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22-1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA.

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Presentation on theme: "22-1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA."— Presentation transcript:

1 22-1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2012 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Responsibility Accounting and Transfer Pricing Chapter 22

2 22-2 Responsibility Centers Large complex businesses are divided into responsibility centers enabling managers to have a smaller effective span of control.

3 22-3 The accounting system provides information about resources used and outputs achieved. The Need for Information About Responsibility Center Performance This information is used to: Plan and allocate resources. Control operations. Evaluate the performance of center managers.

4 22-4 Cost Center A business section that has control over the incurrence of costs, but no control over revenues or investment funds. Cost Centers, Profit Centers, and Investments Centers

5 22-5 Cost Centers, Profit Centers, and Investments Centers Profit Center A part of the business that has control over both costs and revenues, but no control over investment funds. Revenues Sales Interest Other Costs Mfg. costs Commissions Salaries Other

6 22-6 Cost Centers, Profit Centers, and Investments Centers Investment Center A profit center where management also makes capital investment decisions.

7 22-7 Cost Center Cost control Quantity and quality of services Profit Center Investment Center Return on assets (ROA) Residual income (RI) Evaluation Measures Profitability Cost Centers, Profit Centers, and Investments Centers

8 22-8 Prepare budgets for each responsibility center. Prepare timely performance reports comparing actual amounts with budgeted amounts. Measure performance of each responsibility center. Responsibility Accounting Systems

9 22-9 Responsibility Accounting Systems To be of maximum benefit, responsibility reports should... Be timely. Be issued regularly. Be understandable. Compare budgeted and actual amounts.

10 22-10 Two guidelines should be followed in allocating costs to the various parts of a business... According to cost behavior patterns: Fixed or variable. According to whether the costs are directly traceable to the centers involved. Assigning Revenue and Costs to Responsibility Centers

11 22-11 Responsibility margin is the Television Divisions contribution to overall operations. Responsibility margin is the Television Divisions contribution to overall operations. Contribution Margin Responsibility Reports

12 22-12 No computer division means... No computer division manager. Traceable Fixed Costs Traceable fixed costs Traceable fixed costs would disappear over time if the center itself disappeared.

13 22-13 Common fixed costs arise because of overall operation of the company and are not due to the existence of a particular center. Common fixed costs arise because of overall operation of the company and are not due to the existence of a particular center. We still have a company president. Common Fixed Costs No computer division means...

14 22-14 Common costs arise because of overall operating activities and are not due to the existence of a particular division. Common costs arise because of overall operating activities and are not due to the existence of a particular division. Contribution Margin Responsibility Reports

15 22-15 Time Profits Responsibility Margin best gauge Responsibility margin is the best gauge of the long-run profitability of a business center.

16 22-16 Battery DivisionAuto Division Batteries Transfer Prices The amount charged when one division sells goods or services to another division.

17 22-17 Many companies use the external market value of goods transferred as the transfer price. Transfer Prices Transfer prices have no direct effect upon the companys overall net income.

18 22-18 Transfer prices have no direct effect upon the companys overall net income. When the external market value of goods transferred is unavailable... Transfer Prices Negotiated transfer price Cost-plus transfer price

19 22-19 End of Chapter 22


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