Responsibility Accounting and Contemporary Management Accounting Concepts
Responsibility accounting
Responsibility accounting assigns revenues and costs to the managers accountable for them. The centres are cost centre (accountable for costs), revenue centre (for revenue), profit centre (for both, hence contribution or profit) and investment centre (for profit and the assets employed). Reports should separate controllable from uncontrollable items and follow management by exception.
Performance measures and transfer pricing
ROI = divisional profit ÷ divisional investment. Residual income = profit − (imputed interest rate × investment). EVA = NOPAT − (WACC × capital employed). Transfer prices may be market-based, cost-plus, negotiated or dual.
Worked example
Division profit ₹12,00,000 on investment ₹60,00,000: ROI = 20%. Company cost of capital 12%, so RI = 12,00,000 − (0.12 × 60,00,000) = ₹4,80,000. A new project needs ₹10,00,000 and earns ₹1,50,000 (15%). Under ROI the manager rejects it, because ROI falls to 13,50,000 ÷ 70,00,000 = 19.29%. Under RI, income becomes 13,50,000 − (0.12 × 70,00,000 = 8,40,000) = ₹5,10,000, an increase, so accept. Reasoning: ROI can conflict with goal congruence; RI uses the cost of capital and removes that distortion.
Contemporary concepts
Activity-based costing (costs driven by activities and cost drivers); target costing (target cost = competitive price − desired profit); life-cycle costing; just-in-time and kanban; total quality management; kaizen costing; throughput accounting; the balanced scorecard with financial, customer, internal-process, and learning-and-growth perspectives; benchmarking and value-chain analysis.
Traps that cost marks
Treating apportioned head-office costs as controllable; confusing ROI with RI; calling target costing "cost plus" (it is price-led); assuming the balanced scorecard is only financial.