Literature week 3 – Financial Management
Young, D. (2014) Management Accounting in Health Care Organizations
Chapter 6 – responsibility accounting: an overview
Accounting staff prepare financial statements for use by outsiders and cost analyses for use
by line and senior managers. Also undertake ad hoc analyses for use in making alternative
choice decisions. Next to this, a third kind of accounting information assists management in
making decisions: information generated via the responsibility accounting system (i.e.
management control system). This information focuses on the costs (sometimes revenues)
that are controllable by various managers and are their responsibility.
A responsibility accounting system (RAS) is concerned with planning and controlling rather
than measuring the organization’s resources. Responsibility center: an organizational unit
headed by a manager charged with achieving certain agreed-upon results (they are
responsible for this). Key issues is how senior management will measure the group’s
financial performance. Responsibility accounting system is focuses on the managers who are
responsible for controlling the use of those resources. It requires senior management to
establish a network of responsibility centers. So you’d look at the individuals who control
resources. In cost accounting on the other hand, one looks at the specific resources used.
Effectiveness: accomplishing what the organization wants to do. Efficiency: accomplishing
something at low cost (ratio of outputs to inputs). Goal of a RAS is to ensure the effective
and efficient use of an organisation’s resources. There is variety in RAS’s of different
organisations. This is due to the difference in the amount of autonomy and flexibility that
1
, senior management gives to lower-level managers. Although there is not one single correct
way to design a RAS, managers find RAS principles useful in designing systems to assist the
organization with its planning and control activities. Contingency theory – the form of the
organization should fit with its’ environment. The type of RAS is heavily dependent on how
it is embedded into its organizational context.
Each responsibility center (a laboratory, sales office, department etc.) generally exists of an
aggregation of smaller responsibility centers. Five main types of responsibility centers:
- Revenue centers: manager’s financial performance measured in terms of the amount
of revenue earned by that center.
- Standard expense centers: financial performance measured by a flexible budget. The
computation for the flexible budget can be made more precise by dividing the
department’s expenses into their fixed and variable components. With this method
only the variable components are flexed; the fixed components remain at their
budgeted levels as long as the volume is within the relevant range. Flexible budget is
the actual units used x variable cost per unit. Then the total of that plus total fixed
costs makes for the total budget.
- Discretionary expense centers: FP measured in terms of total expenses incurred by
the center regardless of how much output the center produces. No easy way to
measure unit of output, so usually receive a fixed budget which the manager needs
to adhere to in the time period.
- Profit centers: FP measured in terms of total revenues of the center – total expenses.
- Investment centers: FP measured in terms of the total revenues – expenses, as % of
the assets used (so the ROA).
Senior management determines the best formal organizational structure, which is a
prerequisite to designing the network of responsibility centers. This design is very
important, as it facilities the organisation’s ability to achieve its goals. Without it this might
not be achieveable. Everyone needs to know their role and responsibility. Incentives must
be given too, senior management must design an appropriate motivation process for
rewarding good performance.
2
Young, D. (2014) Management Accounting in Health Care Organizations
Chapter 6 – responsibility accounting: an overview
Accounting staff prepare financial statements for use by outsiders and cost analyses for use
by line and senior managers. Also undertake ad hoc analyses for use in making alternative
choice decisions. Next to this, a third kind of accounting information assists management in
making decisions: information generated via the responsibility accounting system (i.e.
management control system). This information focuses on the costs (sometimes revenues)
that are controllable by various managers and are their responsibility.
A responsibility accounting system (RAS) is concerned with planning and controlling rather
than measuring the organization’s resources. Responsibility center: an organizational unit
headed by a manager charged with achieving certain agreed-upon results (they are
responsible for this). Key issues is how senior management will measure the group’s
financial performance. Responsibility accounting system is focuses on the managers who are
responsible for controlling the use of those resources. It requires senior management to
establish a network of responsibility centers. So you’d look at the individuals who control
resources. In cost accounting on the other hand, one looks at the specific resources used.
Effectiveness: accomplishing what the organization wants to do. Efficiency: accomplishing
something at low cost (ratio of outputs to inputs). Goal of a RAS is to ensure the effective
and efficient use of an organisation’s resources. There is variety in RAS’s of different
organisations. This is due to the difference in the amount of autonomy and flexibility that
1
, senior management gives to lower-level managers. Although there is not one single correct
way to design a RAS, managers find RAS principles useful in designing systems to assist the
organization with its planning and control activities. Contingency theory – the form of the
organization should fit with its’ environment. The type of RAS is heavily dependent on how
it is embedded into its organizational context.
Each responsibility center (a laboratory, sales office, department etc.) generally exists of an
aggregation of smaller responsibility centers. Five main types of responsibility centers:
- Revenue centers: manager’s financial performance measured in terms of the amount
of revenue earned by that center.
- Standard expense centers: financial performance measured by a flexible budget. The
computation for the flexible budget can be made more precise by dividing the
department’s expenses into their fixed and variable components. With this method
only the variable components are flexed; the fixed components remain at their
budgeted levels as long as the volume is within the relevant range. Flexible budget is
the actual units used x variable cost per unit. Then the total of that plus total fixed
costs makes for the total budget.
- Discretionary expense centers: FP measured in terms of total expenses incurred by
the center regardless of how much output the center produces. No easy way to
measure unit of output, so usually receive a fixed budget which the manager needs
to adhere to in the time period.
- Profit centers: FP measured in terms of total revenues of the center – total expenses.
- Investment centers: FP measured in terms of the total revenues – expenses, as % of
the assets used (so the ROA).
Senior management determines the best formal organizational structure, which is a
prerequisite to designing the network of responsibility centers. This design is very
important, as it facilities the organisation’s ability to achieve its goals. Without it this might
not be achieveable. Everyone needs to know their role and responsibility. Incentives must
be given too, senior management must design an appropriate motivation process for
rewarding good performance.
2
