Page 215 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes Continuing up the organizational chart, the VP of Operations will focus on summary data
from store management, catering management, and procurement. Notice that the “stores”
column (below) is derived from information found in the “combined” column (above).
Again, note the presence of fixed costs that are not traceable to any specific operating
segment ($1,300,000). Even though this cost is not assigned to a specific segment, it remains
a cost for which the VP of Operations is responsible.

The next step in the corporate ladder is the CEO. This individual is evaluated on the overall
financial statement outcomes. Although the CEO would have access to any and all of the
reports from within the organization, they would mostly focus on the reports emanating
from each vice president’s unit.
Questions
1. After analysing the case above, do you think all the organizations, especially those
in catering/hoteliering business, should run on the same model of responsibility
accounting? Support your argument with reasons.
2. What problems do you see in responsibility accounting at OTL Cuisines Inc.?

Source: www.otlcatering.com

Self Assessment

Fill in the blanks:
12. Assigning ........................ to lower level managers allows higher level managers to pursue
other activities.

13. Segment managers and individual workers within segments tend to ........................ to
optimize their ........................ performance measurements.
14. The accounting system of the company supports preparation of an ........................ for each
responsibility center.
15. An implicit assumption of responsibility accounting is that separating a company into
responsibility centers that are controlled in a ........................ manner is the way to optimize
the system.

10.5 Transfer Pricing

Large business units are usually organised into different divisions for better control. In such a
situation, if one division supplies its finished output as input to other division, there arises a very
important issue. The issue being at which price should be transferring unit transfer its product or
service. Such price is known as transfer price.
Transfer prices are the amounts charged by one segment of an organization for a product or
service that it supplies to another segment of the same organization.

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