reports should . . . • Betimely. • Be issued regularly. • Beunderstandable. • Compare budgetedand actual amounts.

  14. ServiceDepartment Assigning Revenue and Costs to Business Centers Revenue is easily and automatically assigned to specific departments using point of sale entries from cash registers.

  15. Assigning Revenue and Costs to Business Centers Two guidelines should be followed in allocating costs to the various parts of a business . . . • According to cost behavior patterns: • Fixed or variable. • According to whether the costs are directly traceable to the centers involved.

  16. Profit Center Reporting Webber, Inc. has two divisions. Let’s look more closely at the Television Division’s income statement.

  17. Profit Center Reporting Cost of goods sold consists of variablemanufacturingcosts.

  18. Profit Center Reporting Fixed and variable costs are listed in separate sections.

  19. Profit Center Reporting Responsibility marginis the TelevisionDivision’s contribution to overall operations.

  20. Traceable Fixed Costs Traceable fixed costs would disappear over time if the center itself disappeared. No computer division means . . . No computer division manager.

  21. Common Fixed Costs Common fixed costs arise because of overall operation of the company and are not due to the existence of a particular center. No computer division means . . . We still have a company president.

  22. Profit Center Reporting Let’s see how the Television Division fits into Webber, Inc.

  23. Profit Center Reporting Common costs arise because of overall operating activities and are not due to the existence of a particular division.

  24. Traceable Costs Can Become Common Costs Fixed costs that are traceable on one level can become common if the business is divided into smaller parts. Let’s see how this works!

  25. Profit Center Reporting

  26. Profit Center Reporting $90,000 cost directly tracedto the Television Division.

  27. Responsibility Margin Responsibility margin is thebest gauge of the long-run profitability of a business center. Profits Time

  28. The Dryer Division is unprofitable becausethe responsibility margin is negative. When is a BusinessCenter Unprofitable?

  29. The key issue is controllability. Evaluating BusinessCenter Managers Managers should be evaluated on the portion of responsibility margin they control. Common fixed costs can not be traced to theDryer Division or the Washer Division, so theyare excluded from the responsibility margin.

  30. Arguments Against Allocating Common Fixed Costs • Common fixed costs would not change even if a business center were eliminated. • Common fixed costs are not under the direct control of the center’s managers. • Allocation of common fixed costs may imply changes in profitability that are unrelated to the center’s performance.

  31. Transfer Prices The amount charged when one division sells goods or services to another division. Batteries Battery Division Auto Division

  32. Transfer Prices The transfer price affects the profit measure for both buying and selling divisions. A higher transferprice for batteriesmeans . . . . . . greater profits for the Battery Division. Battery Division Auto Division

  33. Transfer Prices The transfer price affects the profit measure for both buying and selling divisions. A higher transferprice for batteriesmeans . . . . . . lowerprofits for the Auto Division. Battery Division Auto Division

  34. Many companies use the external market value of goods transferredas the transfer price. Transfer Prices Transfer prices have no direct effect uponthe company’s overall net income.

  35. Negotiatedtransferprice Cost-plustransfer price Transfer Prices When the external market value of goodstransferred is unavailable . . . Transfer prices have no direct effect uponthe company’s overall net income.

  36. Nonfinancial Performance Measures

  37. VariableCosting ProductCosts Direct Materials ProductCosts Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead PeriodCosts PeriodCosts Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses Overview of Traditional and Variable Costing TraditionalCosting

  38. Dana, Inc. produces a single product with the following information available: Unit Cost Computations

  39. Unit product cost is determined as follows: Unit Cost Computations Selling and administrative expenses arealways treated as period expenses and deducted from revenue.

  40. Dana had no beginning inventory, produced25,000 units and sold 20,000 units this year. Income Comparison of Traditional and Variable Costing

  41. Income Comparison of Traditional and Variable Costing Dana had no beginning inventory, produced25,000 units and sold 20,000 units this year.

  42. Now let’s look at variable costing by Dana, Inc. Variablecostsonly. All fixedmanufacturingoverhead isexpensed. Income Comparison of Traditional and Variable Costing

  43. Let’s compare the methods. Income Comparison of Absorption and Variable Costing

  44. Fixed mfg. overhead $150,000 Units produced 25,000 units = = $6.00 per unit Reconciliation We can reconcile the difference betweenabsorption and variable income as follows:

  45. End of Chapter 22

More Related