Chapter 5 - Responsibility accounting and transfer pricing. The following will be discussed in this chapter: Responsibility accounting, cost center - design, profit center - design, investment centers, return on investment, residual income, economic value added, | Responsibility Accounting and Transfer Pricing Chapter Five Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 5- Responsibility Accounting Characteristics of responsibility centers are: Knowledge of the centers’ managers is difficult to acquire, maintain, or analyze at higher levels Decision rights are specified for each center Performance measurement is obtained from internal accounting system (Recall organizational architecture concepts in Chap. 4.) Types of responsibility centers: cost, profit, investment. See Table 5-1. Cost Center - Design Knowledge: Central manager knows optimal production quantity and budget Cost center manager knows optimal mix of inputs Decision rights: Cost center manager chooses quantity and quality of inputs used in cost center (labor, material, supplies) Measurement: Minimize total cost for a fixed output Maximize output for a fixed budget 5- Cost Center - Problems Minimizing average costs does not necessarily maximize profits. Cost centers have an incentive to produce more units to spread fixed costs over a large number of units. Quality of products produced by cost center must be monitored. 5- Profit Center - Design Knowledge: Profit center managers’ knowledge of product mix, demand, and pricing is difficult to transfer to central management Decision rights: Can chose input mix, product mix, and selling prices Given fixed capital budget Measurement: Actual profits Actual profits compared to budget 5- Profit Center - Problems Setting appropriate transfer prices on goods and services transferred within the firm How to allocate corporate overhead costs to responsibility centers Profit centers that focus only on their own profits often ignore how their actions affect other responsibility centers 5- Investment Centers Knowledge: Investment center manager has knowledge of investment opportunities and operating decisions Decision rights: Ratify and monitor decisions of cost and . | Responsibility Accounting and Transfer Pricing Chapter Five Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 5- Responsibility Accounting Characteristics of responsibility centers are: Knowledge of the centers’ managers is difficult to acquire, maintain, or analyze at higher levels Decision rights are specified for each center Performance measurement is obtained from internal accounting system (Recall organizational architecture concepts in Chap. 4.) Types of responsibility centers: cost, profit, investment. See Table 5-1. Cost Center - Design Knowledge: Central manager knows optimal production quantity and budget Cost center manager knows optimal mix of inputs Decision rights: Cost center manager chooses quantity and quality of inputs used in cost center (labor, material, supplies) Measurement: Minimize total cost for a fixed output Maximize output for a fixed budget 5- Cost Center - Problems Minimizing average costs does not .
