Responsibility Accounting Unit 3 & 4 PDF

**[UNIT: 4]** **What is Responsibility Accounting?** Responsibility accounting is a kind of management accounting that is accountable for all the management, budgeting, and internal accounting of a company. The primary objective of this accounting is to support all the Planning, costing, and respo...

**[UNIT: 4]** **What is Responsibility Accounting?** Responsibility accounting is a kind of management accounting that is accountable for all the management, budgeting, and internal accounting of a company. The primary objective of this accounting is to support all the Planning, costing, and responsibility centres of a company. The accounting generally includes the preparation of a monthly and annual budget for an individual responsibility centre. It also accounts for the cost and revenue of a company, where reports are accumulated monthly or annually and reported to the concerned manager for the feedback. Responsibility accounting mainly focuses on responsibilities centres. Advantages of Responsibility Accounting: - It urges the management to acknowledge the company structure and checks who is accountable for what and fix the problems. - It enhances attention and awareness of the managers as they have to explain the variations for which they are responsible. - It helps to compare the achievements between the pre-planned goals and actual results. - It creates a sense of efficiency within individual employees as their work and achievements will be reviewed. - It guides the management to plan and structure the future expenditure and revenue of a company. Being a cost control tool, it creates 'cost consciousnesses among workers. - Individual and company goals are established and communicated in the best way. - It improves and controls the company's operating activities for an effective and efficient outcome - Simplifies the report structure and guides to prompt reporting. **Limitations of Responsibility Accounting:** **1) Classification of Costs:** For responsibility accounting system to be effective, a proper classification between [controllable and non-controllable costs](https://www.toppers4u.com/2020/11/classification-and-analysis-of-cost.html) is a prime requisite. But practical difficulties arise while doing so on account of the complex nature and variety of costs. **2) Inter-departmental Conflicts:** Separate departmental pursuits may lead to inter-departmental rivalry and it may be prejudicial to the interest of the enterprise as a whole. Managers may act in the best interests of their own, but not in the best interests of the enterprise. **3) Delay in Reporting:** Responsibility reports may be delayed. Each responsibility centre can take its own time in preparing reports. **4) Overloading of Information:** Responsibility accounting reports may be overloading with all available information. This danger is inherent in the system but with clear instructions by management as to the functioning of the system and preparation of reports, etc., only relevant information flow in. **5) Complete Reliance Will Be Deceptive:** Responsibility accounting can\'t be relied upon completely as a tool of management control. It is a system just to direct the attention of management to those areas of performance which required further investigation. Example of Responsibility Accounting ------------------------------------ Here is the Company Structure of a Manufacturing Company - - - - - ### **1. Production Department (Cost Center)** The production department is responsible for manufacturing products. The manager focuses on controlling production costs, such as raw materials, labor, and overheads. **Key Metrics:** - - - **Example:** - - - ### 2. Sales Department (Revenue Center) The sales department is responsible for generating revenue through product sales. The manager focuses on achieving sales targets. **Key Metrics:** - - **Example:** - - - ### **3. Regional Office (Profit Center)** The regional office is responsible for both generating revenue and controlling costs within its region. The manager focuses on maximizing profitability. **Key Metrics:** - - - **Example:** - - - - - - - ### **4. Investment Division (Investment Center)** The investment division is responsible for the returns on investments made in various projects. The manager focuses on maximizing return on assets. **Key Metrics:** - - **Example:** - - - Advantages of Responsibility Accounting --------------------------------------- **1.** **System of Control:** Responsibility Accounting sets up a system of control in a way that concerned people are held responsible for their work and they are accountable to their seniors and management regarding their performances. **2.** **Awareness:** Responsibility accounting creates awareness in the [workplace](https://www.geeksforgeeks.org/types-of-workplace) as the personnel has to explain the deviation of their assigned responsibility center. **3.** **Better Results:** As actual numbers are compared with the target numbers over the years, management will know the reasons for the constant deviation and they can take corrective measures carefully according to the needs of the organization. **4.** **Efficiency:** Responsibility Accounting creates a sense of efficiency within individual employees as their work and achievements will be reviewed. **5.** **Effective [[communication]](https://www.geeksforgeeks.org/what-is-management):** Individual and company goals are established and communicated in the best way. C:\\Users\\BBA\\Downloads\\DocScanner 12 Dec 2024 9-46 am\_1.jpg Transfer pricing: Transfer pricing is an accounting practice that involves setting a price for goods or services exchanged between different parts of a company, such as divisions or subsidiaries. It\'s used in responsibility accounting to help generate separate profits for each division, evaluate their performance, and allocate revenue and expenses.  Examples of Transfer Pricing ---------------------------- A few prominent cases remain a matter of contention between tax authorities and the companies involved. ### Coca-Cola Because the production, marketing, and sales of Coca-Cola Co. (KO) are concentrated in various overseas markets, the company continues to defend its \$3.3 billion transfer pricing of a royalty agreement. The company transferred IP value to subsidiaries in Africa, Europe, and South America between 2007 and 2009. The IRS and Coca-Cola continue to battle through litigation, and the case has yet to be resolved. Transfer Pricing and Taxes -------------------------- To better understand how transfer pricing impacts a company\'s tax bill, let\'s consider the following scenario. Let\'s say that an automobile manufacturer has two divisions: Division A, which manufactures software, and Division B, which manufactures cars. Division A sells the software to other carmakers as well as its parent company. Division B pays Division A for the software, typically at the prevailing market price that Division A charges other carmakers. Let\'s say that Division A decides to charge a lower price to Division B instead of using the market price. As a result, Division A\'s sales or revenues are lower because of the lower pricing. On the other hand, Division B\'s costs of goods sold (COGS) are lower, increasing the division\'s profits. In short, Division A\'s revenues are lower by the same amount as Division B\'s cost savings---so there\'s no financial impact on the overall corporation. However, let\'s say that Division A is in a higher tax country than Division B. The overall company can save on taxes by making Division A less profitable and Division B more profitable. By making Division A charge lower prices and pass those savings on to Division B, boosting its profits through a lower COGS, Division B will be taxed at a lower rate. In other words, Division A\'s decision not to charge market pricing to Division B allows the overall company to evade taxes. In short, by charging above or below the market price, companies can use transfer pricing to transfer profits and costs to other divisions internally to reduce their tax burden. **[UNIT: 3]** 1. **Marginal cost:** What is marginal cost? Marginal cost is the change in total production cost that comes from making or producing one more unit. It\'s calculated by dividing the change in production costs by the change in quantity. You can use marginal cost to determine your optimal production volume and pricing. n management accounting, marginal cost is the additional cost of producing one more unit of a product or service:  - **Definition**: The change in total production cost when one more unit is produced  - **Formula**: Change in total costs divided by change in quantity  - **Purpose**: Helps businesses optimize production volumes and set prices to maximize revenues  - **Use**: Managers can use marginal cost to make informed decisions about pricing, product mix, and profitability  - **Calculation**: Requires good cost accounting that separates fixed and variable costs  2. **[Relevant costs:]** In management accounting, relevant cost is a term for costs that are relevant to a specific business decision and can be avoided. Relevant costs are used to eliminate unnecessary data and make the decision-making process more efficient.  Here are some examples of relevant costs: - **Construction firm** A construction firm is deciding whether to continue building an office building after spending \$1 million on it. The firm must consider whether the additional \$0.5 million needed to complete the building is worth it, given that the real estate market has declined and the building is expected to sell for less than the original price.  - **Clothing store** A clothing store is deciding whether to close 50 of its stores and rebrand as a smaller luxury boutique store. The store must consider the costs of closing the stores, such as losing revenue, versus the costs of keeping them open.  - **Special orders** A business may receive a special order from a customer and must decide whether to accept it. The business will consider whether it has the capacity to complete the order, whether the order will cover production costs, and whether it will be profitable in the long run.  3. **Differential Cost** What is Differential Cost? Differential cost refers to the difference between the costs of two alternative decisions. The cost occurs when a business faces several similar options, and a choice must be made by picking one option and dropping the other. Differential cost is the difference between the cost of two alternative decisions, or of a change in output levels.  The concept is used when there are multiple possible options to pursue, and a choice must be made to select one option and drop the others. The concept can be particularly useful in [step costing](https://www.accountingtools.com/articles/what-is-a-step-cost.html) situations, where producing one additional unit of output may require a substantial additional cost. Here are two examples: Types of Differential Costs --------------------------- A differential cost can be a [variable cost](https://www.accountingtools.com/articles/what-is-a-variable-cost.html), a [fixed cost](https://www.accountingtools.com/articles/fixed-cost), or a mix of the two -- there is no differentiation between these types of costs, since the emphasis is on the gross difference between the costs of the alternatives or change in output. Nonetheless, we make note of all three types of costs below: - *Variable cost*. A variable cost is one that changes in accordance with an associated activity. For example, the cost of commissions will increase as sales increase, and decline as sales decline. There are relatively few types of variable costs in most businesses, usually just direct labor, direct material, credit card fees, and commissions. - *Fixed cost*. A fixed cost is one that stays relatively fixed, irrespective of the activity level of a business. For example, a firm will incur rent expense for its premises, no matter what level of sales it generates. Depending on the business, it may have a relatively large base of fixed costs. - *Mixed cost*. A mixed cost is one that contains both a fixed and variable element. This means that there will be a baseline cost, irrespective of the activity level, plus a variable cost that changes to a degree as the activity level changes. 4. **sunk cost** - n management accounting, a sunk cost is a cost that has already been incurred and cannot be recovered. Sunk costs are also known as retrospective costs.  - Sunk costs are fixed costs, but not all fixed costs are sunk costs. For example, equipment is not a sunk cost if it can be returned or resold.  Sunk costs are expenses that have already been incurred and which are unrecoverable. In business, sunk costs are typically not included in consideration when making future decisions, as they are seen as irrelevant to current and future budgetary concerns