Chapter 12 – Responsibility Accounting, Operational Performance Measures, and the Balanced Scorecard
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CHAPTER 12
RESPONSIBILITY ACCOUNTING, OPERATIONAL PERFORMANCE
MEASURES, AND THE BALANCED SCORECARD
Learning Objectives
2. Define and give an example of a cost center, a revenue center, a profit center, and
an investment center.
3. Prepare a performance report and explain the relationships between the
performance reports for various responsibility centers.
4. Use a cost allocation base to allocate costs.
6. Describe the operational performance measures appropriate for today’s
production environment.
Chapter 12 – Responsibility Accounting, Operational Performance Measures, and the Balanced Scorecard
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Chapter Overview
I. Responsibility Centers
A. Types of responsibility centers
B. Illustration of responsibility accounting
II. Performance reports
A. Budgets, variance analysis, and responsibility accounting
B. Cost allocation
C. Cost allocation bases
D. Allocation bases based on budgets
E. Activity-based responsibility accounting
III. Behavioral Effects of Responsibility Accounting
A. Information rather than blame
B. Controllability
IV. Segmented Reporting
V. Operational Performance Measures in Today’s Production Environment
A. Gain-sharing plans
VI. The Balanced Scorecard
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Key Lecture Concepts
I. Responsibility Centers
• Most organizations are divided into smaller units or segments. A segment
may be a geographic region, division, department, product line, and so
on.
• Responsibility accounting provides a method of encouraging goal
congruence by setting and communicating the performance measures by
which managers will be evaluated. This system establishes responsibility
centers, or subunits whose managers are held accountable for specified
financial results.
• Responsibility centers can be categorized as a:
➢ Cost center—an organizational subunit where a manager is held
responsible only for costs (e.g., the custodial department of a J.C.
Penney store).
➢ Revenue center—an organizational subunit where a manager is
held accountable only for revenues (the reservations group of
Southwest Airlines).
➢ Investment center—an organizational subunit (often a division)
where a manager is accountable for profits and the invested capital
used by the subunit (e.g., the Northern region of Best Buy).
Chapter 12 – Responsibility Accounting, Operational Performance Measures, and the Balanced Scorecard
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Teaching Tip: Good examples of cost, revenue, profit, and investment
centers are found in banking. To illustrate, the computer services and
human resources departments are often evaluated as cost centers.
II. Performance reports
• A performance report shows the budgeted and actual amounts, and key
financial results appropriate for the type of center involved (see text
Exhibits 12-3 and 12-4).
➢ The report is based on the organizational hierarchy, with less detail
shown for higher levels of the organization. As an example, the
• A cost pool (a collection of costs) is assigned to a cost object in a
multistage process:
• The cost drivers (i.e., allocation bases) used in the allocation system
should measure, as accurately as possible, cost consumption by
responsibility centers.
➢ The allocation base should be computed on the basis of budgeted
Chapter 12 – Responsibility Accounting, Operational Performance Measures, and the Balanced Scorecard
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III. Behavioral Effects of Responsibility Accounting
• Since responsibility accounting systems can influence behavior through
performance reporting, segment managers must believe the focus of the
IV. Segmented Reporting
• Segmented income statements present the results of operations for the
whole company and for each individual segment, and the contributions of
those segments toward covering various types of fixed costs.
➢ Many accountants feel that organizations should not allocate
common costs, or nontraceable costs that benefit more than one
segment (such as the CEO’s salary and headquarters’ depreciation).
• The segmented income statement, presented in a contribution format,
discloses the segment profit margin, computed as follows:
➢ Sales revenue – Variable operating expenses = Segment
contribution margin
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➢ Profit margin controllable by the segment manager – Fixed
expenses traceable to the segment, but controllable by others
= Segment profit margin
• If the segmented income statement is used to evaluate a manager’s
performance, care is taken to highlight costs that are controllable by the
manager. Holding an individual responsible for costs that he/she cannot
change decreases the chance that the report will be a positive motivator.
V. Operational Performance Measures in Today’s Production Environment
• Operational performance measures carry great importance. Exhibit 12-8
shows examples of operational performance measures.
➢ The theory of constraints (TOC) seeks maximum long-run profit
though proper management of organizational bottlenecks or
constrained resources.
➢ Manufacturing cycle time is the total amount of production time
required per unit.
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➢ Velocity is equal to the total number of units produced in a given
time period.
➢ Manufacturing cycle efficiency (MCE) is equal to the processing
time divided by the total of these four times: processing, inspection
time, waiting, and move. It compares the value-added time with
the non-value added time
• A gain-sharing plan is an incentive system that specifies a formula by
which cost or productivity gains achieved by a company are then shared
with the worker who helped achieve the improvements.
VI. The Balanced Scorecard
• The balanced scorecard is a balanced approach to the area of performance
evaluation. Employees are evaluated on a series of financial and
nonfinancial measures in a variety of areas.
• Many balanced scorecards integrate performance measures in four key
areas: financial, internal operations, customer satisfaction, and learning
and growth. Typical examples:
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➢ Financial perspective—net income; earnings per share; cash flow
from operations; return on investment; profit growth; revenue
growth.
➢ Learning and growth perspective —number of new products, process
improvements, and services introduced; number of employee
suggestions submitted and adopted; employee retention rates;
number of hours of employee training programs.
• A key underlying premise of the balanced scorecard: Lead indicators of
performance are used to communicate with, motivate, and evaluate
individuals such that the employees’ current actions will result in
improvement of the company’s significant lag measures.
➢ Lead indicators are measures that guide management actions
today, actions that will have positive, future effects on the
organization.
• A major goal of the balanced scorecard is to broaden employees so they
look at the diverse requirements needed to produce a competitive
Chapter 12 – Responsibility Accounting, Operational Performance Measures, and the Balanced Scorecard
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Teaching Overview
I begin the chapter by discussing the concept of responsibility accounting and then
doing some role playing, creating a “soap opera” where many problems exist in an
organization and someone is usually in the best position to be held accountable. That
individual reports to me and is scolded for having done a poor job, with a “shape-up-or–
ship-out” mandate ultimately being delivered. The poor soul has to defend him- or
herself, which usually leads to a lot of fun/ribbing in class. Next, I turn to the
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Links to the Text
Homework Grid – CHAPTER 12
Item No.
Learning
Objectives
Completion
Time (min.)
Exercises:
12-27
1
10
12-28
2
10
12-29
3
50
12-30
1, 2
10
12-31
1, 2
10
12-32
4
30
12-33
5
40
12-34
1, 2
30
12-35
6
15
12-36
6
12-37
6
10
12-38
7
30
Problems:
12-39
1, 2
30
12-40
3
40
12-41
2
35
12-42
3
60
12-43
4
45
12-44
5
75
12-45
1, 2, 3
30
12-46
3, 5
35
12-47
1, 2
45
12-48
6
35
12-49
6
40
12-50
6
45
12-51
7
60
Cases:
12-52
1, 5
60
12-53
1, 2, 5
45
* W = Written response E = Ethical issue G = Group work
I = International C = Internet use S = Spreadsheet