Responsibility accounting and transfer pricing ppt

RESPONSIBILITY ACCOUNTING

& VERTICAL INTEGRATION

Responsibility Accounting

System of control where responsibility is assigned for the control of costs

Emphasis is on men rather than on systems

Also called profitability accounting and activity accounting

Collects and reports both planned actual accounting information in terms of responsibility centres

Essential Features

Inputs and Outputs or Costs and Revenues

Planned and Actual Information or Use of Budgeting

Identification of Responsibility Centres

- cost centres

- profit centres

- investment centres

Assigning Costs to Individuals and Limiting their Efforts to Controllable Costs

Transfer Pricing Policy

Relationship between organisation structure and responsibility centres

Advantages and Disadvantages

Provides a way to motivate lower level managers and workers

Provides a way to manage an organization that would otherwise be unmanageable

Stovepipe organization

Tend to compete to optimize their own performance measurements rather than working together to optimize the performance of the system

Numeric Examples

Vertical Integration

When a company controls more than one stage of the supply chain

Forward integration is when a company at the beginning of the supply chain controls stages farther along

Backward integration is when a business at the end of the supply chain takes on activities "upstream."

Four degrees of vertical Integration

Full Vertical Integration

Quasi Vertical Integration

Long-term Contracts

Spot Contracts

Advantages

Company doesn't have to rely on suppliers

Suppliers have a lot of market power and can dictate terms

Economies of scale , efficient

“Knock off" the most popular brand-name products

Low prices

Disadvantages

Expense – more investment

Reduces flexibility

Loss of focus

Not likely that any company will have a culture that supports both retail stores and factories

Numeric Example

References

McNair, C. J. and L. P. Carr, 1994. Responsibility redefined: Changing concepts of accounting-based control. Advances in Management Accounting: 85-117.

Elliott, R. K. 1992. The third wave breaks on the shores of accounting. Accounting Horizons 6 (June): 61-85