Page 212 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 10: Responsibility Accounting and Transfer Pricing

1. In addition, assigning responsibility to lower level managers allows higher level managers Notes
to pursue other activities such as long term planning and policy making.
2. It also provides a way to motivate lower level managers and workers.
3. Managers and workers in an individualistic system tend to be motivated by measurements
that emphasize their individual performances.

However, this emphasis on the performance of individuals and individual segments creates
what some critics refer to as the “stovepipe organization.” Others have used the term “functional
silos” to describe the same idea.
1. Information flows vertically, rather than horizontally.
2. Individuals in the various segments and functional areas are separated and tend to ignore
the interdependencies within the organization.
3. Segment managers and individual workers within segments tend to compete to optimize
their own performance measurements rather than working together to optimize the
performance of the system.
Thus it can be said that an implicit assumption of responsibility accounting is that separating a
company into responsibility centers that are controlled in a top down manner is the way to optimize
the system. However, this separation inevitably fails to consider many of the interdependencies
within the organization. Ignoring the interdependencies prevents teamwork and creates the need
for buffers such as additional inventory, workers, managers and capacity. Of course, a system
that prevents teamwork and creates excess is inconsistent with the lean enterprise concepts of
just-in-time and the theory of constraints. For this reason, critics of traditional accounting control
systems advocate managing the system as a whole to eliminate the need for buffers and excess.
They also argue that companies need to develop process oriented learning support systems,
not financial results, fear oriented control systems. The information system needs to reveal the
company’s problems and constraints in a timely manner and at a disaggregated level so that
empowered users can identify how to correct problems, remove constraints and improve the
process. According to these critics, accounting control information does not qualify in any of
these categories because it is not timely, disaggregated, or user friendly.
This harsh criticism of accounting control information leads us to a very important controversial
question. Can a company successfully implement just-in-time and other continuous improvement
concepts while retaining a traditional responsibility accounting control system? Although the
jury is still out on this question, a number of field research studies indicate that accounting based
controls are playing a decreasing role in companies that adopt the lean enterprise concepts. In a
recent study involving nine companies, each company answered this controversial question in
a different way by using a different mix of process oriented versus results oriented learning and
control information. Since each company is different, a generalized answer to this question for all
firms in all situations cannot be provided.


Case Study Out to Lunch Cuisine Inc.

Out to Lunch was established in Vancouver, Canada, in 1985. It is a rapidly growing fast-
food restaurant chain.
Their business model revolves around a uniquely flavored hamburger, and a very simple
menu consisting of a hamburger, fries, and drinks. They provide simple “round number”
pricing, few products, and rapid service. Out to Lunch also has a catering service for
sporting events, corporate outings, and similar occasions.
Contd…

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