Accounting Module 6: Responsibility Accounting and Balanced Scorecard

Responsibility Accounting

• A responsibility center is a part of an organization whose manager is accountable for specific activities.
• Responsibility accounting is a system for evaluating the performance of each responsibility center and its manager.
• It accumulates and reports costs (and revenues, where relevant) based on the manager who has the authority to make day-to-day decisions.

Conditions for Responsibility Accounting

• Costs and revenues can be directly associated with the specific level of management responsibility.
• Costs and revenues can be controlled by employees at the level of responsibility with which they are associated.
• Each higher level can obtain detailed reports for each lower level.

Responsibility Reporting System

• There are four basic types of responsibility centers:
  • Cost centers
  • Revenue centers
  • Profit centers
  • Investment centers

Cost Centers

• Managers have authority to incur costs but not directly generate revenue.
• Usually, the manager of a production department or a service department.
• Based on a manager's ability to control costs in order to meet budgeted goals for controllable costs.
• Results in responsibility reports that compare actual controllable costs with flexible budget data.
• Only controllable costs are included in reports.
• No distinction between variable and fixed costs.

Revenue Centers

• Managers are primarily accountable for revenues.
• This manager is responsible for generating revenue.
• Revenue center performance reports compare actual with budgeted revenues.

Profit Centers

• Based on detailed information about both controllable revenues and controllable costs.
• Manager is judged on the profitability of the center.
• Manager controls operating revenues earned, such as sales.
• Manager controls all variable costs incurred by the center because they vary with sales.

Investment Centers

• Incurs costs, generates revenues, and has investment funds available for use.
• Manager is evaluated on the profitability of the center and the rate of return earned on funds.
• Often a subsidiary company or a product line.
• Manager able to control or significantly influence investment decisions, such as plant expansion.

Responsibility Accounting for Investment Centers

• Return on investment (ROI) is the primary basis for evaluating the performance of a manager of an investment center.
• ROI shows the effectiveness of the manager in using the assets at his/her disposal.

Performance Evaluation

• Goal of performance evaluation:
  • Promoting goal congruence and coordination
  • Communicating expectations
  • Motivating unit managers
  • Providing feedback
• Performance evaluation systems provide top management with a framework for maintaining control over the entire organization.

Balanced Scorecard

• Recognizes that management must consider both financial performance measures and operational performance measures.
• The balanced scorecard incorporates financial and nonfinancial measures in an integrated system that links performance measurement and a company's strategic goals.
• Evaluates company performance from a series of "perspectives":
  • Financial perspective
  • Customer perspective
  • Internal business processes perspective
  • Learning and growth perspective
• The balanced scorecard creates linkages so that high-level corporate goals can be communicated all the way down to the shop floor.