Accounting Module 6: Responsibility Accounting and Balanced Scorecard

Study Notes

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.

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.

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

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.

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.

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.

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.

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.