1. Foundations and Evolutions
Cost Accounting
Foundations and Evolutions
Kinney and Raiborn
Seventh Edition
Chapter 13
Responsibility Accounting, Support Department Allocations, and Transfer Pricing
COPYRIGHT © 2009 South-Western, a part of Cengage Learning. South-Western is a trademark used herein under license.

2. Learning Objectives (1 of 2)
Explain the organizational characteristics used to determine if a firm should be centralized or decentralized
Clarify the relationship between responsibility accounting and decentralization
Identify and contrast the four types of responsibility centers

3. Learning Objectives (2 of 2)
Explain how revenue variances are computed
Explain why and how service department costs are allocated to operating departments
Explain why transfer prices are used and describe the types of transfer prices
Explain difficulties that multinational companies may encounter when using transfer prices

4. Decentralization Continuum
Factor Centralized Decentralized
Age of firm Young Mature
Size of firm Small Large
Stage of product
development Stable Growth
Growth rate Slow Rapid
Impact on profits
of incorrect decisions High Low
Management’s
confidence in
subordinates Low High
Degree of control Tight Moderate/loose

5. Decentralization Continuum
Factor Centralized Decentralized
Geographic
diversity Local Widespread
Cost of communications Low High
Ability to resolve
conflicts Easy Difficult
Level of employee
motivation Low Moderate to high
Level of organizational
flexibility Low High
Response time to
changes Slow Rapid

6. Advantages of Decentralization
Personnel
train and screen aspiring managers
develop leadership qualities, problem-solving abilities, and decision-making skills
compare managers’ results
increase job satisfaction and job enrichment
Effective means of achieving organizational goals
Reduces decision-making time
Allows management by exception

7. Disadvantages of Decentralization
Lack of goal congruence
Suboptimization
pursuing the subunit manager’s goals instead of the company’s goals
Requires more effective communication skills
Managers must relinquish control
Expensive
train managers in decision-making skills
absorb cost of poor decisions
requires a sophisticated planning and reporting system

8. Responsibility Reports
Monetary and nonmonetary
Adjusted for the planning, controlling, and decision-making needs of each unit manager
Separates costs as controllable or noncontrollable by the unit manager

9. Nonmonetary Measures Capacity measures
Target ROI
Desired/actual market share
Throughput
Defects
Backorders
Complaints
On-time delivery
Manufacturing cycle efficiency
Reduction of non-value-added time
Employee suggestions received/implemented
Unplanned production interruptions
Schedule changes
Engineering changes
Safety violations
Absenteeism

10. Control Process Steps Plan Gather actual data Compare
Exert managerial influence

11. Responsibility Accounting
Upward flow of information
from operations to top management
Unit level reports are detailed
Upper-level reports are summarized
Encourages management by exception
Major deviations are highlighted

12. Responsibility Accounting
Disadvantages of responsibility accounting include
Important details may not be visible at upper management levels
Managers might “promote” their unit while “blaming” their competitor units
Departmental interdependencies might not be visible

13. Responsibility Centers
Responsibility accounting systems identify, measure, and report on activities in responsibility centers
Cost center
Revenue center
Profit center
Investment center

14. Service Cost Allocation Methods
Direct method
Step method
Benefits-provided ranking
Algebraic method
Simultaneous equations

15. Service Cost Allocation
Allocated service department costs are included in the overhead application rate for the revenue-producing areas
Service department costs are allocated to products or jobs through normal overhead assignment procedures

16. Transfer Pricing
Internal charges for the exchange of goods or services within the organization
Promote goal congruence
Make performance evaluation among segments more comparable
Transform a cost center into a pseudo- profit center
For internal use only
Eliminated on external financial reports
Encourages managers to be entrepreneurial

17. Transfer Pricing Systems
May cause disagreement among managers
Adds costs and takes time
May not work for all departments
May cause underutilization or overutilization of services
May cause dysfunctional organizational behavior
Complicates tax planning for multinationals

18. Multinational Transfer Pricing
Internal Objectives
Better goal congruence
Better performance evaluations
More motivated managers
Better cash management
External Objectives
Less taxes and tariffs
Less foreign exchange risks
Better competitive positions
Better relations with government

19. Multinational Transfer Pricing
Develop guidelines that are followed on a consistent basis
Set transfer prices that reflect an arm’s-length transaction
Be prepared for transfer pricing audits
Consider Advance Pricing Agreements –binding contracts between a company and taxing authorities that set an acceptable transfer pricing methodology

20. Questions
What are some advantages and disadvantages of decentralization?
What are the four types of responsibility centers?
Why are transfer prices used?

21. Potential Ethical Issues
Managers who make decisions to benefit themselves but not always the firm
Burying important details in responsibility reports
Allocating costs using “ability-to-bear” criterion

22. Potential Ethical Issues
Shifting support department costs to inappropriate departments
Not allowing managers to buy or sell externally in a transfer pricing situation
Using transfer pricing to shift costs to low-or no-tax locations