Chapter 10

Responsibility Accounting

Managers are given responsibility for a particular part of the business and are then evaluated based on a performance in that area

4 types of responsibility centers

• Cost center

• Revenue center

• Profit center

• Investment center

Cost center

Have the authority to incur costs to support their areas of responsibility-do not always generate from customern

Revenue center

Responsible for generating revenue for their segment of business

Profit center

Responsible for generating profit for their area of business

Investment center

Abe authority to make decisions about how and where to invest the company’s assets to drive long-term profitability

Balanced scorecard

Comprehensive performance measurement system that translates and organization’s strategic vision into a set of operational performance metrics

Return on investment

Most common way to measure financial performance

2 reasons to increase ROI

• increase investment turnover by generating more sales revenue per dollar of invested assets

• Increase profit margin by reducing costs without a corresponding decrease in revenues

Residual income

The amount of net operating income earned over and above the minimum amount needed to meet the required rate of return

Economic value added

A metic to measure the economic wealth that is created when a company’s after tax net operating income exceeds its cost of capital

Cost of capital

Represents the after tax cost of financing company’s operation

Total capital employed

Measure of investment rather than average assets

Market-price method

The market price is the price that and unrelated party would pay for similar goods and services

Negotiation

final option for managers to negotiate appropriate transfer price

Cost Based method

Looks internally to determine how much it costs to produce the product or provide the service