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Responsibility accounting

Responsibility accounting. Class Announcements. Service Learning Assignment: Service Learning Placements/Projects discussed in class  Service Learning Placements will be posted on Thursday February 6 th at 12:00 pm at SCHW 396 (First Come First Serve Basis)

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Responsibility accounting

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  1. Responsibility accounting

  2. Class Announcements • Service Learning Assignment: • Service Learning Placements/Projects discussed in class •  Service Learning Placements will be posted on Thursday February 6th at 12:00 pm at SCHW 396 (First Come First Serve Basis) • Schedule a meeting with Danika Leblanc (x2010quu@stfx.ca) prior to contacting your organization • See Service Learning Project on-line • Next class – Transfer Pricing (changed in schedule) • Assignment #2 due February 10, available on-line • Midterm February 19th (Wednesday) • Business Banquet - April 2nd – 5:45-8pm, Catering - Gabrieau's Bistro; Keynote Speaker - Annette Verschuren, Past President of Home Depot for Canada and Asia

  3. StFX Students: What does innovationmean to you? The StFX Extension Department is conducting a study to assess the feasibility of establishing an Innovation Centre at StFX. What could this mean for StFX students? Join us for a focus group discussion: Friday, February 7th, 1:00 – 2:30 PM StFX Bloomfield Council Chambers For more information, contact Mark MacIsaac atmdmacisa@stfx.ca / 902.867.3645

  4. Class Objectives • Understanding responsibility in budgeting • Consider the responsibility according to responsibility centre • Understanding the concept of controllability

  5. Responsibility Accounting • Responsibility centre—a part, segment, or subunit of an organization whose manager is accountable for a specified set of activities. • To promote better alignment of individual and company goals • Responsibility accounting—a system that measures the plans, budgets, actions, and actual results of each responsibility centre. • Early warning of issues/problems • Performance evaluation • Strategy evaluation

  6. Responsibility: Controllability • Controllability is the degree of influence that a manager has over costs, revenues, or related items for which she/he is being held responsible. • Controllability is difficult to pinpoint • Few costs are rarely under sole influence • Time span influences controllability • Responsibility accounting focuses on information sharing, not in laying blame on a particular manager but gather information to enable future improvement. • Responsibility is more far reaching than control

  7. Responsibility: Centres • Cost—accountable for costs only • Revenue—accountable for revenues only • Profit—accountable for revenues and costs • Investment—accountable for investments, revenues, and costs

  8. Responsibility: Performance Measures • Four common measures of economic performance: • Return on investment • Residual income • Economic value added • Return on sales • Selecting subunit operating income as a metric is inappropriate because it obviously differs simply on the differing size of the subunits.

  9. ROI is an accounting measure of income divided by an accounting measure of investment. Responsibility: Return on Investment (ROI)

  10. Responsibility: ROI (cont’d) • Most popular metric for two reasons: • Blends all the ingredients of profitability (revenues, costs, and investment) into a single percentage • May be compared to other ROI’s both inside and outside the firm • Also called the accounting rate of return (ARR) or the accrual accounting rate of return (AARR) • Goal congruence is a problem with ROI • Profitable subunits may reject projects that from the viewpoint of the company as a whole should be accepted

  11. Responsibility: ROI (cont’d) • ROI may be decomposed into its two components as follows: • ROI = Return on Sales X Investment Turnover • This is known as the DuPont Method of Profitability Analysis

  12. Responsibility: Residual Income • Residual income (RI) is an accounting measure of income minus a dollar amount for required return on an accounting measure of investment. • RI = Income – (RRR X Investment) • RRR = Required Rate of Return • Required rate of return times the investment is the imputed cost of the investment. • Imputed costs are cost recognized in some situations, but not in the financial accounting records. • RI promotes goal congruence between manager and company • A project evaluated on RI, manager will choose a new project only it has a positive RI which is congruent with company goals

  13. EVA is a specific type of residual income calculation that has recently gained popularity. Weighted average cost of capital equals the after-tax average cost of all long-term funds in use. Allows for incorporation of the cost of capital into decisions at the divisional level. Responsibility: Economic Value Added (EVA)

  14. Responsibility: Return on Sales (ROS) • Return on sales is simply income divided by sales. • Simple to compute, and widely understood. • Measures how effectively costs are managed • Does not consider investment

  15. Class Objectives - Revisited • Understanding responsibility in budgeting • Consider the responsibility according to responsibility centre • Understanding the concept of controllability

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