Chapter 12

Responsibility
Accounting, Quality
Control, and
Environmental Cost
Management

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 Learning
Objective
1

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Responsibility Accounting
Responsibility accounting is used to measure
the performance of people and departments
to foster goal congruence.

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 Learning
Objective
2

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 Responsibility Centers
A subunit in an organization whose
manager is held accountable for
specified financial results.

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 Responsibility Centers
Cost Center
Segment has Revenue Center
control over Segment
the incurrence is responsible
of costs. for the revenue of
a unit.

The Paint Department The Reservations

in an automobile plant. Department of an airline.
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 Responsibility Centers
Profit Center Investment Center
Segment has
Segment has
control over
control over profits
both costs and
and invested
revenues.
capital.

Company-owned restaurant A division of a

in a fast-food chain. large corporation.
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 Learning
Objective
3

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 Performance Reports
Show the budgeted and actual
amounts, and the variances
between these amounts, of key
financial results appropriate for
the type of responsibility center.

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 Performance Reports
Flexib le Budget* Actual Results* Variance†
February Year to Date February Year to Date Febru ary Year to Date
Company . . . . . . . . . . . . . . . . . . . . . . $30,660 $64,567 $30,716 $64,570 $56 F $3F
Maui Division . . . . . . . . . . . . . . . . . . $18,400 $38,620 $18,470 $38,630 $70 F $10 F
Oahu Division . . . . . . . . . . . . . . . . . . 12,260 25,947 12,246 25,940 14 U 7U
Total profit . . . . . . . . . . . . . . . . . . . . $30,660 $64,567 $30,716 $64,570 $56 F $3F
Oahu Division
Waimea Beach Resort . . . . . . . . . . . $6,050 $12,700 $6,060 $12,740 $10 F $40 F
Diamond Head Lodge. . . . . . . . . . . 2,100 4,500 2,050 4,430 50 U 70 U
Waikiki Sands Hotel . . . . . . . . . . . . . 4,110 8,747 4,136 8,770 26 F 23 F
Total profit . . . . . . . . . . . . . . . . . . . . $12,260 $25,947 $12,246 $25,940 $14 U $7U
Waikiki Sands Hotel
Grounds and Maintenance . . . . . . . . ($45) ($90) ($44) ($90) $1F —
Housekeeping and Custodial . . . . . . (40) (90) (41) (90) 1U —
Recreational Services . . . . . . . . . . . . 40 85 41 88 1F $3F
Hospitality . . . . . . . . . . . . . . . . . . . . 2,800 6,000 2,840 6,030 40 F 30 F
Food and Beverage . . . . . . . . . . . . . 1,355 2,842 1,340 2,832 15 F 10 U
Total profit . . . . . . . . . . . . . . . . . . . . $4,110 $8,747 $4,136 $8,770 $26 F $23 F
Food and Beverage Departmen t
Banquets and Catering . . . . . . . . . . . $600 $1,260 $605 $1,265 $5F $5F
Restaurants . . . . . . . . . . . . . . . . . . . 1,785 3,750 1,760 3,740 25 U 10 U
Kitchen. . . . . . . . . . . . . . . . . . . . . . . (1,030) (2,168) (1,025) (2,173) 5F 5U
Total profit . . . . . . . . . . . . . . . . . . . . $1,355 $2,842 $1,340 $2,832 $15 U $10 U
Kitchen
Kitchen staff wages . . . . . . . . . . . . . ($80) ($168) ($78) ($169) $2F $1U
Food . . . . . . . . . . . . . . . . . . . . . . . . (675) (1,420) (678) (1,421) 3U 1U
Paper products. . . . . . . . . . . . . . . . . (120) (250) (115) (248) 5F 2F
Variable overhead. . . . . . . . . . . . . . . (70) (150) (71) (154) 1U 4U
Fixed overhead. . . . . . . . . . . . . . . . . (85) (180) (83) (181) 2F 1U
Total expense . . . . . . . . . . . . . . . . . . ($1,030) ($2,168) ($1,025) ($2,173) $5F $5U

*Numbers w ithout parentheses denote profit; numbers w ith parentheses denote ex penses; numbers in thousands.
†F denotes fav orable v ariance; U denotes unfav orable v ariance.

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 Learning
Objective
4

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 Cost Allocation
The process of assigning the costs in the cost pool
to the cost objects is called cost allocation or cost
distribution.

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Cost Allocation Bases

An allocation base is
a measure of activity,
physical
characteristic, or
economic
characteristic that is
associated with the
responsibility centers,
which are the cost
objects in the
allocation process.

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 Activity-Based Responsibility
Accounting
Traditional responsibility-accounting systems tend to
focus on the financial performance measures of cost,
revenue, and profit for subunits of the organization.

Activity-based costing systems associate costs

with the activities that drive those costs. In activity-
based responsibility accounting attention is
directed not only to costs incurred but also to the
activity creating the cost.
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 Behavioral Effects of
Responsibility Accounting

Controllability

Information Motivating
versus Desired
Blame Behavior

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 Learning
Objective
5

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 Segmented Reporting
A segment is any part or
activity of an organization
about which a manager seeks
cost, revenue, or profit data.

Segmented reporting refers to

the preparation of accounting
reports by segment and for the
organization as a whole.

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 Segmented Reporting
Aloha Hotels and Divisions
Resorts •

Maui Division Oahu Division

Waimea Beach Diamond Head Waikiki Sands

Resort Lodge Hotel

•
Units

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Segmented Reporting

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 Key Features of Segmented
Reporting

Contribution format.
Controllable versus uncontrollable expenses.
Segmented income statement.

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 Customer Profitability Analysis
and Activity-Based Costing

Let’s see, I need . . . We can handle

Special credit terms, that - but we need
Small order lots, to quote a price that
Special packing, reflects the value
Great field service, of these services.
and JIT delivery.

Company
Customer Sales Rep
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 Learning
Objective
6

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Total Quality Management

Design

Grade Conformance

Quality

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 Cost of Quality
Quality costs include the follows:
– Prevention costs,
– Appraisal costs,
– Internal failure costs, and
– External failure costs.

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Cost of Quality

The opportunity
cost of lost
sales and
decreased
market share
can represent a
significant
hidden cost.
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 Learning
Objective
7

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 Changing Views of Optimal
Product Quality
Costs

Traditional View
Total
quality
costs
Failure costs

Prevention and
appraisal costs

Percentage
of defective
0% 100% products
Minimum

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 Changing Views of Optimal
Product Quality
Costs

Contemporary View

Total
quality Failure costs
costs

Prevention and
appraisal costs
Percentage
of defective
0% 100% products
Minimum
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Identifying Quality Control Problems
150
140
Poor reception/
130
static on line Pareto Diagram
120
110
100 Too easily
90 moves out of
80 transmission
range
70
60
50 Power
declines too
40
rapidly
30 Faulty casing
20 (easily broken)
10
0
Type of product defect
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 ISO 9000 Standards
The International Standards Organization (ISO),
require that a manufacturer have a well-defined
quality control system in place, and that the target
level of product quality be maintained.
Sustain quality of product.
Effective quality control system in place.
Provide purchaser confidence in the product.

12-30
 Learning
Objective
8

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Environmental Cost Management
Private environmental
costs are assumed by
a company.

Social environmental
costs are assumed by
the public.

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Environmental Cost Management
Visible private environmental
costs are measurable and
clearly identified
environmental issues. Hidden private
environmental costs are
caused by
environmental issues
but have not been so
identified by the
accounting system.

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 Environmental Cost Strategies
End-of-pipe

Process
improvement

Prevention

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End of Chapter 12

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