Page 944 - Accounting Principles (A Business Perspective)

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25. Responsibility

accounting: Segmental

analysis

Learning objectives
After studying this chapter, you should be able to:
• Explain responsibility accounting and its use in a business entity.
• Prepare responsibility accounting reports.

• Prepare a segmental income statement using the contribution margin format.
• Calculate return on investment, margin, and turnover for a segment.
• Calculate the residual income of a segment.
• Allocate costs from service departments to operating departments (Appendix).
When a business is small, the owner usually supervises many different activities in the business. As a business
grows, responsibility for some of these activities must be given to other persons. Obviously, the success of a
business depends to a great extent on the persons responsible for these activities.
In this chapter, you learn about delegating authority to lower level managers for managing various business

activities and holding these lower level managers responsible for the activities under their control. You also learn
how to assess the performance of these managers. A company's activities are grouped into responsibility centers.
The company measures the performance of each center manager in terms of the items of revenue and expense over
which that manager has control.

Responsibility accounting
The term responsibility accounting refers to an accounting system that collects, summarizes, and reports
accounting data relating to the responsibilities of individual managers. A responsibility accounting system provides
information to evaluate each manager on the revenue and expense items over which that manager has primary
control (authority to influence).
A responsibility accounting report contains those items controllable by the responsible manager. When both
controllable and uncontrollable items are included in the report, accountants should clearly separate the categories.

The identification of controllable items is a fundamental task in responsibility accounting and reporting.
To implement responsibility accounting in a company, the business entity must be organized so that
responsibility is assignable to individual managers. The various company managers and their lines of authority
(and the resulting levels of responsibility) should be fully defined. The organization chart in Exhibit 202
demonstrates lines of authority and responsibility that could be used as a basis for responsibility reporting.

Accounting Principles: A Business Perspective 945 A Global Text