RESPONSIBILITY�ACCOUNTING

INTRODUCTION

Responsibility Accounting is one of the most recent developing function of management accounting. It’s a system of control where responsibility is assigned for control of costs and persons are made responsible for the control of cost.

MEANING

Responsibility accounting is a system that complies revenue, cost and profit information at the level of those individual managers who are responsible for them. Proper authority is given to the persons so that they are able to keep up their performance.

DEFINITION

“Responsibility Accounting is that type of management accounting that collects and reports both planned actual accounting information in terms of responsibility centre”

- Anthony And Ree

Features of Responsibility Accounting

• Input & Output OR Costs & Revenue
• Planned And Actual Information OR Use Of Budgeting
• Identification Of Responsibility Centres
• Relationship between organisation structure and Responsibility Accounting
• Transfer Pricing Policy
• Assigning Costs to Individuals And Limiting Their Efforts To Controllable Costs
• Performance Reporting
• Participating Management

Objectives of Responsibility Accounting

• 1. Accountability: Responsibility Accounting makes concerned people accountable for the results. Division needs to prepare the reports and send them to the manager. In this way, personnel takes care of all the necessary things, as they know they have to give proper reports to the managing authorities.
• 2. More Responsible Personnel: Responsibility Accounting makes the company’s personnel more responsible for the organisation’s performance. Responsibility accounting ensures better results, growth, proper documentation, effective and efficient personnel, and more accountable and responsible employees.
• 3.Minimisation of Costs: Responsibility Accounting ensures the minimisation of costs at various levels in order to avoid wastage of resources. A cost center ensures a cut in costs and makes the overall cost system effective.
• 4. Maximization of Profits: Under Responsibility Accounting, the main goal of the profit center is to increase the profits of the organization over different periods of time, which improves the overall financial position of the company.

Steps In Responsibility Accounting

• Organisation is divided into various centres.
• Targets for each centre are set.
• Actual performance of each responsibilty centre is recorded.
• Comparing actual performance with goal set.
• Finding the variations.
• Action to be taken for improving performance.

Responsibility Centres

A responsibility centre is a specific unit of the organisation assigned to a manager who is held responsible for its oprations and resources. In other words, for effective control, a large firm is usually divided into departments and divisions. These sub-units or divisions of the organisation are called responsibility centres.

Types Of Responsibility Centres

Cost Centre

In this centre,

managers are made

responsible for the

Cost incurred in

the centre

It is cosider the both

revenue and cost

because the difference

between revenue and

cost incurred, will be

the profit.

PROFIT CENTER

Cost vs Profit Centers

• The main difference between the two is that a cost center is only responsible for its costs, while a profit center is responsible for both its revenues and costs. Another difference is that cost centers tend to be organizationally simple, while profit centers are more likely to have a complex structure. Both concepts are used in a business where senior management wants to drive responsibility down into the organization.

Revenue Centre

This is where the

the manager is

totally concern

with raising revenue

with no responsibility

of cost.

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Investment Centre

Its an entity in which a manager can control

not only cost and revenue but also

Investments

​

Return on investment = Net Profit *100

Capital Employed

​

EVA = Capital Employed (ROI - Cost of capital)

Advantages Of Responsibility Accounting

• Assigning of Responsibility
• Improve Performance
• Reduction In Cost
• Control Of Management
• Helpful In Decision Making
• Helpful In Achieving The Goal

​

Disadvantages Of Responsibility Accounting

• It is a Costly System of Accounting.
• Possibility of Employee Frustration.
• Only For Controllable Costs.
• May Lack Accuracy.
• It is a Complex System.
• Not Suitable For Small Organizations.
• Defective Reporting system
• Unrealistic goals

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