Responsibility accounting

MEANING AND DEFINITION OF REPONSIBILITY
ACCOUNTING
• Responsibility accounting is a system of accounting
that recognizes various responsibility centres
throughout the organization and actions of each of
these centres by assigning particular revenues and
costs to the one having the pertinent responsibility. It
is also called profitability accounting and activity
accounting.
Charles,
T.Horngreen
• Responsibility accounting is that type of
management accounting that collects and reports
both planned actual accounting information in terms
of responsibility centres.”
Anthony

FEATURES OF RESPONSIBILITY ACCOUNTING
1. INPUTS AND OUTPUTS OR COST AND REVENUE: The implementation
and maintenance of responsibility accounting system is based upon
information relating to inputs and outputs. Inputs expressed In the
monetary term are known as cost and output expressed in monetary
terms are called revenue.
2. PLANNED AND ACTUAL INFORMATION OR USAGE OF BUDGETING:
Effective responsibility accounting requires both planned and actual
financial information . It is not only the historical cost and revenue
data but also the planned future data which is essential for the
implementation of responsibility accounting system . It is through
budget that responsibility for implementing the plans is
communicated to each level of management.
3. IDENTIFICATION OF RESPONSIBILITY CENTRES : For effective control
,a large firm is usually ,divided into meaningful segments
,departments or divisions of organization are called responsibility
centres . Responsibility centres are usually classified under three

4. RELATIONSHIP BETWEEN ORGANISATION STRUCTURE AND RESPONSIBILITY
ACCOUNTING SYSTEM :A sound organization structure with clearcut lines
of authority –responsibility relationship is a prerequisite for establishing a
successful responsibility accounting system.Further ,responsibility
accounting system must be so designed as to suit the organisation
structure of the organisation.
5. ASSIGNING COST TO INDIVIDUALS AND LIMITING THEIR EFFORTS TO
CONTROLABLE COSTS : Only those costs and revenues over which an
individual has a definite control can be assigned to him for evaluating his
performance .Responsibility accounting has an appeal because it
distinguishes between controllable and uncontrollable cost
 CONTROLABLE COST : are those costs which can be controlled or
influenced by a specified person or a level of management of an
undertaking.
 UNCONTROLABLE COST : are those which cannot be so controlled or
influenced by the action of specified individual or undertaking.

7. PERFORMANCE REPORTING :As responsibility account is a control device
.A control system to be effective should be such that plans must be reported
at the earliest so as to take corrective action for the future. The deviations
can be known only when performance is reported . Thus ,responsibility
accounting system is focused on performance reports also known as
‘responsibility reports’ ,prepared for each responsibility unit.
8. PARTICIPATIVE MANAGEMENT: The function of responsibility accounting
system becomes more effective if participative or democratic style of
management is followed ,wherein ,the plans are laid or budgets/standards
are fixed according to the mutual consent and the decisions reached after
consulting the subordinates. It provides motivation to the workers by
ensuring their participation and self imposed goals.
9. MANAGEMENT BY EXCEPTION : An effective responsibility accounting
system must provide for management be exception, i.e., it should focus
attention of the management on significant deviations and not burden them
with all kinds of routine matters condensed reports requiring their attention
must be sent to them particularly at higher levels of management.

STEPS INVOLVED IN RESPONSIBILITY
ACCOUNTING
1. The organisation is divided into various responsibility centres each
responsibility centre is put under the charge of responsibility manager.
The manger are responsible for the performance of their department.
2. The targets of each responsibility centre are set in. the targets or goals
are set in consultation with the manager of the responsibility centre so
that he may be able to give full information about his department. The
goal of the responsibility centres are properly communicated to them.
3. The actual performance of each responsibility centre is recorded and
communicated to the executives concerned and the actual performance
is compared with goals set and it helps in assessing the work of these
centres.
4. If the actual performance of a department is less than the standard set,
then the variances are conveyed to the top management . The names of
those persons who were responsible for that performance are also
conveyed so that responsibility may be fixed.

5. Timely action is taken to take necessary corrective measures so that
the work does not suffer in future. The directions of the top level
management are communicated to the concerned responsibility
centre so that corrective measure are initiated at the earliest.

TYPES OF RESPONSIBILITY CENTRES:
1.Cost or Expense Centre: Cost centres are segments in which managers are
responsible only for the cost incurred but have no revenue responsibilities. The
performance of a cost centre is measured in terms of quantity of inputs used in
producing a given level of output. A comparison between the actual input used and
predetermined budgeted inputs is made to determine the variances which represent
the efficiency of the cost centre. Cost centres can be further classified on the basis
of
(a)Types of cost
(b)Functions performed
Expense/Cost centre
(classificationon basis of type of cost)
Engineered expense
centres
Discretionary expense
centre

EXPENSE OR COST CENTRE
(CLASSIFICATION ON FUNCTIONAL BASIS)
Production cost
centre
Service cost
centre
Ancillary cost
centre
Administrative
and support
centre
Research and
Development
centre
Marketing
centre
2.PROFIT CENTRE :
Responsibility centres may have both inputs and outputs. The inputs are
taken as cost and outputs are revenues. The difference between the revenue
and cost gives the profit. When a responsibility centre gets revenue from
output, it will be called a profit centre .When the output is meant for
outsiders ,then the revenue will be measured from the price charged from
customers and if the output is meant for other responsibility centre ,then the
management takes a decision whether to treat it as profit centre or not.

SUITABILITY OF PROFIT CENTRE :
Establishment of profit centre may be suitable if the following conditions are
satisfied:
There exist a decentralized form of organization.
The divisional manager has access to all relevant information needed for decision
making.
The divisional manager is sufficiently independent.
Internal transfer of output from one division/centre to another division are not
significant.
A definite measure of performance is available.
ADVANTAGES OF PROFIT CENTRE :
Establishment of profit centre offers the following advantages
It encourages initiative as a manager of profit centre is subject to a lesser degree of
control of the top management.
It may improve the quality of decisions.
It quickens the decision making process as these need not be referred to top
management.
It saves time of the top management.
It enhances profit consciousness in the entire organization.
It promotes competition amongst managers of various profit centres and improves
their performance.
It helps in training divisional managers for top management responsibilities.

DISADVANTAGES OF PROFIT CENTRES:
Loss of top management control over different divisions.
Faulty decision at divisional level .
Conflict among individual interests of divisions and the organization as a whole.
Too much emphasis on short term profitability
Increased cost due to multiple requirement of facilities and personnel at each profit
centre.
Transfer pricing problems amongst profit centres.
INVESTMENT CENTRE:
“An investment centre is an entity segment in which a manager can control not only
revenue and cost but also investment ”.The manager is made responsible for properly
utilizing the assets used in his centre and earn fair return on the amount employed in
assets in his centre .The performance of an investment centre can be measured by
relating profit to the investment base. The two commonly used methods are as
follows:
1.RETURN ON INVESTMENT/CAPITAL EMPLOYED
It establishes the relationship between profits and capital employed.The
term capital employed refers to the total investment made in the investment
centre/business .
RETURN ON CAPITAL EMPLOYED = NET PROFIT(BEFORE TAX)CAPITAL EMPLOYED
100

Or, ROI = NET PROFIT
SALES
SALES
CAPITAL
EMPLOYED
100
Or, ROI = NET PROFIT RETIO CAPITAL TURNOVER RATIO
(WHERE , NET PROFIT = TOTAL ASSETS
– CURRENT LIABILITIES)
2.ECONOMIC VALUE ADDED/RESIDUAL INCOME APPROACH
Economic value added is a measure of performance evaluation the was originally
employed by Stern Stewart and Co . It is a popular method used to measure the
surplus value created by an investment or portfolio of investments . It is considered
to be a better measure of divisional performance as compared to return on
investment or assets.
EVA = NET OPERATING PROFIT AFTER TAX – COST OF CAPITAL
CAPITAL INVESTED
Or, EVA = CAPITAL EMPLOYED (Return on investment- cost of capital)
According to this approach an investment can be accepted if surplus(EVA) is
positive . It is only the positive EVA that will add value and enhance the
wealth oF shareholders.

ADVANTAGES OF RESPONSIBILITY ACCOUNTING
1. Assigning of Responsibility: Each and every individual in the
organization is assigned some responsibility and they are accountable
for there work. Everybody knows what is expected of him. The
responsibility can easily be identified as satisfactory and unsatisfactory
performances of various persons are known. Nobody can shift
responsibility to anyb0ody else if something goes wrong. So, under this
system responsibility is assigned individually.
2. Improves Performance: The assigning of tasks to specific persons acts
as a motivational factor too. The persons in charge for different
activities know that their performance will be reported to the top
management. They will try to improve their performance. On the other
hand, it acts as a deterrent for low performance also because persons
know that they are accountable for their work and they will have to
explain for their low performance.
3. Helpful in Cost Planing; Under the system of responsibility accounting ,
full information is collected about costs and revenues. This data is
helpful in planning of future costs and revenues, fixing of standards and
preparing of budgets.

4. Delegation and Control: This system enables management to delegate
authority while retaining overall control. The authority is delegated
according to the requirements of the task assigned. On the other hand,
responsibility of various persons is fixed which is helpful in controlling their
work. The control remains with top management because performance of
every cost centre is regularly reported to it. So management is able to
delegate authority and at the same time to retain control.
5. Helpful in Decision-Making: Responsibility accounting is not only a
control device but also helpful in decision-making. The information
collected under this system is helpful to management in planning its future
actions. The past performance of various cost centres also helps in fixing
their future targets. So this system enables management to take important
decisions.

LIMITATIONS ON RESPONSIBILITY
ACCOUNTING
THE PREREQUISITES FOR A SUCCESSFUL RESPONSIBILITY
ACCOUNTING SYSTEM ARE :
a. A SOUND ORG. STRUCTURE WHERE DIVISIONS CAN BE
IDENTIFIED CLEARLY AS RESPONSIBILITY CENTER
b. [ROPER DELEGATION OF WORK AND RESPONSIBILITY
c. A PROPER SYSTEM OF REPORTING
IF THESE CONDITIONS ARE ABSENT, IT IS DIFFICULT TO HAVE A
RESPONSIBILITY ACCOUNTING SYSTEM
THE TRADITIONAL WAY OF CLASSIFICATION OF EXPENSES
NEEDS TO BE SUBJECTED TO A FURTHER ANALYSIS WHICH
BECOMES DIFFICULT
IN INTRODUCING THE SYSTEM, CERTAIN MANAGERS MAY
REQUIRE ADDITIONAL CLASSIFICATION PARTICULARLY IF THE
RESPONSIBILITY REPORTS ARE DIFFERENT FROM ROUTINE
REPORTS

BY
PRIYA
RIFAT
IMRAN
SABARINATH SURYAPRAKASH
PRAVEEN KUMAR

Responsibility accounting

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