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Hilton_MA_12e_Chap012_PPT.pptxResponsibility Accounting and the Balanced Scorecard
Chapter 12
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Chapter 12: Responsibility Accounting and the Balanced Scorecard
Learning Objective 12-1 – Explain the role of responsibility accounting in fostering goal congruence.
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Learning Objective 12-1. Explain the role of responsibility accounting in fostering goal congruence.
Responsibility Accounting
Goal congruence results when the managers of subunits throughout an organization strive to achieve the goals set by top management.
Responsibility accounting is used to measure the performance of people and departments to foster goal congruence.
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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. (LO 12-1)
Learning Objective 12-2 – Define and give an example of a cost center, a revenue center, a profit center, and an investment center.
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Learning Objective 12-2. Define and give an example of a cost center, a revenue center, a profit center, and an investment center.
Responsibility Centers (1 of 3)
A subunit in an organization whose manager is held accountable for specified financial results.
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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. (LO 12-2)
Responsibility Centers (2 of 3)
Cost Center
Segment 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.
The Reservations
Department of an airline.
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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. (LO 12-2)
Responsibility Centers (3 of 3)
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.
A division of a
large corporation.
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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. (LO 12-2)
Learning Objective 12-3 – Prepare a performance report and explain the relationships between the performance reports for various responsibility centers.
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Learning Objective 12-3. Prepare a performance report and explain the relationships between the performance reports for various responsibility centers.
Performance Reports (1 of 3)
Show the budgeted and actual amounts, and the variances between these amounts, of key financial results appropriate for the type of responsibility center.
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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. (LO 12-3)
Performance Reports (2 of 3)
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A performance report shows the budgeted and actual amounts for key financial metrics appropriate for the type of responsibility center involved, and the variances between these amounts. For example, a cost center’s performance report concentrates on budgeted and actual amounts for various cost items attributable to the cost center. Performance reports also typically show the variance between budgeted and actual amounts for the financial results conveyed in the report. (LO 12-3)
Performance Reports (3 of 3)
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The performance report for Aloha Hotels and Resorts 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. (LO 12-3)
Learning Objective 12-4 – Use a cost allocation base to allocate costs.
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Learning Objective 12-4. Use a cost allocation base to allocate costs.
Cost Allocation
The process of assigning the costs in the cost pool to the cost objects is called cost allocation or cost distribution.
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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. (LO 12-4)
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.
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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. (LO 12-4)
Behavioral Effects of Responsibility Accounting
Information versus Blame
Motivating Desired Behavior
Controllability
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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. (LO 12-4)
Learning Objective 12-5 – Prepare a segmented income statement.
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Learning Objective 12-5. Prepare a segmented income statement.
Segmented Reporting (1 of 3)
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.
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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. (LO 12-5)
Segmented Reporting (2 of 3)
Divisions
•
Units
•
Aloha Hotels and Resorts
Maui Division
Oahu Division
Waikiki Sands Hotel
Diamond Head Lodge
Waimea Beach Resort
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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. (LO 12-5)
Segmented Reporting (3 of 3)
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Segmented income statements are prepared in the contribution format. Three items require special emphasis.
First, the common fixed expenses are 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. (LO 12-5)
Key Features of Segmented Reporting
Contribution format.
Controllable versus uncontrollable expenses.
Segmented income statement.
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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. (LO 12-5)
Learning Objective 12-6 – Describe the balanced scorecard concept and explain the reasoning behind it.
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Learning 12-6. Describe the balanced scorecard concept and explain the reasoning behind it.
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 (1 of 3)
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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 the past.
Nonfinancial measures concentrate on current activities, namely, activities that will drive future financial performance. (LO 12-6)
The Balanced Scorecard (2 of 3)
Financial
Learning and Growth
Internal Business Processes
Customer
Strategy
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There are four categories of measures that are important for understanding a company’s past and future success. These perspectives are general enough to apply to most types of organizations but specific enough to help guide the selection of measures in the scorecard.
Financial measures are critically important, not only as measures of past success, but because financial success is required if a company hopes to attract and retain investment capital that can be used to accomplish the activities needed for achieving its goals in the future.
By measuring and monitoring the customer perspective, managers may be alerted to the need to diagnose problems and fix them before it is too late.
Having the internal business perspective as part of a balanced scorecard forces the organization to focus on identifying goals and creating measures that will trigger the right adjustments well before customers take their business elsewhere.
The learning and growth perspective of the balanced scorecard is the section where an organization measures its transformation skills and the strengths of its core resources. (LO 12-6)
The Balanced Scorecard (3 of 3)
Lead and Lag Measures: The Key to the Balanced Scorecard
Lead indicators of performance are measures of nonfinancial and financial outcomes that guide management in making current decisions that will result in desirable results in the future.
Lag indicators are measures of the final outcomes of earlier management decisions. Examples of lag indicators are a company’s profit and cash flow.
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One key to understanding the value and construction of the balanced scorecard is the distinction between lead and lag indicators of performance. Lead indicators of performance are measures of nonfinancial and financial outcomes that guide management in making current decisions that will result in desirable results in the future. In other words, lead indicators guide management to take actions now that will have positive effects on enterprise performance later. For example, Flit FinTech’s scorecard includes the startup’s market share in its target demographic as an indicator of future revenue growth, which will ultimately translate into growth of the company’s profitability in a later period. By including this key lead indicator in its scorecard, management is directed to take actions now that will increase Flit’s market share.
Lag indicators are measures of the final outcomes of earlier management decisions. Examples of lag indicators are a company’s profit and cash flow. These key financial measures, while important, only change well after management has already made the important decisions that affect key operational results. As such, lag indicators are less useful for performance management and control. (LO 12-6)
Learning Objective 12-7 – Describe some operational performance measures that can be used to measure and control production.
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Learning Objective 12-7. Describe some operational performance measures that can be used to measure and control production.
Operational Performance Measures (1 of 5)
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Operational performance measures help companies understand whether they are creating and delivering products and services as planned and with appropriate levels of efficiency. Most companies strive toward continual improvement in their operations and activities, and for that reason operational control measures tend to focus on the key activities in which the organization engages. (LO 12-7)
Operational Performance Measures (2 of 5)
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
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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. (LO 12-7)
Operational Performance Measures (3 of 5)
Machine Performance
Availability
Downtime
Maintenance records
Setup time
Product Quality
Warranty claims
Customer complaints
Defective products
Cost of rework
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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. (LO 12-7)
Operational Performance Measures (4 of 5)
Production
Manufacturing cycle time
Velocity
Manufacturing
Delivery
% of on-time deliveries
% of orders filled
Delivery cycle time
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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). (LO 12-7)
Operational Performance Measures (5 of 5)
Productivity
Aggregate productivity
Partial productivity
Innovation and Learning
Percentage of sales from new products
Cost savings from process improvements
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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. (LO 12-7)
End of Chapter 12
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