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Responsilbility Accounting

Responsilbility Accounting

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Published by Sophia Ali

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Published by: Sophia Ali on May 21, 2009
Copyright:Attribution Non-commercial


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“Responsibility Accounting collects and reports planned and actual accounting information aboutthe inputs and outputs of responsibility centers”.It is based on information pertaining to inputsand outputs. The resources utilized in an organization are physical in nature like quantities of materials consumed, hours of labour, etc., are called inputs. They are converted into a commondenominator and expressed in monetary terms called “costs”, for the purpose of managerialcontrol. In a similar way, outputs are based on cost and revenue data.
Responsibility Accounting must be designed to suit the existing structure of the organization.Responsibility should be coupled with authority. An organization structure with clear assignmentof authorities and responsibilities should exist for the successful functioning of the responsibilityaccounting system. The performance of each manager is evaluated in terms of such factors.
The main focus of responsibility accounting lies on the responsibility centres. A responsibilitycentre is a sub unit of an organization under the control of a manager who is held responsible for the activities of that centre. The responsibility centresare classified as follows:1) Cost Centres,2) Profit Centres and3) Investment centres.
1) Cost Centres
When the manager is held accountable only for costs incurred in a responsibility centre, it iscalled a cost centre. It is the inputs and not outputs that are measured in terms of money. In a costcentre records only costs incurred by the centre/unit/division, but the revenues earned (output)are excluded form its purview. It means that a cost centre is a segment whose financial performance is measured in terms of cost without taking into consideration its attainments interms of “output”. The costs are the planning and control data in cost canters. The performanceof the managers is evaluated by comparing the costs incurred with the budgeted costs. Themanagement focuses on the cost variances for ensuring proper control. A cost centre does notserve the purpose of measuring the performance of the responsibility centre, since it ignores theoutput (revenues) measured in terms of money. For example, common feature of productiondepartment is that there are usually multiple product units. There must be some common basis toaggregate the dissimilar products to arrive at the overall output of the responsibility centre. If thisis not done, the efficiency and effectiveness of the responsibility centre cannot be measure.
2) Profit Centres
When the manager is held responsible for both Costs (inputs) and Revenues (output) it is called a profit centre. In a profit centre, both inputs and outputs are measured in terms of money. Thedifference between revenues and costs represents profit. The term “revenue” is used in a differentsense altogether. According to generally accepted principles of accounting, revenues arerecognized only when sales are made to external customers. For evaluating the performance of a profit centre, the revenue represents a monetary measure of output arising from a profit centreduring a given period, irrespective of whether the revenue is realized or not.The relevant profit to facilitate the evaluation of performance of a profit centre is the pre–tax profit. The profit of all the departments so calculated will not necessarily be equivalent to the profit of the entire organization. The variance will arise because costs which are not attributableto any single department are excluded from the computation of the department’s profits and the

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