Responsibility Accounting, Operational Performance Measures, and the Balanced Scorecard Chapter 12 McGraw-Hill/Irwin Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Responsibility Accounting Responsibility accounting is used to measure the performance of people and departments to foster goal congruence. 12-2

Responsibility Centers A subunit in an organization whose manager is held accountable for specified financial results. 12-3

Responsibility Centers Cost Center S egment has control over the incurrence of costs. Cost Center S egment 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. Revenue Center Segment is responsible for the revenue of a unit. The Reservations Department of an airline. 12-4

Responsibility Centers Profit Center Segment has control over both costs and revenues. 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. Investment Center Segment has control over profits and invested capital. A division of a large corporation. 12-5

Performance Reports Show the budgeted and actual amounts, and the variances between these amounts, of key financial results appropriate for the type of responsibility center. 12-6

Performance Reports 12-7

Cost Allocation The process of assigning the costs in the cost pool to the cost objects is called cost allocation or cost distribution. 12-8

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. 12-9

Activity-Based Responsibility Accounting Traditional responsibility-accounting systems tend to focus on the financial performance measures of cost, revenue, and profit for subunits of the organization. Activity-based costing systems associate costs with the activities that drive those costs. In activity- based responsibility accounting, attention is directed not only to costs incurred but also to the activity creating the cost

Behavioral Effects of Responsibility Accounting Information versus Blame Controllability Motivating Desired Behavior 12-11

Segmented Reporting 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

Segmented Reporting Divisions Units Aloha Hotels and Resorts Oahu Division Maui Division Waikiki Sands Hotel Diamond Head Lodge Waimea Beach Resort 12-13

Segmented Reporting 12-14

Key Features of Segmented Reporting  Contribution format.  Controllable versus uncontrollable expenses.  Segmented income statement.  Contribution format.  Controllable versus uncontrollable expenses.  Segmented income statement

Customer Profitability Analysis and Activity-Based Costing Let’s see, I need... Special credit terms, Small order lots, Special packing, Great field service, and JIT delivery. We can handle that - but we need to quote a price that reflects the value of these services. Company Sales Rep Customer 12-16

Operational Control Measures in Today’s Manufacturing Environment 12-17

Operational Performance Measures in Today’s Manufacturing Environment Raw Material & Scrap Control l Quality l Lead time l Cost of scrap l Total cost Inventory Control l Average value l Average holding time l Ratio of inventory value to sales revenue 12-18

Operational Performance Measures in Today’s Manufacturing Environment Machine Performance l Availability l Downtime l Maintenance records l Setup time Product Quality l Warranty claims l Customer complaints l Defective products l Cost of rework 12-19

Operational Performance Measures in Today’s Manufacturing Environment Production Manufacturing cycle time Velocity Manufacturing cycle efficiency Delivery % of on-time deliveries % of orders filled Delivery cycle time 12-20

Operational Performance Measures in Today’s Manufacturing Environment Productivity l Aggregate productivity l Partial productivity Innovation and Learning l Percentage of sales from new products l Cost savings from process improvements 12-21

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