1. 1 Responsibility accounting  Benefits of managing decentralised organizations: –management concentrates on strategic decisions and coordination of activities of the whole organisation –better information for decision-taking at a level where the problem exists –improved management of managers' knowledge, they learn as the organisation grows and responsibilities change –greater elasticity in decentralised organisations –decentralisation allows for more effective assessment of managers  Need to develop managerial control –control is aimed at ensuring fulfillment of goals set by the management  Accounting based on responsibility centers - provides information needed for managerial control

2. 2 Responsibility centers (1)  Responsibility center (pl. centrum odpowiedzialności) –organisational unit, which is responsible for management of particular (selected) group of activities and which is headed by a manager with a delineated set of competences and responsibilities  Conditions for effective managerial control: –organisational structure with specific units –specified set of skills and responsibilities required for the unit managers –precisely described relationships between employers and employees  Types of responsibility centers: –for costs, for profit, for investment

3. 3 Responsibility centers (2) Cost center Profit center Investment center Investment center Responsibilitycenters

4. 4 Cost center  Cost center (pl. Centrum kosztów ) –lowest scope of responsibility –managers are responsible for incurring costs –managers have a right to take decisions that have an impact on the level of costs and need information required to control the process of the implementation of decisions and costs  Identification of responsibility centers: –spatial –organisational –informational –subjective –decisional  Assessment of cost centers: –minimalisation of total costs for the fixed level of activities

5. 5 Cost center - problems  Responsibility of cost centers: –taking decisions which ensure implementation of activities as well as conformity of controlled costs to a plan (budget, standards) –explaining existing deviations, also due to reasons beyond cost center's control  Limitations of cost control: –in a short-term there is a low possibility to change costs –subjective assessment, which costs are controlled –impact of external economic variables –impact of unpredictable events –problem of interdependencies between responsibility centers

6. 6 Profit center  Profit center (pl. Centrum zysków) –greater need for management than for cost centers –managers responsible for originating costs and generating income (profits) –specifying profit centers is based on the same criteria as specifying cost centers –profit centers may include one, few or tens of cost center(s) –if a profit center provides services to other profit centers in a company in order to price the internal services transfer prices (internal prices) are used  Assessment of profit centers: –based on income (profit)

7. 7 Profit center - problems  Set correct transfer prices inside the company  Allocated common costs to responsibility centers  Profit centers concentrating only on its profits often ignore activities which impact results of other responsibility centers

8. 8 Investment center  Investment center (pl. Centra inwestycyjne) –possesses the largest scope of responsibility –managers are responsible for profits, costs and assets –investment centers may include one or more profit centers –for investment decision-taking ex-ante information about costs and profits as well as information about inflows and outflows of various alternatives are necessary  Assessment of investment centers: –Return on Investment (ROI) –Residual Income (RI) –Economic value added (EVA ® )

9. 9 Investment centers - problems  Choice of measure used for assessment –necessity to include costs and profits common with other centers as well as services present among centers –necessary to include effectiveness investment processes  Difficulty in comparing cost centers of different sizes

10. 10 Return of Investment - ROI  Return on Investment – ROI (pl. Stopa zwrotu z aktywów) ROI = Income from operations Average assets of operational unit

11. 11 Calculation of ROI Cost of products sold and services rendered Sales, administrative and managerial costs Other operational revenues – other operational costs Operational costs Sales Income from operations Income from operations ROIROI Sales Return on sales Return on sales Return on assets Return on assets Operational assets Cash and cash equivalent Liabilities Inventory and other short- term assets Long-term assets Legal assets Other long-term assets Short-term assets Long-term assets

12. 12 How to calculate ROI? ROI = Income from operations Assets of operational unit Income from operations SalesSales Assets of operational unit = x = Return on sales x assets

13. 13 Example: How to calculate ROI Assets of the operational unit $ 100 000 Income from operations $ 18 000 Sales $ 200 000 ROI = Income from operations Assets of operational unit = Return on sales Return on assets = 18 000 100 000 = 18% 18 000 200 000 = 9% = 200 000 100 000 = 2 times ROI = 9% x 2 = 18%

14. 14 Limitations of utilising ROI  Using ROI to assess activities has its limitations: –ROI measure is not directly tied to the goal of maximising the value of the enterprise for its owners –ROI used as an assessment measure of managers can lead to incorrect investment decisions –ROI is a short-term assessment measure

15. 15 Residual income  Residual income – RI (pl. Zysk rezydualny) –so the surplus of an income from operations – result of operational activities, which an investment center can generate over a specific rate of return using available operational assets  RI as an assessment measure: –aim of the investment center: maximising the residual income

16. 16 How to calculate RI? Revenues from sales 12 000 000 Average value of operational assets 8 000 000 Income from operations 1 200 000 ROI (1 200 000/8 000 000) x 100% 15% Minimum result from operations (12% x 8 000 000) 960 000 RI (1 200 000 – 960 000) 240 000

17. 17 ROI and RI in decision-taking (1)  Assumption: ALFA Co. can invest 300 000 zł in activating new product line, which will lead to increase of: sales by 636 000 zł per annum, cost of goods sold by 500 000 zł, sales costs by 56 000 zł and administrative costs by 40 000 zł. P/L Statement for ALFA Co.Before the project Incremental result from the project After the project Sales revenue1 200 0000636 00012 636 000 Cost of goods sold (COGS)9 000 000500 0009 500 000 Gross income from sales3 000 000136 0003 136 000 Sales costs1 000 00056 0001 056 000 Administrative costs400 00040 000440 000 Income from sales1 600 00040 0001640 000 Other operational income400 000- Other operational costs800 000- Income from operations1 200 00040 0001 240 000

18. 18 ROI and RI in decision-taking (2)  Investment in the project decreases the ROI measure, which is why the ALFA manager, assessed based on ROI, will reject the project Before the project Incremental result from the project After the project Average operating assets8 000 000300 0008 300 000 Income from operations1 200 00040 0001 240 000 ROI15%13%14,94%

19. 19 ROI and RI in decision-taking (3)  Investment in the project increases the RI measure, which means that the manager assessed based on RI will undertake the project  Limited use of RI: should not be used to assess investment centers of various sizes, bigger investment centers can show larger RI Before the project Incremental result from the project After the project Sales12 000 000600 00012 600 000 Average operating assets8 000 000300 0008 300 000 Income from operations1 200 00040 0001 240 000 ROI15%13%14,94% Minimal required result from operating activities960 00036 000996 000 RI240 0004 000244 000

20. 20 EVA ® = Wynik operacyjny – koszt kapitału x zainwestowane środki Economic value added - EVA ®  EVA ® (ang. economic value added) –measure that shows the value that the activities of a given investment center "add" to the value of an enterprise –shows the aim of activities of an enterprise – maximialisation of its value  Limitations of applying the EVA ®: –short-term measure based on annual data –its used can lead to faulty investment decisions taken by managers interested in short-term benefits  Modifications of EVA ®: –e.g. bonus bank – managers lose motivation to conduct long-term non- income generating projects

21. 21 EVA ® in decision-taking (1)  Assets in 2001 - 10 000 000 zł, in 2002 – 20 000 000 zł  Liabilities in 2001 - 3 000 000 zł, in 2002 – 4 000 000 zł  Cost of capital set at 10% P/L Statement of Gamma Co.20012002 Sales revenue12 200 00020 000 000 Cost of goods sold (COGS)7 400 00015 000 000 Gross income from sales4 800 0005 000 000 Sales costs1 200 0001 000 000 Administrative costs2 000 0001 500 000 Income from sales1 600 0002 500 000 Other operational income400 000 Other operational costs500 000400 000 Income from operations1 500 0002 500 000

22. 22 EVA ® in decision-taking (2)  Decrease in ROI: worsening of the investment center's effectiveness?  Increase in EVA ® : improvement of the investment center's effectiveness? 20012002 Return on sales12,29%12,5% Return on assets1,221 ROI15%12,5% EVA ® 800 000900 000 Calculation 1,5 mln-7mln*10%=0,8 mln2,5mln-16mln*10%=0,9 mln