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MANAGEMENT

ACCOUNTING
LECTURE :
YULIA HENDRI
GROUPS :
AGUSNI KURNIAWATI (0910532)
CHINTYA LOVITA MATALITO
(0910533176)
KINANTI YURNALIS (0910532)
NINDYA MARETTA ALINI
(0910531021)
PUTRI ANJELIA (0910531018)
YUDHI
Functional Based Responsibility Accounting

Subtopics of discussion

Types of responsibility accounting system


Responsibility accounting
Application of functional based
responsibility accounting
Reasons for decentralization
Responsibility centers
Accounting information used to measure
performance
Incentive pay for managers

Responsibility Accounting

A system that measures the


results of each responsibility
center according to the
information managers need to
operate their centers.

Types of responsibility accounting system

Traditional responsibility accounting


Contemporary responsibility accounting

Application of FBRA

FBRA only can be applied to


decentralized firms
Decentralized firm is the firm that
delegates the decision making
authority to lower level

Reason for decentralization

Ease of gathering and using local


information
Quick response
Focusing of central management
Training and motivating segment
managers
Enhanced competition, exposing
segments to market forces

Responsibility centers

A unit in the organization in which


manager performance will be evaluated

Type of responsibility centers

Cost center
Revenue center
Profit center
Investment center

Cost Center

A responsibility center in which a


manager is responsible only for costs.
Performance measure: Eficiency
Budgeted cost vs actual costdiscretionary cost
Input output ratio-engineered cost
Production department, accounting
department, and personel department
can be made as a cost center

Revenue Center

A responsibility center in which a


manager is responsible only for sales
Performance measure: targeted sales
Marketing department can be made as a
revenue center

Profit Center

A responsibility center ini which a


manager is responsible for both
revenues and costs
Performance measure : targeted profit
Division, product line, and branch can be
made as a profit center

Investment Center

A responsibility center in which a


manager is responsible for revenue,
costs, and investments
Performance measure : targeted return
on investment (ROI)/residual income/RI
and economic value added (EVA)
Division, product line, and branch can be
made as an investment center

Formula

ROI = NI/Investment
RI = NOPAT
EVA = Nopat (Net Operating Profit After
Tax)-COC(Cost of Capital)
COC = Cost of Debt +Cost Equity
Cost of Debt = interest Rate = Tax
Deductible
Cost Equity : dividend and capital gain=
non tax deductible

Accounting information used to measure


performance
Cost

sales

Cost center

Revenue
center

Direct cost
only

Profit center

Investment
center

Capital
investmen
t

other

Return on Investment (ROI)

Comparison of ROI
Electronic Division

Medical Supplies

Sales

60.000.000

234.000.000

Operating income

3.600.000

7.020.000

Average operating
assets

20.000.000

39.000.000

ROI

18%

18%

2003:

Comparison of ROI
Electronic Division

Medical Supplies

Sales

80.000.000

234.000.000

Operating income

4.000.000

5.850.000

Average operating
assets

20.000.000

39.000.000

ROI

20%

15%

2004:

ROI in Margin and Turn Over

Margin and Turn Over Comparisons


Electronics division

Medical supplies
division

2003

2004

2003

2004

Margin

6,0%

5,0%

3,0%

2,5%

Turnover

X3,0

X4,0

X6,0

X6,0

ROI

18%

20%

18%

15%

Advantages of ROI

Disadvantages of ROI

It encourages managers to focus


on the relationship among sales,
expenses, and investments

It can produce a narrow focus on


divisional profitability at the
expense of profitability for the
overall firm

It encourages managers to focus


on cost efficiency

It encourages managers to focus


on the short run at the expense
of the long run

It encourages managers to focus


on operating asset efficiency

Residual income
Sales 480.000
Cost of good sold 222.000
Gross margin 258.000
Selling and adm. Exp. 210.000
Operating Income 48.000
January 1st net book value of operating assets 227.000
December 31 net book value of operating assets
323.000
Assuming that a minimum rate of return 12%

RI = operating Income (minimum rate of


return x average operating assets)
RI = 48.000 (0,12 x 300.000)
= 48.000 36.000
= 12.000

Residual Income
advantages

Disadvantages

Gives another view of project


profitability

Can encourage short run


orientation
Direct comparisons are difficult

Economic Value Edit (EVA)

After tax operating profit minus the total


annual cost of capital
EVA = After tax operating income
(weighted average cost of capital x total
capital employed)

EVA Example:

Suppose that Mahalo, Inc., had after-tax


operating income last year of $900,000.
Three sources of financing were used by
the company: $2 million of mortgage
bonds paying 8% interest, $3 million of
unsecured bonds paying 10% interest,
and $10 million common stock, which
was considered to be no more or less
risky than other stocks. Mahalo, Inc. pays
a marginal tax rate 0f 40%.

Mortgage
bonds
Unsecured
bonds
Common
stock
total

Weighted
average cost
of capital

Amount

Percent
x

After-tax
cost

weighted
cost

$
2.000.000

0.133

0.048

0.006

0.2

0.06

0.012

0.667

0.12

0.08

3.000.000
10.000.00
0
$15.000.0
00
0.098

EVA example
EVA
= after tax income cost of
capital
= $900.000 - $784.000
= $116.000

Incentive Pay For Managers


Why ould managers not provide good
service? There are the reason:
a. They may have low ability
b. They may prefer not to work as hard as
needed
c. They may prefer to spend company
resources on perquisites

Perquisites are type of fringe benefit


given to managers over and above
salary:
A nice office
Use of a company car or jet
Expense accounts
Paid country club memberships

THANK YOU