Faisal Acc 301 (Chapter 21)

RESPONSIBILITY ACCOUNTING It is created when manager in different responsibility centers is doing accounting transactions in his department Responsibility center: If entire organization is divided into units/sections and units are divided into subunits, then this units and subunits are called responsibility centers. Manager is responsible for each center.

Def. of RESPONSIBILITY ACCOUNTING Most business is organized into a number of different sub units that perform different functions. E.g. manufacturing to divided into different subunits i.e., purchasing department, production department, sales department, shipping department, accounting department finance department and personal department Finance rep center, accounting responsibility centers etc.

Continue… If you organize a business in the above manner, managers and employees are enabling to specialize in specific activities. Some organization use different names for sub unit such as division/section/department/branches etc. Responsibility centers describe a sub unit with an organization

Continue… Manager of each sub unit is responsible to directing the activities of each sub unit The following needs for the responsibility center arises Planning and allocating resources Controlling operations Evaluating the performance

Continue… Responsibility centers consist on following types Cost center: Only cost or expense related activities are occurred. Manager has the duty to control the cost. Top level management then evaluate/ check the performance of manager whether he controlled the cost or not.

Cost center Definition Cost center is a business section that incurred cost or expenses but doesn’t directly generate revenue. E.g. Maintenance department, data processing production, financing, accounting, legal services administrative department and laundry etc. The decision making responsibility assigned to cost center manager, include decision about the input resource.

Continue… cost sector are evaluated primary on their ability to control cost The quantity is quality of the services. Income statement cannot be made in it. Profit center : this center generate both revenue and cost e.g., sale department (marketing), product line department (production): in profit center, manager has decision making responsibility over both input and output related resources.

Responsibility They are responsible for using center. resource in the least costly method, possible to generate the highest revenue for the business. Profitability profit centers are evaluated primary on their profitability.

Investment Centre Definition Profit and earned by profit center are reinvested in investment center. An investment center is a profit center for which, management has been decision making responsibility for making significant capital investment related to the central business activities. To evaluate the performance of an investment center, it is necessary to measure objectively the cost of assets used in the center’s operation.

Responsibility accounting An accounting system design to measure the performance of each center written a business are refer to as a responsibility accounting system. Measuring performance along with the line management responsibility is an important function of this system In addition such system provides top management with information useful in identifying strength and weaknesses among units throughout the organization.

Responsibility income statement This statement shows not only the operating result of a particular business but also the revenue and expense of each profit center. Such Incremental source enables manager to review quickly the performance of the various profit centers. Terminologies used in I.S.

Continue… Contribution Margin: Revenue → variable cost also amount of revenue available to contribute towards fixed cost and operating income Performance Margin: Performance margin is a sub total in a responsibility income statement, design to assist in evaluating the performance of a manager. Responsibility Margin: Revenue → variable cost and traceable fixed cost

Traceable fixed cost Fixed cost those are directly traceable to a specific center. Common fixed cost (indirect fixed cost) Jointly benefit several parts of the business. The level of these fixed cost not change, even if one of the center is closed. When there is cost one department then it is also beneficial to the other department.

Continue… Cutting department cost helps assembly department and assembly department helps finished department. Cost is already cutting department through which the benefits are to the assembly department.

Important Formulas ROA= Responsibility Margin / Aug Total Assets Residual income= Responsibility Margin - minimum acceptable return Cost- margin per unit= unit selling price – V.C/Unit Count margin ratio= cont. M per unit/unit sales price*100

Committed fixed cost: Fixed cost that are traceable to responsibility center but that in the short run can’t readily change by the central manager. E.g. depreciation taxes, It is not under the control of manager.it is calculated as a whole not by manager in a single department. It can uncontrolled fixed cost when co. don’t want to calculate the depreciation cost. 2. Common fixed cost: Fixed costs that are of joint benefits to several responsibility. Centers E.g. Salary of the store e the raw material which is beneficial to all departments.

3. controllable fixed cost: Fixed cost that are under the direct control of their central manager e.g. loss of advertising specific product lines a salaries. 4. traceable fixed cost: Fixed cost those are directly traceable to specific center. Salaries of employees, depreciation etc. and b are the types of T.F.C.

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