e. ao pecounting 2S / ACCOUNTING AND PERFORMANCE EVALUATION (INCLUDING TRANSFER PRICING) + Understand the meaning and essential features of responsibility accounting. * Steps involved in responsibility accounting. Responsibility centres-cost, profit and investment centres. Return on investment and economic value added. | + Balanced score card. Transferprices. Advantages of responsibility accounting. Performance evaluation. Be tae = INTRODUCTION As stated earlier, one of the fundamental functions of management accounting is facilitating ‘managerial control, Various devices are used by the management in performing this important function. Responsibility accounting is one of the most recent developments in this field. It has assumed great Significance and is rightly described as modern approach to managerial control and reporting. The Stowth of Tesponsibility accounting is attributed to the realisation that the results of operations must be regarded as human responsibilities and not aS abstract concepts. While the other control techniques Wailable under conventional accounting, ate direoted towards determining the total and unit product cost ‘or the organisation as a whole, responsibility #e°OUnting lays emphasis on performance of india Where responsibilities are fixed for persons 294 divisions accountable for the same. The concept of “sponsibility accounting is closely related '© ‘aes of budgetary control and standard ea cording to Schaltke, R.W. and Johnson, H.G. “® Management accounting system that ties budgeting "3 pefomance epovting to a decentralised oF8misaton is called responsibility accounting.=. MEANING AND DEFINITION /OF RESPONSIBILITY ACCOUNTING => The systems of costing like standard costing and budgetary control are useful to mana, ean the costs. In those systems the emphasis is on the devices of control and not aie levices. Responsibility Accounting is a system of control where responsibility is assigned f the control of costs. The persons are made responsible for the control of costs. Proper authority is pees to the persons so that they are able to keep uP their performance. In case the performance is not according to the predetermined standards then the persons who are assigned this duty will be personally responsible for it. In responsibility accounting the emphasis is on men rather than on systems. For example, if Mr. A, the manager of a department, prepares the cost budget of his department, then he will be made responsible for keeping the budgets under control. A will be supplied with full information of costs incurred by his department. In case the costs are more than the budgeted costs, then A will try to find out reasons and take necessary corrective measures. A will be personally responsible for the performance of his department. “Responsibility accounting is a system of accounting that recognizes various responsibility centres throughout the organisation and reflects the plans and actions of each of these centres by assigning particular revenues and costs to the one having the pertinent responsibility. It is also called profitability accounting and activity accounting”.’ —Charles, T. Horngreen ‘According to this definition, the organisation is divided into various responsibility centres and each centre is responsible for its costs. The performance of each responsibility centre is regularly measured. “Responsibility accounting is that type of management accounting that collects and repor's both planned actual accounting information in terms of responsibility centres”? —Anthony and Reece ‘The emphasis in this definition is on setting the objectives of responsibility centres and then recording the actual performance so that the persons incharge of various activities are able to assess their performance. Responsibility accounting is “a system of management accounting under which accountability is established according to the responsibility delegated to various levels of management and a ‘management information and reporting system instituted to give adequate feedback in terms of the delegated responsibility. Under this system divisions or units of an organisation under a specified authority in @ person are developed as responsibility centres and evaluated individually for their performance.” —Institute of Cost and Works Accountants of India. ‘According to this definition the organisation is divided into different cost centres. These cost centres are put under certain persons and adequate authority is delegated to them for completing the work assigned to them. A system of management reporting is used to assess the performance of cost centres. It is “the classification, management, maintenance, review and appraisal of accounts serving the purpose of providing information on the quality, quantity and standards of performance attained bY persons to whom authority has been assigned.” —Kohler E-L- Tntroduction to Management Accounting, p. 236. ‘Management Accounting Principles, p. 470 Glossary of Management Accounting Terms, p. 3. ‘A Dictionary of Accountants, p. 408.ee Responsibility accountingand Performance Evaluation ~*~ 123 : esponsibility accounting, according, to Kohler, js “the maintaining of accounts in such a way that speperformance and level of achievement of various persons responsible for different works is studied”. | esponsibility accounting is the name given to that aspect of the managerial process dealing with the reporting of information 10 facilitate control of operations and evaluation of performance.”! —Louderback and Dominiak. \ «Responsibility accounting is a system of accounting that recognises various decision centres | ag an organisation and traces costs to the ingvidal managers who are primarily responsibie for waving decisions about the costs in question.” —Charles T. Horngren. * | -Responsibility accounting “is a system of accounting in which costs and revenues are accumulated || gd reported to managers on the basis of the manager's control over these costs and revenues. The : tmanagerial accounting system that ties budgeting and performance reporting to a decentralised crganisation is called responsibility accounting.” —Schaltke, R.W. & Jonson, H. G. This is a system of accounting in which cost data are reported to managers who are in-charge of _ variosus cost centres. In this system, budgets are prepared and actual performance is recorded and : reported. i Responsibility accounting “is a system or mechanism for controlling the wider freedom of action that ; cxecutives— decision centre manages in other words—are given by senior management and for holding > those executives responsible for the consequences of their decisions.” —David Fanning. : ‘According to this definition, responsibility accounting is used as a controlling device by top th management for controlling the performance of other executives. The executives’ decisions are judged ce on the basis of their performance and they are made responsible for the outcome of their actions. en Responsibility accounting focuses main attention on responsibility centres. The managers of different oss activity centres are responsible for controlling the costs of their centres. Information about costs incurred | fr different activities is supplied to the persons incharge of various centres. The performance is constantly compared to the standards set and this process is very useful in exercising cost controls. Responsibility accounting is different from cost accounting in the sense that the future lays emphasis on ‘ost control whereas the latter lays emphasis on cost ascertainment, © FUNDAMENTAL ASPECTS OR ESSENTIAL FEATURES OF “ RESPONSIBILITY ACCOUNTING cost : An analysis of the definitions given above reveals the following important features or fundamental ae "ets of responsibility accounting : cost 1 Inputs and Outputs or Costs and Revenues The implementation and maintenance of ‘Sosy accounting system is based upon information relating to inputs and outputs. The physical , the ate a lised in an organisation ; such a8 quantity of raw material used and labour hours consumed, & temed as inputs, These inputs expressed in the monetary terms are known as costs. Similarly 2 expressed in monetary terms are called 7¥"00CS. Thus, responsibilty accounting is based on cost vente information i cag Taicheay 4 Ba, p32, 2 tnd Domtniak, Managerial Accounting. 204 EA, + Soe pena ee Bt DB. 4 ER Account fe and Uses, p- 325326 "St bok of Manageme ng: Responaity ACCME, (Cited by David-Fanning). p. 23,Ss 24 6 Responsibility Accounting and Performance Evaluation 2. Planned and Actual Information or Use of Budgeting. Effective responsibility accounting requires both planned and actual financial information. It is not only the historical cost and revenue datg but also the planned future data which is essential for the implementation of responsibility accountn, system, Itis through budgets that responsibility for implementing the plans is communicated to each leve] of management. The use of fixed budgets, flexible budgets and profit planning are all incorporated intg one overall system of responsibility accounting. 3. Identification of Responsibility Centres. The whole concept of responsibility accounting is focused around identification of responsibility centres. The responsibility centres represent the sphere of authority or decision points in an organisation. In a small firm, one individual or a small group of individuals, who are usually the owners, may possibly manage or control the entire organisation, However, for effective control, a large firm is, usually, divided into meaningful segments, departments or divisions. These sub-units or divisions of organisation are called responsibility centres. A responsibility centre is under the control of an individual who is responsible for the control of activities of that sub- unit of the organisation. This responsibility centre may be a very small sub-unit of the organisation, as ‘an individual could be made responsible for one machine used in manufacturing operations, or it may be very big division of the organisation, such as a divisional manager could be responsible for achieving a certain level of profit from the division and investment under his control. However, the general guideline is that “the unit of the organisation should be separable and identifiable for operating purposes and its performance measurement possible”. Organisation Structure a Responsibility Centres (CHIEF EXECUTIVE re (OR THE GENERAL MANAGER» nvesrMENT-CENTRE DIVISIONAL MANAGER DIVISIONAL MANAGER DIVISIONAL MANAGER ———». PROFIT CENTRES @ @ @ MARKETING MANAGER _ PRODUCTION MANAGER ———_______» COSTS AND REVENUE Cia ‘CENTRES PURCHASE SALES MAINLINE ASSEMBLY MAINTENAN sTS AND REVENUE MANAGER _MANAGER SANTENANCE “COSTS ENTRES [AREAL SALES MANAGERS SUPERVISORS COSTS AND REVENUE cose ie ‘CENTRES SALES REPS WORKERS For effective planning and control purposes, responsibility centres are, usually, classified under thre categories : (i) cost centres ; (ii) profit centres ; and (iii) investment centres. These have ® discussed in detail later in this chapter. 4. Relationship between Organisation Structure and Responsibility Accounting Syste™ : sound organisation structure with clear-cut lines of authority—responsibility relationships is @ prerequis® for establishing a successful responsibility accounting system. Further, responsibility accounting 89°" must be so designed as to suit the organisation structure of the organisation, It must be founded up >a - ss Responsibility Accountingand Performance Evaluation + 125 3 existing authority” responsibility relationships in the organisation. In fact, responsibility accounting should parallel the organisation structure ang provide financial information to evaluate actual Sats of each individual responsible for a function The following chart shows relationship between organisation structure and responsibility centres. 5, Assigning Costs to Individuals and Limiting their Efforts to Controllable Costs. After identifying responsibility centres and establishing authority-responsibility relationships, responsibility accounting system involves assigning of costs and revenues to individuals. Only those costs and revenues over which an individual has a definite control can be assigned to him for evaluating his formance. Responsibility accounting has an appeal because it distinguishes between controllable and uncontrollable costs. Unlike traditional accounting where costs are classified and accumulated according to function such as manufacturing cost or selling and distribution cost, etc. or according to products, responsibility accounting classifies accumulated costs according to controllability. ‘Controllable costs’ are those costs which can be controlled or influenced by a specified person or a level of management of an undertaking. Costs which cannot be so controlled or influenced by the action of a specified individval of an undertaking are known as ‘uncontrollable costs’. The difference in controllable and uncontrollable costs may only be in relation to a particular person or level of management. The following guidelines recommended by the Committee of the American Accounting Association in regard to assigning of costs may be followed : (a) If the person has authority over both the acquisition and use of the services, he should be charged with the cost of these services. (®) If the person can significantly influence the amount of cost through his own action, he may be charged with such costs. (c) Even if the person cannot significantly influence the amount of cost through his own direct action, he may be charged with those elements with which the management desires him to be'concemed, so that he will help to influence-those who are responsible. "FUNDAMENTAL ASPECTSOFRESPONSIBILITY ACCOUNTING + | Inputs and Output or Costs and Revenue .| Planned and Actual Information or Use of Budgeting | Identification of Responsibility Centres. .| Relationship between Organisation Stucture and Responsibility Accounting Assigning Costs to Individuals Limiting their Efforts to Controllable Costs. | Management by Exception Human Aspect of Responsibility Accounting 10. ® Transfer p, icing Policy In a lage scale i having decentralised divisions, there is “mon practice of transferring goods and see" Om one segment of the organisation to another. a ee12.6 «Responsibility Accounting 4! id Performance Evaluation in such situations, there is a need to determine the rice at which the transfer should take place so oe cecnd revenues could be properly assigned: The significance of the transfer price can well be ju at from the fact that for the transferring division it will be a source of revenue, whereas for the divisns con ich transfer is made it wll be an elementiof cost. Thus, there is a need of having a proper trans policy for the successful implementation of responsibility accounting system. There are various transfy pricing methods in use, such as cost price, cost plus normal profit, incremental cost basis, negotiates price, standard price, etc. These methods of infti-company transfers have been discussed in detail later in this chapter. 7. Performance Reporting. As stated earlier, responsibility account is a control device. A contr] system to be effective should be such that deviations from the plans must be reported at the earliest so este take corrective action for the future. The deviations can be known only when performance is reported. Thus, responsibility accounting system is focused on performance reports also known as ‘responsibility reports’, prepared for each responsibility unit. Unlike authority which flows from top to bottom, reporting flows from bottom to top. ‘These reports should be addressed to appropriate persons in respective responsibility centres. The reports should contain information in comparative form as to show plans (budgets) and the actual performance and should give details "of vatiances which are related to that centre, The variances which are not controllable at a particular responsibility centre should also ‘be mentioned separately in the report. To be effective, the reports should be clear and simple, Use of diagrams, charts, illustrations, graphs and tables may be made to make them attractive and easily understandable. ‘A specimen of a performance report is given below : PERFORMANCE REPORT ‘ Department ....coossteveeeent ‘Month Ending Actual Budget ao a Controllable Costs : Direct Material Direct Labour Direct Expenses “Allocated and Uncontrollable Costs : Depreciation Rent Insurance Total Cost” 8. Participative Management The function of responsibility accounting system becomes 08 effective if participative or democratic style of management is followed, wherein, the plans are aid bbudgets/standards are fixed according to the mutual consent and the decisions reached after consul ae It provides motivation to the workers by ensuring their participation and self imp* { 9. Management by Excepti x a .ption. It is a well accepted fact that at successive higher lever 5 management in the organisational chain less and less time is devoted to control and more and ™* 1. Anthony anv ‘Anthony and Reece—Management Accounting Principles, pp. 463-464, tJeee ee ae ee Responsibility Accountingand Performance Evaluation * 127 ffective responsib; j tanning. Thus, an © ?Ponsibility accounting system must provide for management by Txcepton, i. it should focus attention of the Management on significant deviations and not burden them with all kinds of routine matters, rather condenseq reports requiring their attention must be sent to them. ly at higher levels of management. The following diagram explains the flow and reporting details tr different levels of management : 10. Human Aspect of Responsibility Accounting. ‘The sim of responsibility accounting is not to place blame, instead itis to evaluate the performance and provide feed back so that future operations can be improved’. Goals an, achieved through people and, hence, responsibility accounting | ie system should motivate people. It should be used in positive ‘MANAGEMENT sense, It should not be taken as a device to punish subordinates, 1t should rather help in improving their performance. MIDDLE LEVEL. Subordinates sometimes dislike control because they take them MANAGES as estraints. The best responsibility accounting system enlightens employees about the positive side of control. To ensure the success of responsibility accounting system, it must look into the himan aspect also by considering needs of subordinates, (FLOW AND REPORTING DETAILS) developing mutual interests, providing information about control measures and adjusting according to requirements. STEPS INVOLVED IN RESPONSIBILITY ACCOUNTING Responsibility accounting is used as a control device. The aim of responsibility accounting is to hhelp management in achieving organisational goals. The following steps are involved in responsibility accountin, 1. The organisation is divided into various responsibility centres. Each responsibility centre is put under the charge of a responsibility manager. The mangers are responsible for the Performance of their departments. 2. The targets of each responsibility centre are set in. The targets or goals are set in consultation with the manager of the fesponsibility centre so that he may be able to give full information about his department. The goals of the responsibility centres are properly communicated to them. The actual performance of each responsibility centre is recorded and communicated to the executive concemed and the actual performance is compared with goals set and it helps in assessing the work of these centres: If the actual performance of a department is less than the standard set, then the variances are conveyed to the top management. The names of those persons who were responsible for that performance are also conveyed 80 that responsibility may be fixed. . Timely action is taken to take necessaty corrective measures so that the work does not suffer in future. The directions of the top level management are communicated to the concemed responsibility centre so that Corrective measures are initiated at the earliest. vant Purpose of all these steps is to assign sponsibility to different individuals so that the ce is improved. In case the performance ae their targets set, then responsibility may the a it. Responsibility accounting will certai 88 control device and it will help in improving Performance of the business. > id objectives are128508 Responsibility AecountingandPerformance Evaluation = RESPONSIBILITY CENTRES “A. responsibility Centre is like an engine in that it has inputs, which are physical quantities of acovesioj, Boure.ef:acoa (gen St AGRA Tene’ OT Neevinns:¢ it works with these resources Nteually; working capital and fixed assets are also required. AS @ result of this work, it produces output, vaerch are classified either as goods, if they are tangible or as services, if they are intangible. These goods wr services go either to other responsibility centres within the company or 10 ‘customers in the outside world®. Responsibility accounting is used to measure both inputs and owtpa, The inputs of materials in quantity and labour in hours are expressed in monetary terms. The total of various inputs is called ‘cost’ The output can be expressed either in goods produced or services rendered. If the output is meant for ‘outsiders, then it is easy to measure the monetary ‘value of the output but if the output is used for other departments of the centre, then it will have t0 be valued objectively. The total of output is called seownue’, So responsibility accounting is used in measuring costs and revenues. ‘The responsibility centres represent the sphere of authority or decision points in an organisation. or effective control, a large firm is usually divided into meaningfol segments, deparmcis 6° divisions. ‘These sub-units or divisions of an organisation unit are called responsibility centres. In the words of Deakin and Maher, “a responsibility centre is a specific unit of an organisation assigned to a manager who is held responsible for its operations and resources.” m TYPES OF RESPONSIBILITY CENTRES. For the purposes of evaluating financial performance and control, the responsibility centres are generally classified into three categories : 1, Cost or Expenses Centre 2. Profit Centre 3. Revenue Centre 4. Investment Centre 1. COST OR EXPENSE CENTRE Cost centres are segments in which the managers are responsible for costs incurred but avt no revenue responsibilities.” As observed earlier, responsibility ‘accounting is used to measure both inputs and outputs. However, when we can measure only the expenses or ‘costs incurred and not the revend® camed from a responsibility centre, it is known as cost or Expense Centre. ‘The contribution of accounting department to the company cannot be measured in monetary terms so we will call it an expense centre. Generally, a company has production and service departments. T™ utput of production departments can be measured whereas service departments incur only expenses their output is not measured. It may not be either feasible or necessary to measure the output of 50" service departments. Such centres are, therefore, called expense cost centres. The performance of a cost centre is measured in terms of quantity of inputs used in producit® given output. A comparison between the actual input used and the predetermined budgeted inputs nade to determine the variances which represent the efficiency of the cost centre, 1. Louder Back and Dominiak Managerial Accounting, 2nd Ed. >a ae ee Responsibiity AccountingandPerformanceEvaluation * 129 Types of Cost/Expense Centres ; ‘There can be two general types of expense centres : (a) Engineered expense centres (b) Discretionary expense centres ‘he above classification of expense centres is based upon the two types of cosh i» engineered and aisoretionary. Engineered costs are those costs which can be estimated with reasonable reliability, for ‘example, factory costs for direct material, direct labour and direct overheads. An engineered cost has « definite physical relationship with output. Discretionary costs are those for which no such engineered cetimate is feasible. In discretionary expense centres, the costs incurred depend upon the manager's decisions. Discretionary expense centres include administrative and support cost centres. Cost centres can also be classified on functional basis as : () Production cost centre ~ (i) Service cost centre (i) Ancillary cost centre (iv) Administrative and support centre (v) Research and development centre . (vi) Marketing centre 2. (PROFIT CENTRE Responsibility centres may have both inputs and outputs. The inputs are taken as costs and outputs are rvegues, The difference between the revenue eamed and costs incurred will be profit. When a responsibility centre gets revenue from output, it will be called a profit centre. ‘The output of a centre may be undertaken either for outside consumers oF for other centres in the same organisation. When the output is meant for outsiders, then the revenue will be measured from the price charged from customers. Khe output is meant for other responsibility een then management takes a decision whether to treat the centre as profit centre or not. For example, if a business has a number of processes and the output of one process is transferred to the next process. .en the transfer from one process to another is only 0 cost, then these processes will not be profit centres. On the other hand, if management decides to ‘ansfer the output from one process to the other at @ profit (or at a price at which the output is available in the market), then the process will become profit centre, Internal transfers at profit do not increase company's assets whereas sales to outsiders Will increase assets of the company (in the shape of cash, dion ble etettes cay The income saementof¢ profit eenre i used asa conto) device. The Profits of a responsibility centre will enable in evaluating the performance of the manager of that centre. Performance of the manager of @ Pro The fit centre may be evaluated by the following measures of Profitability (9 Contribution margin (i) Direct profit ii) Controllable profit () Profitincome before tax (©) Profivincome after tax/net income Suitabin aay of Profit Centres fic ' able i _ , abcent of proft centres may bes following conditions are satisfied :42.10» Responsibility Accountingand Performance Evaluation - (a) There exists a decentralised form of organisation. (&) ‘The divisional manager has access {0 all relevant information needed for decision making (c) The divisional manager is sufficiently independent, (@) Internal transfers of output from one division/centre to another division are not significan, (e) A definite measure of performance is available. Advantages of Profit Centres Establishing of profit centres offers the following advantages: (@ Itencourages initiative as a manager of a profit centre is subject to a lesser degree of contol of the top management. (ii) It may improve the quality of decisions as these are made by managers responsible for their execution. i (ii) Tt may quicken the decision making process as these need not be referred to top management. (iv) It saves time of top management by allowing them management by exception. () It enhances profit consciousness in the entire division/organisation. (vi) It promotes competition amongst managers of various profit centres and improves their performance. (vii) It helps in training divisional managers for top management responsibilities. Disadvantages of Profit Centres Inspite of many advantages of establishing profit centres, there are many limitations or disadvantages (i) Loss of top management control over different divisions. (ii) Faulty decisions at divisional level which might have been avoided at top management level (iii) Conflict amongst individual interests of divisions and the organisation as a whole (iv) Too much emphasis on short-term profitability. (») Increased cost due to multiple requirements of facilities and personnel at each profit cents | (vi) Transfer pricing problems amongst profit centres. 3. INVESTMENT CENTRE asd “An investment centre is an entity segment in whi ich a manager can control not only revenues and ‘costs but also investment.” ‘The manager of a responsibility centre is made responsible for properly utilising the assets used i" his conte, He is expected to eam a fair return the amount employed in assets in his cen Measurement of assets employed poses many problems. It becomes difficult to determine the amv ‘of assets employed in a particular responsibility centre. Some assets may be used in a responsibilitY centre but their actual possession may be with some other department, Some assets may be used bY two or more responsibility centres and it becomes difficult to apportion the amount of those assets © - “en Pitt various centres, Investment Centres may be used for big responsibility centres where assets will be exclusive possession of that centre. ‘The performance of an inyestment centre can be measured by relating profit to the ‘investment bas ‘The two methods which are generally used to evaluate the performance of an investment centre an= _ a Responsibility Accountingand Performance Evaluation + 12.1 1. Return on Investmen’Capital Employed ae 2, Beonomic Value Added (EVA) or Residual Income Approach (RD) 1, Return on Investment/Capital Employeq Return on capital employed establishes the relationship between profits and the capital employed. The term ‘capital employed” refers to the total investment made in the investment centre/business. However, net capital employed comprises the total assets used less its current liabilities. The profits for the purpose of calculating return on capital employed should be computed according to the concept of capital employed, ie., gross capital employed or net capital employed. Further, net profits should be taken before tax because tax is paid after profits have been eamed and has no relation to the earning capacity of a centre, Return on investment can be computed as follows : Net Profit rear ee | NERErOsees 2100 Return on Investment/Capital Employed Capital Employed ~ Net Profit Sales Or, ROL = “Sales “ Capital Employed ~ Or, ROI = Net Profit Ratio Capital Turnover Ratio 100 2. Economic Value Added/Residual Income Approach Economic value added is a measure of performance evaluation that was originally employed by Stern Stewart and Co. It is also referred to as residual income (RI) approach of performance evaluation. It is a very popular method used to measure the surplus value created by an investment or a portfolio of investments, EVA has been considered as a better measure of divisional performance as compared to the return on assets ROA or ROI. It is also being used to determine whether an investment Positively contributes to the shareholders’ wealth. The economic value added of an investment is simply ‘qual to the after tax operating profits generated by the investment minus the cost of funds used to finance the investment. EVA can be calculated as below : . 2 Poe GOeEAD GAL cites tax) — (Cost of capital x Copital invested) F a Cant onaioved (Retum on investment — cost of capital) ‘VA = Capital employed (ROI — Cost of capital) According to this approach, an investment can be accepted only if the surplus (EVA) is positive. It on the positive EVA that will add value and enhance the wealth of shareholders. However, to calculate ;. Sconomic value added, we need to estimate the net operating profit after tax and cost of funds 34. Suppose an investment generates net opevating profit after tax of % 20 lakhs and the cost of investment is & 16 lakhs, The economic Valle added by the investment shall be & 4 lakhs and be accepted. finan eps to calculate EVA : 1. Caleulate the net operating profit after '@ (NOPAT) 2. Calculate total capital invested 3. Determine the cost of capital Po Apply the above stated formula = a Cag es Employed (ROL Cost of Capital) '» |(tty 12120 ° Responsibility Accounting and Performance Evaluation ‘to caloulate EVA, we need to estimate the Net operating profit after tax and cost of funds invest Accafast this approsch, an investment can be accepted only if the EVA is positive. Iti ene peste EVA that will add value and enhance the wealth of the shareholders. Suppose an investmnen, rence vet operating profit of Rs 20 Lakhs and the cost of financing investment is Rs 16 Lakhs The economic value added by the investment shall be Rs 4 Lakh and it should be accepted. uthermore, EVA helps us to identify the best investments. All other things being equal, comp ther companies over time with lower or negative EVA. Economie with high EVA should outperform ot ‘ vue added attempts to ascertain the true economic profit of the company and helps to identify the bes investment alternatives vis-a-vis the other companies. However, one thing worth noting is that the actual EVA level is less important as compared to the change in the level of EVA. On the basis of the research conducted by Stem Stewart, EVA is a key drive of company’s stock performance. IFEVA is positive but is expected to become less positive in the near future, itis not very good signal On the other hand, if a company has a negative EVA but is expecting it to rise to positive level, a good | signal is indicated. EVA is an important and day operations. ‘As has been disscussed, the concept of EVA is in a sense nothing more than the traditional concept of profit, however, the utility of having a separately defined term such as EVA is that it separates various accounting adjustments which may be dubious in nature. For instance companies like Enron reported profits by making various accounting adjustments while infact, they were in the final stage of becoming insolvent. There has been a growing criticism of financial measures of performance evaluation on the grounds that they are historic in nature and lack futuristic outlook. In todays age of information technology. when the companies are building internal assets and capabilities their relevance and utility is being questioned The situation may worsen when the company is compelled to pursue short term obejective at the cost of long term organisational objectives. Kaplan and Norton developed an innovative performance evaluation measure known as balanced scorecard, which is yet another important financial performance measures. easy measure of evaluating performance and can be translated in day to BALANCED SCORECARD = 2 “The balanced scorecard is another technique of performance evaluation and measurement. While be phrase balanced scorecard was coined in the early 1990's, the roots are deep and include the pioneer Fork of GE on performance measurement reporting in the 1950's and the work of French proce engineers (who created the Tableau de Bord - literally, « dashboard” of performance measures) in the early part of the 20th century. ‘The balanced scorecard is a strategic management and measuring process used to help align specific business activities with an organisation’s strategy and vision. It provides feedback regarding both interns! ‘business processes and external outcomes in order to continuously improve performance and results Before implementing the balanced scorecard in the organisation, the company must know and unerstand the following : 1, The mission statement of the company 2. Company's mission 3. Financial status/position of the company ,SS" 0 0 00 ————o-~—~—"—“_e”t”~— Responsibility AccountingandPerformanceEvaluation ° 12.13 4. Organisational structure 5. The employees and 6. The level of customer satisfaction Beane scorecard = ae the identification of a small number of financial and non-finanacial measures a ee gets to them so that whenever they are reviwed it is possible to determine whether the actual performance is in accordance with the expectations. The basic idea behind this is that jn case the actual performance deviates from the expectations, steps can be taken to improve the performance. Kaplan and Norton have asserted four steps as being part of the balanced scorecard process :- 1, Translating the vision into operational goals. 2. Communicating the vision and linking them to individuals performance. 3, Business planning and 4. Feedback and adjustments in strategy accodingly. Balanced scorecard offers a more detailed view of an organisations performance by framing strategic objectives within a balanced set of areas that contributes to success. These areas are known as perspectives. Robert Kaplan and David Norton further advocate, that business units should measure the assigned goals from the following four perspectives (i Financial, e.g. profit margins, return on assets, cash flow. (ii) Customer, e.g., market share, customer satisfaction. (iii) Internal business processes, ¢-8- capacity utilisation, on time delivery, quality, employee retention. (iv) Innovation, e.g., development of new products. Financial « profit margrins e return on assets e cash flow Innovation ‘*Development growth ‘Customer ‘Market share customer satisfaction internal Business process ‘e capacity Utilisation ‘Squall rig. Balanced score Card Perspective1244 nccoummmmmaamanormance Evaluation + Responsibility: measure the price of goods or services furnished by a pr ch a cornet centre to other responsibly eon profit centres is impossible without determining transfer prices performance within the company company exchange goods and services, In such situations, there i a need to determing ould be properly assigned. The implication of the transfer price is that for so that cots a pace it wil be a souree Of Fevenv, whereas for the division to which tanser the rane be an clement of cost. Thus, there is a need to determine proper transfer price for the Successful implementation of responsibility accounting. ‘There are various transfer pricing methods in use, These methods are generally based on either (@) cost, or (b) market price. The following ate the important types or methods of intra-company transfer price 1, Cost Price Cost Plus a Normal Mark-up. Incremental Cost Shared Profit Relative to the Cost Market Price Standard Price 7. Negotiated Price. 8. Dual or Two-way Price. aveee 1. Cost Price. According to this method, goods and services are transferred from one segment of the company to another on the basis of unit cost of production of the transferring division. The cost could either be taken to be the actual cost of production or the standard cost of production, The advantage of this method of transfer pricing is that it is very simple and convenient to operate. But.it distorts the profit figures of the various responsibility centres in the sense that the profit of the ‘transferring centre shall be underestimated and that of the centre to which transfer is made would be ‘over estimated. In fact, this method of transfer pricing is inappropriate for profit centre analysis 2. Cost Plus a Normal Mark-up. To overcome the shortcomings of the simple cost price method. Ee ae pe Cost a margin of profit, say 15% of the cost, to determine the transfer PS eam eae oe Ween is charged the actual unit cost of production of the transfer siplisiyiand convetionce: but thilitihodae SIR see ee met oF this ee as the inefciencis of one depart gs iso not an appropriate method for profit cente 2) ngwith their costs are transferred to another departm=” Another meth 3. Incremental Cost. i sthod of transfer pricing in use by certain companies of ion is transferred to another division within the Which are directly attributable ty the col OF variable cost of transferring centre plus any fixe same defects as that of cost prige een ivision. The incremental cost so calculated suffers Os are sold 10 outside customers ge nots, THE Second approach may b ds and Se incremental cost may be een eg et fsferred within nee Tn such 2% es st storing division would om Sin = apoity cost in the fon at sie of Brame which i © market price basis and is mone asere eens, outside ; ESSDS acescasnganc BFrMAANES atoaton + 1248 4, Shared ae o fee Cost, According to this method no price is charged for the intra y transfer ag GRATE et SS recast is company the aggregate cost of various divisions is deduct ind out the profit for the company as a whole ; and then the profit is shared ty the various profit centres relative to the cost basis of each centre, as below : of a Particular Profit Centre _P pe Company Cost of Particular Profit Centre a bea ou Ve ‘Total Cost rs Tins, inthis method profit is shared according te the cost of each divieion, The drawback of this method is that inefficiencies are not evaluated, and hence, it is not an appropriate method for profit centre analysis. 5, Market Price. In this method, the Ptices charged for intra-company transfers are determined on the basis of market price and not on the cost basis. There are three ways of computing the market price. Firstly, the prevailing market price, after making adjustment for discounts and other selling costs, Mie as rete price lif there’ ia/an ecive markt fi gocta| andl serviced tanafeered between divisions of the same company. The main advantage of this method is that it protects the profitability division is charged what it has to otherwise pay to the outsiders, and the transferring division gets the price which, in any case, it would have obtained from outsiders. Further, selling and distribution Costs as well as costs of bad debts are reduced and the transferring department gets an assured market, whereas, the buying division is assured of regular and timely deliveries. Secondly, where active market-does not exist or where market price is not available, cost plus a normal profit may be taken as a reasonable market price. But, then, inefficiencies of one division will be transferred to another division. Thirdly, the company could invite bids from the market 80 as to determine the market price. The lowest bid may be accepted as the market price for the transfer, However, the problem may arise because of false bidding or no bidding at all. S. Standard Price. Transfer prices can also be fixed on predetermined standard price basis. The Standard price may be determined on the basis of cost of production and the prevailing market conditions. Thus, division working at less than the desired efficiency will show lesser profits as sotto the efficient divisions. However, difficulties may arise in fixing the standard price agreeable ‘0 the different divisions, 1. Negotiated Price. The intra-company transfer price can also be determined on the basis of lations between the buying and the transferring division, The price arrived at after negotiations will the mutually agreed price. Such a pricing method will be advantageous to both the divisions as well company as a whole, However, this method could be used only when both “S famsfering divisions have altemative choices available with them, 8. Dual or edit at one lation of & to. pro the buying as well Two-way Price. According to this method, the transferring division is allowed to give Price, whereas, the buying division is charged at a different price. It enables better Profit centres and avoids conflict among them on account of transfer Prices. However, fits of the various segments would differ from the actual profit of the company as a whole. = Poses no problems for the company #8 tansfer prices are meant for internal Purposes of ‘formance evaluation only. (OF TRANSFER PRICING METHOD The 1 : ds reveals that th Study of the yz transfer pricing metho ‘at there is no particular method which ipa BS termed asthe be tnd tr all tuations: The selection of e paige ce oe depend crite Particular circumstances which may differ fm case to case, However, the following general Hi should be kept in mind while determining * ansfer price: za12:16 +: Responsibility Accountingand Performance Evaluation (a) the transfer price should be objectively determinable, 4 the transferring division and charge the buying diyj. should compensate ie a Mee Gis, (ee Ha MerHHMGAR ARMM c0ds/ercices enchonsea (©) it should contribute to congruence between the goals of the divisions and the o organisation ; ‘ (d) it should provide for profit centre evaluation ; and Boals of the (€) it should maximise the efforts towards achievement of organisational goals, = ADVANTAGES OF RESPONSIBILITY ACCOUNTING Management uses responsibility accounting as a control performance of executives who are incharge of various cost cen to the targets set for them and proper action is taken for low result important in every type of business. device. It is used to evaluate the tres. Their performance is compare - So responsibility accounting is very The following are some of the advantages of responsibility accounting : 1. {Assigning of Responsibility. Each and every individual in the org responsibility and th cy are accountable for theit work. Every body knows what is expected of him The rononsibilty can easily be identified and satisfactory and unsatisfactory performances. of various This operas own. Nobody can shift responsibility to any body else if something goes wrong. So, under this system responsibility is assigned individually, anisation is assigned some 2 ‘Improves Performance. The assigning of tasks to specific Persons acts as a motivational factor too. The persons incharge for different activities know that their performance will be reported to the top Tow eaent. They will try to improve their performance. On the other hand, it acts as a deterrent for tow performance also because persons know that they are accountable for their work and they will have to explain for their low performan s also helps in fixing their fut" © take important decisions, hhnique of responsibility accounting is useful for all 8% ility accounting may diften Prof government and non-government, etc. But it Y differ “from oganisation to organisation, Further, in spite aha cat Hever be a substitute for a good managemet! the Management,—— ee eee ng, the rhe | to s1s0 of $0 nt 38 nased SPOnsibility Accountingand Performance Evaluation * 12.17 During the last month, the total kilometres run by git the 10 cars were 22,400 and the costs incurred were © 83,150. The cost of hiring a car Would have been & 4 per km. Evaluate the performance of the transport department on the basis of (a) Cost Centre, (b) Profit Centre Solution = Performance Evaluation Report ‘otal budgeted expenditure for the month ‘ess: Fixed expenditure YVariablecost ‘Variable cost per km. (62,500/25,000) TH Cast Centre Basis Allowed Cost : Variable (22,400 x 2.50) Fixed Total allowed cost Actual cost Cost Variance 2,150 (A) © Profit Centre Basis Cost of hiring car (22,4004) ‘Actual cost incurred Profit Variance Illustration 2. A and B are two divisions of a company. A makes a single product, which it sells only to B for incorporation into B's products. The relevant costs and revenues are : = Cost A Revenue of B (After deducting own eae variable cost) e e 50 300 a 240 400 200 a 320 490 a +400 370 z 510 640 5 it between divi its should s What is the appropriate transfer price Per sunit be iivisions A and B, and how many units shot Produced ? Solution ; incremental cost and revenue Statement showing 0 200 Quantity (nits) . omental Quant (Units) Cosa ey rs Tneremental Cost to A(®) venue of B @ tal Revenue of B OO S, incremental ti Ta revenue f= eal at 400 units when the ineremental quantity ental cost and inerem:oo 12:18 + ResponsibilityAccountingand Performance Evaluation ‘5 100 units and incremental cost/revenue is ® 80, thus the transfer price should be 80/100 = is units f Re. 0.89 per unit, The number of units to be produced by A for B should be 400. Tlustration 3. The following is a Control Report prepared by a Cost Accountant of Departmen, X in a factory : ‘Overhead directly assigned to Department X : w 3 Indirect materials (based on actual requisitions) 1,000 Indirect Labour (job tickets) ‘900 Overtime charges 100 Depreciation on equipments, 500 no Allocated Factory Overhead (38% of Factory space) Allocated Overhead of Repair Shop (62% of repairs in repair shop done for Department X) 1,200 Allocated Office and Administration Overhead (on an agreed basis) 5,000 Total Departmental Expenses B.000 Revise the report treating Department X as a responsibility Centre. 4,300 Solution : Revised ControlReport of Department X Fully Controllable Costs : Indirect Materials, Indirect labour Overtime Charges, Partially Controllable Costs : Allocated Overhead of Repair Shop Total Cost Working Notes : ns eo a X has no control over: Depreciation cost on equipments, Allocated Foci % of factory space), Alk oie basish these costs have, thereten, wetc®) Allocated office and Administrative overhead (on an agreed ‘ore, been excluded while preparing Revised Control ff Department X Bile ae allocated on tho basis 9h pecoral canoer ne ee OP control, what, so ever, of of general _management policy and department X has ™ mn these costs. Mustrati Shop. es Works Ltd, has at the factory three production departments. Masi superintendent along with =a ly which are the responsibility of the shop superintendent. The * Budget Variance Oo budget Salescommission an Raw material & components : 300 —Machine shop 208 Publicity expenses 900 ‘co 1,100esponsibility Accountingand PertormanceEvaluation * 1219 Printing & stationery 3.200 ae | ‘Travellingexpenses 4,000 200 A Wages —machine shop 0 how fabrication 600 DA —assembly n0 108 Material —assembly ae 4A —fabrication 460 104 | Utilities machine shop 320 10A —assembly 470, 60F —febeteation 560 30F —maintenance 400 20A —stores 210 40F —planning 180 20A Shop superintendent's office —Salaries & expenses 1,100 2F Depreciation — factory 3,880 404 ‘Works manager’ office: —Solaries & administration 3,810 40a General office salaries & administration 4.270 30F ‘Managing director's office —Salary & administration 2,800 20F (A= Adverse, F = Favourable) 7 Treating the machine shop, fabrication and assembly as cost centres, prepare cost sheets for each centre with the help of the following additional information : The shop superintendent devotes his time amongst machine shop, fabrication and assembly in the ratio 4.2 3 . 4, Other factory overheads are absorbed on the basis of direct labour in each cost centre. Office, administration, selling and distribution overheads are borne equally by the cost centres. op, fabrication and assembly as responsibility centres, prepare @ (ii) Treating the machine sh b responsibility accounting report for the shop superintendent ‘Shop, Fabrication and Assembly Cost Centres ‘Machine Shop Fabrication ‘Assembly Actual | Budget] Actual | Budget | Actual] a oO O a oO 460 470 760 () Cost Sheet for Machine’ Components Wages Utilities Prime Cost 790 600 620 720 | 730) 330 560 330, 470. 410 2,040 1,620 1,620 1,950 | 1,940 Add Fag Sg, TACO Overheads: i superintendent's, & pre tiesand Expenses "tioned in the ratio of 4:3 :4)1220 ° Responsibility Aecountingand Performance Evaluation Other Factory Overheads 3,200 3,160 2,400 2,480 | 2,880 | 2.929 (See Working Note 1) ; Factory Cost 5,620 5,592 4320 4394 5230 | 5259 ‘Add : Selling and Adm. ‘Overheads (See Working Note 2) 5390 5,443, 5390 5443 5390 | sass Total Cost 71010 [11,035 9,710 9,837 | 10,620 | 10,696 Working Notes : 1. Determination and Apportioningof Factory ‘Overheads (other than Shop Superintendent’s office-salaries andexpenses) Budget ‘Actual o oO “Maintenance Cost 400 420 ‘Stores Cost 210 170 Planning Cost 180 200 ‘Works manager's office Salariesand Administration 3810 3850 Depreciation-factory 3880 3920 Total Factory overhead 8480, 8560 Factory Overhead Other than Shop sat office-salaries and exp, divided in the Rai of Direct Labour, ic, 800: 600 720; thus Machine shop centre 3200 3,160 Fabrication Centre 2400 2.480 Assembly 2880 2920 2 Determination and Apportioning of Selling and Administration Overhead ‘Budget “Actual O 6 SalesCommission 300 350 Publicity Expenses 1100, 1200 Printing and Stationery 3200 3000 ‘Traveling Expenses 4000 4200 General Office Salaries and Administration Exp. 4270 4300 Managing Director's Office-salary and Administration Exp. 2800 2780 ‘Total Selling and Administration Overhead 16,170 16330 “Apportionment : Divided equally among the three cost centres (1 : 1: 1) 5,390 548 Gi Responsibility Accounting Report For the Shop Superintendent Budget Actuat Variance @ o 6 (a) Machine Shop Centre : ‘Raw Material and Components 900 920 20() Wages 800 790 0) eae 320 330 a jotal (@) 2,020 2040 (Fabrication Centre Raw Material and Components 460 470 10) pisos 600 620 20) Utilitie 0 ae o 560 530 es 1620 1620ee eae eee ee EE : _ Responsibitty accounting and Performance Evaluation + 1221 (@ Assembly Centre Raw Material and Components ne ma GG Wages 10 ow n Total (6) fon into om, Total forthe three Centres (a+b +e) at 5,600 10) Ilustration 8. S V Ltd. manufactures a product which is obtained basically from a series of mixing aperations. The finished product is packaged in the company made glass bottles and packed in attractive cartons. The company is organised into two independent divisions viz. one for the manufacture of the end- product and the other for the manufacture of glass bottles. The product manufacturing division can buy all the bottle requirements from the bottle manufacturing division. The general manager of the bottle manufacturing division has obtained the following quotations from the outside manufacturers for the supply of empty bottles : alae; Totalpurchases (empty bottles) . value ( 8,00,000 14,00.000 12,00,000 20,00,000 A.cost analysis of the bottle manufacturing division for the manufacture of emerty bottles reveals the following production costs : Volume Toralcost (empty botties) a 8,00,000. 10,40,000 12,00,000 14,40,000 The production cost and sales value of the end-product marketed by the product manufacturing division are as under : Volume Total cost of end-product Salar voree (bottles of end-product) (excluding cost of empty bottles) (packed in bottles) ,00,000 Cessna %91,20,000 12,00,000 96 EDD 1,27,80,000 ae has been considerable discussion at the corporate level as to the use of proper price for fer This 4.28 MPLY bottles from the bottle manufacturing division to the product manufacturing division. aes is heightened because a significant portion of the divisional general manager’s salary is in ve bonus based on profit centre results. ; ae the corporate management accountant posponsl for defining the proper transfer prices for the are got mPLy bottles by the bottle manufacturing felon to the product manfacturing division, you by uatttd to show for the two levels of volumes of 8,00,000 and 12,00,000 bottles, the profitability Of tag’ market price and i) shared profit relative to the costs involved basis for the determination copa, Prices, The profitability position should be furnished separately for the two divisions and the OF the , °S @ Whole under each method. Discuss also the effect of these methods on the Profitability © divisions, _ ee12.22 Solution : (Profitability Statement Using Market Price Basis, of Transfer Pricing Volume 8,00,000 Bottles 12,00,000 oa a on (@)_ Glass Bottles Manufacturing Division : SalesRevenue 14, 00,000, 20,00,000 Less : Cost of Production 10,40,000 140,009 Profit 3,60,000 $.60,009 (&) Bnd Product Manufacturing Division : Sales Revenue... i) 91,20,000 1,27,80,000 Less : Cost of production 64,80,000 96,80,009 Cost of Empty Bottles 14,00,000 20,00,000 Total cost... «i 778,80,000 116,80,000 Profit i-i) 12,40,000 1,00,000 Total Profit of the Company (a +b) 16,00,000 16,6,000, (ii Profitability Statement Using Shared Profit Relative to the Costs Basis =a Volume ic $,00,000 Bottes 12,00,000 Boties 7" a a SalesRevenue-....G) 91,20,000 127,80,000 Less : Cost of Production of Bottle Division 10,40,000 14,40,000 Production cost of End Product Division 64,80,000 96,80,000 Total cost eee ii) 75,20,000 1,11,20,000 Total Profit for the Company (i-it) 16,00,000 16,60,000 Profit x ost of Botte Division a) sion | ee Division 2,14,964 (0 Samccnae Di SORE DI) () Share of Product Division 13,78,724. 14,45,036 (ii) Determination of Transfer Price Cost of production of Bottle Division 10,40,000, 14,40,000 Add: Share of Profit 2.21276 214,964 TransferPrice 12,61.276 16, 54.964 Effect of the two methods of transfer pricing on profitability. fa ‘The profit to the company as a whole remains the same whatever is the method of transfer Laie However, market price basis of tranfer pricing yields more profits for the bottle manufacturing divi = PERFORMANCE EVALUATION Performance evaluation is regarded as one of the important functional areas of pes accounting. If maximization of profit is the objective of thé business then performance ee Key importnance, Performance evaluation is the process of evaluating the efficiency of a pore ot the basis of management control system, Periodic comparisons of actual costs, revenues, pro! takiné Heciionn's With the budgeted costs, revenues, profits and investments help management iid be ® Geeisions about future actions. The objective of « performance measurement system pa ie Mnplement the firm's strategy. The firm will be effective only and only if itis able to achieve its obje J= ity Accountingand Performance Evaluation + 12.23 ossible only when the perf es ea eclitie aertermane® evaluation is connected to organisational goal setting and closely Bies are being implemented. Performance evaluation should be in respect of all the responsibiti undertaken in respect ‘Sponsibility centres, viz; cost centres, profit centres and investment centres. PERFORMANCE EVALUATION Diversification in terms of both industry activity and geographical area has become an important feature of most of the business organisations today. In recent years, the businesses have seen exponential diversification. Diversification has mainly occurred due to internal expansion. Consolidated financial statments are prepared and presented to disclose financial information on all the different segments of a diversified enterprise. ‘A segment of an organisation simply stating is any part of the organisation that mangement wishes to evaluate. It has been noticed that the financial statement users find segment performance evaluation ‘more useful and valuable in assessing an enterprise standing, its past results and future prospects. The performance of a diversified company can be judged from its performance of all different segments. The success of diversified companies depend on success of all segments that is why segments performance evaluation is quite useful to investors and other user groups. BENEFICIARIES OF SEGMENT PERFORMANCE” EVALUATION 1. Investors. Segment performance evaluation provides the investors information regarding the profitability, risk and growth of various segments of the company. Investors will be in a better position to assess the firms future earnings and their uncertainty about company prospects will be thus reduced With the help of segment performance evaluation. 2. Employees. Employees and all workers of the organisation are equally interested in the Performance and prospects of the company which directly affects their wages and job security. 3. Management. Segment performance evaluation is also helpful to the management while taikng Various important managerial decisions. Management while taking policy decisions should be very clear ‘Tegarding the performance of various segments. Lack of information on segment performance may lead to misunderstanding and conflicts between the management and the workers. at both national and international levels are becoming f large companies. Segment performance evaluation corporate strategies and its impact. 4. Government Agencies. Goverment agencies more and more concerned regarding the activities o ‘ems likely to promote a better understanding of and the general public at large may also be promoted 5. Const sumers. The interest of consumers sob ting in terms of removal of price discrimation etc. ish segment performance evaluation and TeP0 "MEASURES OR TECHNIQUES OF PERFORMANCE MEASUREMENT/ EVALUATION uy are ma : casures which may be used fo evaluate the performance of & Mies. These “measures say be broadly eased mo: . Financial Performance Measures ) Non-Financial Performance MeasuresSs 4224 + Responsibility Accountingand Performance Evaluation (a) Financial Performance Measures : Financial performance measures include the following : (i) Responsibility Accounting (ii) Budgetary Control (ii) Variance Analysis (iv) Contribution Margin (v) Ratio Analysis | (vi) Return on Investment or Return on Capital Employed (RON) (vii) Residual Income (RI) (viii) Economic Value Added (EVA) (ix) Balanced Score Card (BSC) (x) Transfer Pricing Policy We have discussed a few important financial measures later in this chapter.Some other financial ‘measures have been discussed at large in seperate chapter (Ratio analysis, variance ‘analysis, responsibility accounting, transfer pricing and budgeting etc.) (b) Non-Financial Performance Measures “Financial measures of performance are important measures of evaluating the efficiency of a business. However, these measures are not fully adequate and in fact can be dysfunctional for several reasons. Financial performance measures generally lead to short term actions which may not necessarily be in the firm's long-term interests. The business/divisional managers may not undertake long-term actions which may be useful in the long run but are risky so as to obtain short term results which may not be beneficial to achieve the overall objectives of the firm in the long run. Hence, it is essential use non-financial measures also alongwith the financial measures for evaluating the performance of business unit. The following are some of the important non-financial measures that may be employed for measuring the performance of a firm : (® Market share for each product Gi) Product quality (ii) Productivity (iv) After sale service (v) Labour turnover (vi) Customer satisfaction (vii) Employee satisfaction (viii) Corporate governance (ix) Social responsibilities (X) Business ethics (xi) Innovation and research A few important non financial performance measures have been explained below : @ Market Share. Market share refers t it i ing vis-a-vis ® ; ar ‘0 the position the company is enjoying ¥ competitors. While using this technique of performance evaluation it is very important to firstly ide define the market to be served. It should be clearly stated whether the market includes on!Y domestic market or the international market as well. 3 . oe (ii) Product Quality. This measure of performance evaluation helps to ascertain the quai Oe product whether it being raw material, semi-finished or finished product. It aims to attain the best 2a ———————— ts pe be Responsit a= bility AccountingandPerformanceEvaluation * 1225 ssa he minimum cos by ens rly with minimum late deliveries, {iy Productivity. Productivity, si ; (i) qooepted non financial ee at i the rato of ouput to inputs. I he mon ices nisin the resources. Performance which indicates how well an organisation is abour Turnover. Hi 4 © a pes apeiatioas pee amloyes, turnover jg a matter of concem for the management as it sea aly ancl ¢Ontinuows replacement of employees WhO eave the organisation is ° ly und . Labour tumover j : performance evaluation widely used by the einai another important non- financial measures of ” ResponsibiltyAccountingand Performance Evaluation Ere Explain the meaning and diferent 1YPES of "Responsibility Centos’. What steps n to set up a system of responsibilty accounting in an organisation 2 $28 0 ety : sponsibility accounting IS Not to place blame. Inste . Be eeieaseertasd a that future operations can be i oa eromany 3. What is meant by Responsibly Centres ? How are these centes determined and purpose? 4. What is the need of intra company transfer pricing ? Discuss the major technique fry pricing and outine the circumstances in which each may be used with advantage,” "=" 5. What is meant by responsibility centres? Explain their utility to management. 6. What is transfer price ? What are the different types of transfer price ? Discuss the usehiney and appropriateness of different types of transfer price under different circumstances, 7. Explain the concept of responsibility accounting. 8. ‘Responsibility Accounting is an important device for Control’. Discuss. ‘9. What is meant by responsibility centres ? How far are these centres helpful to managemen? 10. Explain clearly what do you understand by the terms—cost centre and responsibilty cenies, 11. Discuss various steps involved in responsibility accounting. 12, What do you mean by performance evaluation ? Discuss the various measures that ae generally used to evaluate the performance of a business unit 13, Discuss the beneficiaries of segment performance evaluation. 14. “No single measure is sufficient to evaluate the performance of a business". Comment 15. What do you understand by EVA ? How it is considered as a better measure of division! performance as compared to the retum on assets ? 16. What are the benefits of using balanced score card 7 | TTT (1 Ex. 1. Nicefit manufactures ready made garments by a simple process of cutting the clothes it various shapes and then sewing the corresponding pieces together to form the finished product. The Sewing Department and the Cutting Department report to the Production Manager who alot with Engineering Manager reports to the Director-manufacturing. The Sales Manager, Publicity Mansee and the Credit Manager report to the Director-Marketing who along with Director-manufacturing repo to the Managing Director of the Company. The Accounts Department reports the following for the last quarter of 2016 : Budgeted “Actual Bad Debt Loses 25.00 E08 Cloth wed 51,000 3600 Aevertsing 400 ‘a ‘Andi Foor 750 73 Credit Reporte 20m ist Seles Reponniive Traveling Expenses S00 om SelesCozmarion 7000 1 Citing Labour «ao a Thread ‘