The Complete CPA Reference

CHAPTER 7

Appraising Segmental Performance

Accountants typically look at budgeting and profit planning as tools for control of responsibility center operations and as facilitating factors in judging managerial performance. Accountants should be familiar with fundamental managerial accounting tools such as standard costing, flexible budgeting, and the contribution approach. They should have a thorough understanding of two important issues that arise frequently with decentralized operations: divisional performance and transfer pricing.

This chapter covers measures and guidelines for internally evaluating a company's performance, including:

• Responsibility accounting and responsibility centers
• Cost center performance and standard costs
• Flexible budgets and performance reports
• Profit centers and segmented reporting
• Evaluation of divisional performance
• Transfer pricing
• Budgeting and financial planning

The What and Why of Responsibility Accounting

What is responsibility accounting?

Responsibility accounting is the system for collecting and reporting revenue and cost information by areas of responsibility. It operates on the premise that managers should be held responsible for their performance, the performance of their subordinates, and all activities within their responsibility center.

What are the benefits of responsibility accounting?

Responsibility accounting, also called profitability accounting and activity accounting, has these advantages:

• It facilitates delegation of decision ...