Chapter
22
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Responsibility Centers
Large complex businesses are divided into responsibility centers enabling managers to have a smaller effective span of control.
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The accounting system provides information about resources used and outputs achieved.
This information is used to:
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Revenues
Sales Interest Other
Costs
Mfg. costs Commissions Salaries Other
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Corporate Headquarters
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Evaluation Measures
Cost Center
Profit Center Investment Center
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Measure performance of
each responsibility center.
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Successful implementation of responsibility accounting may use organization charts with clear lines of authority and clearly defined levels of responsibility.
Board of Directors President Vice President of Finance Vice President of Operations Store Manager Department Manager
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The vice president of operations receives summarized information from each store.
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Revenue is easily and automatically assigned to specific departments using point of sale entries from cash registers.
Service Department
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Two guidelines should be followed in allocating costs to the various parts of a business . . .
or variable.
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Computer Division
Television Division
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Lets see how the Television Division fits into Webber, Inc.
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Common costs arise because of overall operating activities and are not due to the existence of a particular division.
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Fixed costs that are traceable on one level can become common if the business is divided into smaller parts.
Lets see how this works!
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Responsibility Margin
Responsibility margin is the best gauge of the long-run profitability of a business center.
Profits
Time
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Transfer Prices
The amount charged when one division sells goods or services to another division.
Batteries
Battery Division
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Transfer Prices
The transfer price affects the profit measure for both buying and selling divisions.
A higher transfer price for batteries means . . .
. . . greater profits for the Battery Division.
Battery Division
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Transfer Prices
The transfer price affects the profit measure for both buying and selling divisions.
A higher transfer price for batteries means . . .
Battery Division
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Transfer Prices Many companies use the external market value of goods transferred as the transfer price.
Transfer prices have no direct effect upon the companys overall net income.
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Transfer Prices
When the external market value of goods transferred is unavailable . . .
Negotiated transfer price Cost-plus transfer price
Transfer prices have no direct effect upon the companys overall net income.
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Variable Costing
Product Costs
Product Costs
Period Costs
Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses
Period Costs
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Selling and administrative expenses are always treated as period expenses and deducted from revenue.
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$ 600,000
320,000 280,000
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$ 600,000
320,000 280,000
160,000 $ 120,000
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Variable Costing
$ 600,000
250,000 $ 90,000
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Reconciliation
We can reconcile the difference between absorption and variable income as follows:
Variable costing net operating income $ 90,000 Add: Fixed mfg. overhead costs deferred in inventory (5,000 units $6 per unit) 30,000 Traditional costing net opearting income $ 120,000
Fixed mfg. overhead $150,000 = = $6.00 per unit Units produced 25,000 units
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End of Chapter 22
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