Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
The main idea underlying the responsibility accounting concept is that separating a company into responsibility centers provides an adequate way to manage a large diversified organization. However, responsibility accounting causes some problems as indicated below.
Types of Responsibility Centers and Traditional Evaluation Methods
|Types of Responsibility Centers||Traditional Evaluation Methods|
|Revenue Centers||Includes marketing functions only with very little costs relative to the revenue produced.||Sales: Sales Variances (Chapter 13) Sale price variances Sales volume variances|
|Includes production and service functions or departments.||
For purchasing & production departments
Material price variances
Material quantity variances
Direct labor rate variances
Direct labor efficiency variances
Variable overhead spending variances
Variable overhead efficiency variances
Fixed overhead spending variances
Production volume variances
For service departments
| Profit Centers
||Includes both marketing, production and service functions. Examples include a manufacturing plant or product line.||Gross profit or contribution margin, operating income and net income plus the variances for sales and cost such as the ones above.|
| Investment Centers
|| Includes all the functions above plus the managers
control what to produce and how to produce, i.e., have autonomy or more autonomy than profit center managers.
Typically, investment centers are divisions of large companies.
Return on Investment:
= (Return on Sales)(Capital Turnover)
= (Net income ÷ Sales)(Sales ÷ Total assets)
= Net income ÷ Total assets
Also Residual Income.
This is essentially the same as economic value added (EVA). EVA® appears to be an old idea recently presented as something new with various adjustments.
Responsibility Accounting Compared with other Concepts
|System Concept or Characteristic||Traditional Responsibility Accounting||Just-In-Time||Deming and TQM||Goldratt and TOC||Activity Based Management|
|How To Organize||By function into Responsibility Centers (RC’s):
Revenue centers, Cost centers, Profit centers and Investment centers.
|Focused factories with cells. Functions connected as a network along the value chain including vendors and customers.||As a system so that each part understands where their inputs come from and where their outputs go to achieve the system goals.||Organize to maximize throughput.||Use JIT, FMS, CIM and activity accounting.|
|How To Optimize||Manage RC’s independently. Optimize the competing subsystems. Tends to ignore the inter-dependencies and requires slack. Push the work through the system. Meet static budgets.||Manage the system recognizing the inter-dependencies between the subsystems. High levels of teamwork and cooperation. JER and a Pull system.||Manage as a system as in JIT to the left. Use just enough resources (JER) and pull the work through the system. Emphasize continuous improvement (PDCA).||Manage constraints. Balance the flow, i.e., let the constraint (drum) set the pace. Emphasize continuous improvement by breaking constraints.||Manage activities to remove non-value adding work or waste.|
|How To Measure Performance||Management by Objectives using accounting measurements, e.g., budgets, variances. Rank employees sequentially.||Use non-financial critical success factors, e.g. inventory turnover, cycle time, no. of defects etc.||Continuously emphasize work and processes, not financial results. Can rank people in three groups, but not sequentially.||Throughput, inventory (i.e., assets) and operating expense. Individual evaluations are not addressed otherwise.||Both financial and non-financial measurements. Individual evaluations are not addressed.|
|Type of Control System||Accounting top down||Bottom up||Bottom up||Bottom up based on drum buffer rope concept||Bottom up|
|The Concept of Variability or Statistical Variation.||Ignores it. Someone is responsible for every problem or variance.||See the Deming column to the right.||Recognize common causes of variation come from the system. Special causes are small. Also recognizes variation from tampering & structural or seasonal factors.||Important idea. Variation can cause floating bottlenecks. Thus, a drummer is needed to balance the flow of work.||Recognition through the use of JIT and quality concepts. Otherwise not explicitly stated.|
Responsibility Accounting Advantages and Disadvantages
|1. Provides a way to manage a large diversified organization. Better decisions can be made at the local level.||The point at left has some credibility at the division level, but the system must be managed as a system not a group of subsystems. A RA stovepipe organization creates conflicts between segments, e.g., transfer pricing problems, purchasing department buying on the basis of price, production departments pushing defective products downstream to maximize labor efficiency and production volume measurements.|
|2. Provides incentives to department managers and individuals to optimize their individual performances.||This causes competition between segments and individuals rather than cooperation and teamwork. Prevents goal congruence. Creates slack and excess, e.g., inventory buffers, excess capacity, people, and vendors. Promotes ranking people which ignores statistical variation. According to Deming, this destroys moral, intrinsic motivation and teamwork.|
|3. Provides managers with the freedom to make local decisions.||Tends to ignore many, if not most interdependencies within the system. Decisions are based on self interest rather than the best interest of the system.|
|4. Provides top management with more time to make policy decisions and engage in strategic planning.||According to Deming, a system cannot manage itself.|
|5. Allows management to avoid understanding the system by using top down remote control based on accounting measurements. Supports point 4.||This is how management accounting lost relevance according to Johnson and Kaplan. The top down approach also ignores the concept of continuous improvement and Deming’s concept of leadership, i.e., managers need to understand the system so that they can help facilitate improvement, not judge and blame people for variations in financial accounting results.|
|6. Supports management and individual specialization based on comparative advantage.||Specialist can not understand the system and the system cannot manage itself.|
|7. Overall, it supports individualistic capitalism.||
Overall, it conflicts with communitarian capitalism and a Company’s attempt to change to the team oriented model.
Control Tools to Influence Behavior*
|Type of Control Tool||
|Results||Outcomes||Budget comparisons for sales and cost variances, output goals and management by objectives (MBO)|
|Actions: Behavioral constraints - Preaction reviews - Action accountability - Redundancy -||Actions or tasks. Restrict actions. Require authorizations to act. Define and track actions. Redundant tasks to detect errors.||Security locks, passwords. Voucher system for cash payments. Standard set & sequence of tasks. Two individuals inspect same item.|
|Personnel||Social structure and culture of the organization, attitudes.||Groups include: Explorers - seek continuous improvement. Scouts - Settlers - Dead-enders - resist change to status quo.|
*McNair, C. J. 1996. Responsibility accounting and controllability networks. Chapter E4. Handbook of Cost Management. Warren, Gorham & Lamont.
Summary of Ouchi's Three Control Mechanisms*
|Reciprocity and authority (i.e., the employee gives up autonomy for pay)||Reciprocity, authority and shared values and beliefs|
|2||Nature of Information||Explicit competitive price for each task or exchange||Explicit rules and regulations - e.g., accounting systems||Implicit - traditions, e.g., the U.S. Senate|
|Information Completeness||Complete||Incomplete, but stated||Complete, but unstated|
|Accessibility of information and understandability to newcomers||Accessible||Accessible||Inaccessible|
|How information is developed||Supply and demand||Must be created or designed||Develops naturally|
|Information systems capability to cope with participants heterogeneity and turnover||Capable||Capable||Incapable|
|3||Applicable method of controlling people||Self select based on price mechanism||Select employees with little screening and design a system to instruct, monitor and evaluate them||Select employees with careful screening to insure the skills and values needed|
Exhibit 5 Continued
Summary of Ouchi's Three Control Mechanisms*
|4||Cost of system: Employee search and acquisition||Variable
||Low cost||High cost|
|Training||Zero||Low cost||High cost|
|Supervision||Zero||High cost||Low cost|
|5||Timing, need and feasibility of defining the process and measuring efficiency.||Not needed||Short run, critical need||Long run, less significant need.
Process may be black box plus high interdependence and synergy
|6||How participant's commitment to organization's objectives is obtained.||Self interest based on price mechanism||Self interest supported and motivated by training, rules and close supervision insure compliance||Self interest based on common valueses|
|7||When the control mechanism should be
emphasized, i.e., will be the most efficient method.
(Note that high interdependence causes low clarity of performance measurement)
|When interdependence is low, or zero and there is a single task or exchange, or when it is feasible and economical to establish a competitive market price for each multi-task or exchange||When the levels of worker diversity and
employee turnover are high, the level of interdependence is low and the
clarity of individual performance measurement is high.
These requirements tend to produce many specialties and sub-specialties to reduce the interdependence. Rules and close surveillance are required for each specialty and sub-specialty.
|When the levels of worker diversity and turnover are low and the level
of interdependence is high.
The clarity of individual performance is low and teamwork is critical
* Summarized from Ouchi, W. G. 1979. A conceptual framework for the design of organizational control mechanisms. Management Science (September): 833-848.
** According to Ouchi, a group of people with a common specialization represents a profession, the citizens of a political unit make up a culture and the collection of individuals within a unique organization is a clan.
Note that all organizations have hybrid systems that contain elements of all three control mechanisms. Systems designers must decide how much emphasis to place on each form. "In a sense, the Market is like a trout and the Clan like a salmon, each a beautiful, highly-specialized species which requires uncommon conditions for its survival. In comparison the bureaucratic method of control is the catfish - clumsy, ugly, but able to live in the widest possible range of environments and ultimately, the dominant species. The bureaucratic mode of control can withstand high rates of turnover, a high degree of heterogeneity, and it does not have very demanding informational needs."
There is a conflict. American society is becoming more pluralistic, i.e., made up of more diverse ethnic, religious and cultural groups, but increasingly more interdependent. The need for Americans to work together is increasing while it is becoming more difficult for them to do so.
Summary of Ouchi and Jaeger's Dimensions for Three Organizational Types*
|No.||Dimension||Type A - American||Type J - Japanese||Type Z - Modified American|
|1||Length of employment||Short term - high employee turnover||Lifetime - low employee turnover||Long term - moderate employee turnover|
|2||Mode of Decision making||Individual decisions||Consensus decisions||Consensus decisions|
|3||Type of Responsibility||Individual based on merit||Collective||Individual|
|4||Speed of Evaluation and promotion||Rapid||Slow||Slow|
|5||Dimension of control||Explicit with formalized measures. (Emphasis on bureaucratic type control.)||Implicit, informal and subtle. (Emphasis on clan type control.)||Mixed implicit, informal control with explicit formalized measures.|
|6||Degree of specialization||Specialized career path. Bureaucratic control of individuals requires specialties and sub-specialties to reduce the interdependence.||Non specialized career path.||Moderately specialized career path.|
|7||Extent of concern for the individual employee||Segmented, non personal task oriented concern.||Holistic concern for employee's well being.||Holistic concern.|
* Summarized from Ouchi, W. G. and A. M. Jaeger. 1978. Type Z organization: Stability in the midst of mobility. Academy of Management Review (April): 305- 314.
Summary of Yoshida's Analytic versus Holistic Approaches to Management
|No.||Characteristic.||American Analytic.||Japanese Holistic.|
|1||Value system of workers.||Diverse value systems of workers creates the need for detailed job descriptions and a multitude of job classifications. Since workers are not cross trained and tend not to share and help each other, job descriptions must be fairly precise. (This seems to require the bureaucratic form of control.)||Unified common values creates little need for detailed job descriptions. Workers are multi-skilled and help each other, thus few job classifications are needed. For example, in a joint venture of GM and Toyota, (NUMMI) Toyota reduced GM's 100 job classifications to 1. (Consistent with the clan form of control.)|
|2||Approach and attitudes in the area of quality control.||Achieve an acceptable level within specifications..||Achieve the most desirable level of perfection.|
|3||Timing of performance review.||Short run quarterly or annual. (Bureaucratic form.)||Long run, e.g., every five years. (Clan form.)|
|4||Human resource replacement policy.||Workers are viewed as replaceable parts. Thus, replace (hire and fire) separable workers as needed..||Workers are viewed as part of an organic entity. In an economic downturn, retrain and relocate workers within the company. Release and replace workers only as a last resort..|
|5||Level of autonomy and responsibility.||A focus on the parts requires high levels of autonomy, sectionalism, competition and assumed independence in the areas of responsibility and performance. Optimizing the parts will optimize the whole.||A focus on the whole requires low levels of autonomy, with high levels of cooperation, consensus decisions, collective responsibility & recognition of interdependence among the parts. Because of synergy, optimizing the parts will not optimize the whole.|
* Summarized from Yoshida, K. 1989. Deming management philosophy: Does it work in the US as well as in Japan? Columbia Journal of World Business (Fall): 10-17.