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Responsibility Accounting

The control which tries to ensure that managers are only held responsible for activities that are under their control. Responsibility accounting control is implemented by creating different investment centers within a single organization. The performance measures for these centers are

Return on Investment

It is calculated to measure performance regarding total investment made to earn the profit and actual profit being earned.

Return on investment = (Profit before interest and tax / Total Capital Employed ) * 100

Residual Income:

It is the measure of profitability of an investment center after deducting interest cost of capital.

Residual income = Accounting profit – Interest on capital employed

Economic value added developed by Stern Stewart:

It is used to measure true value that has been added to the business during the period.

Economic Value Added = Net Operating Profit after Tax – Capital charges


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