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Responsibility Accounting

Responsibility accounting is a system that recognizes responsibility centers within an organization and assigns revenues and costs to those responsible. It enables accountability for financial results to be allocated to individuals. The objective is to measure the performance of each responsibility center by accumulating costs and revenues so deviations from targets like budgets can be attributed to responsible individuals. Key aspects include identifying responsibility centers, defining responsibilities, and preparing performance reports to provide information to management and evaluate individual performance. It aims to motivate managers and provide control while allowing local decision making.

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737 views

Responsibility Accounting

Responsibility accounting is a system that recognizes responsibility centers within an organization and assigns revenues and costs to those responsible. It enables accountability for financial results to be allocated to individuals. The objective is to measure the performance of each responsibility center by accumulating costs and revenues so deviations from targets like budgets can be attributed to responsible individuals. Key aspects include identifying responsibility centers, defining responsibilities, and preparing performance reports to provide information to management and evaluate individual performance. It aims to motivate managers and provide control while allowing local decision making.

Uploaded by

lulughosh
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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Responsibility Accounting: Responsibility accounting is a system under which manager are given decision making with authority and

responsibility for each activity occuring within a specific of the company. Under this system Manager is made responsible for the activities of segments. These segments may be called department or divisions. OR Responsibility accounting involves the creation of responsibility centres. A responsibility centre may be defined as an organi ation unit for whose performance a manager is held accountable. Responsibility accounting enables accountability for financial results and outcomes to be allocated to individuals throughout the organi ation. The ob!ective is to measure the result of each responsibility center. "t involves accumulating costs and revenues for each responsibility centre so that deviation from performance target #typically the budget$ can be attributed to the individual who is accountable for the responsibility centre. Responsibility Accounting is defined as : %harles T &orngreen ' (Responsibility accounting is a system of accounting that recogni es various responsibility centres throughout the organisation and reflects the plans and actions of each of these centres by assigning particular revenues and cost to the one having the pertinent responsibility. it is also called profitability accounting and activity accounting( Another definition for Responsibility Accounting: Responsibility accounting involves the creation of responsibility centres. A responsibility centre may be defined as an organi ation unit for whose performance a manager is held accountable. Responsibility accounting enables accountability for financial results and outcomes to be allocated to individuals throughout the organi ation. The ob!ective is to measure the result of each responsibility center. "t involves accumulating costs and revenues for each responsibility centre so that deviation from performance target #typically the budget$ can be attributed to the individual who is accountable for the responsibility centre. Elements/Features of Responsibility Accounting: "t is a system of accounting.

"t applies on various responsibility centres. "t is a tool for controlling the action of the e)ecutives it emphasis on human factor management. it is based on accounting information. The process of communication of information follows the principles of organisation. "t is an accounting system which collects and report both planned and actual accounting data in terms of sub units which are recogni ed as responsibility centres. Principles of responsibility Accounting:

The basic principles of responsibility accounting are '

Responsibility centres within an organisations are identified. *or each responsibility centre+ the e)tent of responsibility is defined. %ontrollable and non'controllable factors and activities at various levels of responsibility is specified and defined broadly. ,erformance reports are prepared by the responsible person to provide information to the users team.

Some steps of an effective Responsibility Accounting System: The organisation structure of the business should be divided into various centres like responsibility centre.

A sound organisation structure with strictly and well defined authority and responsibility should e)ist. Ade-uate+ bearable+ acceptable and Accurate budgets with full participation of concerned managers should be developed. Responsibility accounting should have top management support. "t should be supported understood and assigned by managers.

Merits of Responsibility Accounting:

"t introduces the sound system of control. .very person individually accountable for their work assigned and performed by them. .verybody knows what is e)pected o fhim. "t is effective tool of cost control and cost reduction. it is very useful in applying budgetary control and standard costing. "t help the management to make an effectives delegation of authority and re-uired responsibility as well. "t facilitates the management to set realistic plans and budgets.

Responsibility Centre and their Evaluation RESP !S"#"$"%& CE!%RES Revenue Centre E'A$(A%" ! ME%) *S /ale ,rice 0ariance /ale 1uantity 0ariance /ale Mi) 0ariance Cost Centre Raw Material 0ariances: 2abor 0ariances Overhead 0ariances Profit Centre "nvestment Centre 3ross ,rofit %ontribution Margin RO" Residual "ncome .conomic 0alue Added A*'A!%A+ES organi ation Motivate Manager to optimi e their performance ,rovide manager freedom to make local decisions Top management get more time for policy making and strategic planning /upports management and individual specialisation based on comparative Advantages An e,ample to e,plain Responsibility Accounting An integrated te)tile unit showed a net profit after ta) of Rs.565 million. "ts RO" #Return on "nvestment$+ was 76.89 which is much above the supposed cost of capital of 75.89. The company was operating three divisions: #i$ /pinning Unit+ #ii$ :eaving Unit and #iii$ a *inishing Unit. As of now+ it is not apparent who earned what. /o managers of the three departments would be asking for bonuses or rewards. *"SA*'A!%A+ES divisions Undue competition may become dysfunctional 4arrows down vision as overall company prospective are not considered by individual managers. May prove costly due to duplication ,roblem in coordination across divisions &elps manage a large and diversified May create conflicts between various

4ow suppose+ the company asks its accountants to prepare ;ivision'wise ,<2 account and present the same to the management for performance appraisal of the three managers. After considering division'wise performance+ who do you think deserve the bonus= Only the manager+ /pinning ;ivision+ deserves the bonus. Manager :eaving has !ust broken even by earning profit e-ual to cost of capital. Manager *inishing was really a drag on the company>s resources and its losses were only hidden in consolidated statements because of substantial contribution made by /pinning Unit. &owever+ this is over'simplified e)ample but it brings glaring facts to the notice of the management and other users of the accounts.

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