Chapter 10 Responsibility Accounting Systems Flashcards

Vocabulary terms and performance formulas related to responsibility accounting, ROI, residual income, and delivery performance metrics from Chapter 10.

Decentralization

An organizational structure where top management is freed to concentrate on strategy, lower-level managers respond quickly to customers, and decision-making authority based on better information leads to job satisfaction and experience.

Responsibility Accounting

A system that links lower-level managers’ decision-making authority with accountability for outcomes, holding them responsible only for items they can control.

Responsibility Center

Any part of an organization whose manager has control over and is accountable for cost, profit, or investments.

Cost Center

A segment whose manager has control over costs, but not over revenues or investment funds.

Profit Center

A segment whose manager has control over both costs and revenues but not over investment funds.

Investment Center

A segment whose manager has control over costs, revenues, and investments in operating assets.

Return on Investment (ROI)

A performance measure calculated as $\frac{\text{Net operating income}}{\text{Average operating assets}}$.

Net Operating Income

Income before interest and taxes (EBIT).

Operating Assets

Assets including cash, accounts receivable, inventory, plant and equipment, and other productive assets.

Net Book Value

The value of depreciable assets most companies use to calculate average operating assets.

Margin

A component of ROI calculated as $\frac{\text{Net operating income}}{\text{Sales}}$.

Turnover

A component of ROI calculated as $\frac{\text{Sales}}{\text{Average operating assets}}$.

Residual Income

The net operating income earned above a minimum required return on operating assets, calculated as $\text{Net operating income} - (\text{Average operating assets} \times \text{Minimum required rate of return})$.

Process Time

The only time during the production process considered to be value-added time.

Throughput Time

The total time from the start of production to when goods are shipped, calculated as $\text{Process time} + \text{Inspection time} + \text{Move time} + \text{Queue time}$.

Delivery Cycle Time

The amount of time between when a customer order is received and when the goods are shipped, calculated as $\text{Wait time} + \text{Throughput time}$.

Manufacturing Cycle Efficiency (MCE)

An efficiency measure calculated as $\frac{\text{Value-added time}}{\text{Throughput time}}$ or $\frac{\text{Process time}}{\text{Throughput time}}$.

Wait Time

The elapsed time between when an order is received and when production starts.