Chapter 12

Responsibility
Accounting, Quality
Control, and
Environmental Cost
Management

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 Learning
Objective
1

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Responsibility Accounting
Responsibility
Responsibility accounting
accounting isis used
used to
to measure
measure
the
the performance
performance of of people
people and
and departments
departments
to
to foster
foster goal
goal congruence.
congruence.
 Learning
Objective
2

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 Responsibility Centers
A
A subunit
subunit in
in an
an organization
organization whose
whose
manager
manager is is held
held accountable
accountable forfor
specified
specified financial
financial results.
results.
 Responsibility Centers
Cost
Cost Center
Center
S
Segment
egment has
has Revenue
Revenue Center
Center
control
control over
over Segment
Segment
the is
is responsible
responsible
the incurrence
incurrence
of for
for the
the revenue
revenue of
of
of costs.
costs.
aa unit.
unit.

The Paint Department The Reservations

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

Company-owned restaurant A division of a

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

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 Performance Reports
Show
Show the
the budgeted
budgeted and
and actual
actual
amounts,
amounts, and
and the
the variances
variances
between
between these
these amounts,
amounts, of of key
key
financial
financial results
results appropriate
appropriate for
for
the
the type
type of
of responsibility
responsibility center.
center.
 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.
 Learning
Objective
4

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 Cost Allocation
The process of assigning the costs in the cost pool
to the cost objects is called cost allocation or cost
distribution.
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.
 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
Activity-based costing
costing systems
systems associate
associate costs
costs
with
with the
the activities
activities that
that drive
drive those
those costs.
costs. In
In activity-
activity-
based
based responsibility
responsibility accounting
accounting attention
attention isis
directed
directed not
not only
only to
to costs
costs incurred
incurred but
but also
also toto the
the
activity
activity creating
creating the
the cost.
cost.
 Behavioral Effects of
Responsibility Accounting

Controllability

Information Motivating
versus Desired
Blame Behavior
 Learning
Objective
5

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 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.
 Segmented Reporting
AlohaHotels
Aloha Hotelsand
and Divisions
Resorts
Resorts •
MauiDivision
Maui Division OahuDivision
Oahu Division

WaimeaBeach
Waimea Beach DiamondHead
Diamond Head WaikikiSands
Waikiki Sands
Resort
Resort Lodge
Lodge Hotel
Hotel

•
Units
Segmented Reporting
 Key Features of Segmented
Reporting


Contribution
Contribution format.
format.

Controllable
Controllable versus
versus uncontrollable
uncontrollable expenses.
expenses.

Segmented
Segmented income
income statement.
statement.
 Customer Profitability Analysis
and Activity-Based Costing

Let’s see, I need . . . We can handle

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

Company
Customer Sales Rep
 Learning
Objective
6

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Total Quality Management

Design

Grade Conformance

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

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

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 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
 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
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
 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.
 Learning
Objective
8

McGraw-Hill/Irwin Copyright © 2008 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.
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.
 Environmental Cost Strategies
End-of-pipe

Process
improvement

Prevention
End of Chapter 12