This chapter discusses responsibility accounting, quality control, and environmental cost management. It covers topics such as using responsibility accounting to measure the performance of departments, different types of responsibility centers, preparing performance reports, cost allocation, activity-based responsibility accounting, behavioral effects of responsibility accounting, segmented reporting, total quality management, cost of quality, ISO 9000 quality standards, and environmental cost strategies.

1. Chapter 12
Responsibility
Accounting, Quality
Control, and
Environmental Cost
Management
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Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Learning
Objective
1
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3. Responsibility Accounting
Responsibility accounting is used to measure
Responsibility accounting is used to measure
the performance of people and departments
the performance of people and departments
to foster goal congruence.
to foster goal congruence.

4. Learning
Objective
2
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5. Responsibility Centers
A subunit in an organization
A subunit in an organization
whose manager is held
whose manager is held
accountable for specified
accountable for specified
financial results.
financial results.

6. Responsibility Centers
Cost Center
Cost Center
Segment has
Segment has
control over
control over
the incurrence
the incurrence
of costs.
of costs.
The Paint Department
in an automobile plant.
Revenue Center
Revenue Center
Segment
Segment
is responsible
is responsible
for the revenue of
for the revenue of
a unit.
a unit.
The Reservations
Department of an airline.

7. Responsibility Centers
Profit Center
Profit Center
Segment has
Segment has
control over
control over
both costs and
both costs and
revenues.
revenues.
Company-owned restaurant
in a fast-food chain.
Investment Center
Investment Center
Segment has
Segment has
control over profits
control over profits
and invested
and invested
capital.
capital.
A division of a
large corporation.

8. Learning
Objective
3
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9. Performance Reports
Show the budgeted and actual
Show the budgeted and actual
amounts, and the variances
amounts, and the variances
between these amounts, of key
between these amounts, of key
financial results appropriate for
financial results appropriate for
the type of responsibility center.
the type of responsibility center.

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

11. Learning
Objective
4
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12. Cost Allocation
The process of assigning the costs in the cost pool
to the cost objects is called cost allocation or cost
distribution.

13. 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.

14. 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
Activity-based costing systems associate costs
with the activities that drive those costs. In activitywith the activities that drive those costs. In activitybased responsibility accounting attention is
based responsibility accounting attention is
directed not only to costs incurred but also to the
directed not only to costs incurred but also to the
activity creating the cost.
activity creating the cost.

15. Behavioral Effects of
Responsibility Accounting
Controllability
Information
versus
Blame
Motivating
Desired
Behavior

16. Learning
Objective
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17. 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.

18. Segmented Reporting
Aloha Hotels and
Aloha Hotels and
Resorts
Resorts
Maui Division
Maui Division
Waimea Beach
Waimea Beach
Resort
Resort
Divisions
•
Oahu Division
Oahu Division
Diamond Head
Diamond Head
Lodge
Lodge
•
Units
Waikiki Sands
Waikiki Sands
Hotel
Hotel

19. Segmented Reporting

20. Key Features of Segmented
Reporting
Contribution format.
Contribution format.
Controllable versus uncontrollable expenses.
Controllable versus uncontrollable expenses.
Segmented income statement.
Segmented income statement.

21. Customer Profitability Analysis
and Activity-Based Costing
Let’s see, I need . . .
Special credit terms,
Small order lots,
Special packing,
Great field service,
and JIT delivery.
Customer
We can handle
that - but we need
to quote a price that
reflects the value
of these services.
Company
Sales Rep

22. Learning
Objective
6
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23. Total Quality Management
Design
Grade
Conformance
Quality

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

25. Cost of Quality
The opportunity
cost of lost
sales and
decreased
market share
can represent a
significant
hidden cost.

26. Learning
Objective
7
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27. Changing Views of Optimal
Product Quality
Costs
Traditional View
Total
quality
costs
Failure costs
Prevention and
appraisal costs
0%
100%
Minimum
Percentage
of defective
products

28. Changing Views of Optimal
Product Quality
Costs
Contemporary View
Total
quality
costs
Failure costs
Prevention and
appraisal costs
0%
100%
Minimum
Percentage
of defective
products

29. Identifying Quality Control Problems
150
140
130
120
Poor reception/
static on line
Pareto Diagram
110
100
90
80
70
Too easily
moves out of
transmission
range
60
50
40
30
Power
declines too
rapidly
20
10
0
Type of product defect
Faulty casing
(easily broken)

30. 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.

31. Learning
Objective
8
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32. Environmental Cost Management
Private environmental
costs are assumed by
a company.
Social environmental
costs are assumed by
the public.

33. 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.

34. Environmental Cost Strategies
End-of-pipe
Process
improvement
Prevention

35. End of Chapter 12