Responsibility Accounting

PGDM II

Introduction
The role of management is to plan, organize,

integrate, and inter-relate the organizational activities in such a way so that it can support to achieve organizational objectives. This role is facilitated through management control systems. A control system is a set of formal and informal systems to assist the management in steering the organization towards its goals. Control systems are employed in all organizations.

Management Control Systems

The purpose of management control system assists the management in coordinating the activities of the organization and in steering of those activities towards the achievement of the firms overall purposes, goals, and objectives.

Control System

Set of formal and informal system

Assist the management in steering the organisaiton

Accounting Database For Control

Financial Accounting review firms progress to date Cost Accounting cost data for planning, control

and decision making Decision Accounting helps to arrive at right decision Control Accounting permits inclusion of goals other than profit Responsibility Accounting conveys costing information to manager of responsibility centre

Responsibility Accounting
Responsibility accounting emphasises division of an

organisation among different sub units in such a way that each sub unit is the responsibility of an individual manager.
In this way each manager is responsible for the

revenues of the unit under his charge and is also accountable for his actions.

Major Considerations
All inputs and outputs are expressed in monetary

terms as far as possible.

Though a managers total performance depends on a

variety of measures such as quality control, morale of workers etc. but for responsibility accounting it is restricted to financial performance.

Responsibility Centres
Responsibility centre can be defined as a unit of

function of an organisation headed by a manager having direct responsibility for its performance.
Five

types of responsibility centres can be established for management control purposes -- a cost or expense centre; a revenue centre; a profit centre; an investment centre and contribution centre.

Cost Centre
A cost centre is a smaller segment of activity or area

of responsibility for which costs can be accumulated.

Responsibility in a cost centre is restricted to costs

only.
In a manufacturing environment, all production

centres and service centres are termed as separate cost centres.

Revenue Centre
The revenue centre is the smallest segment of

activity or an area of responsibility for which only revenues are accumulated.

A revenue centre has the primary responsibility of

generating revenues.
Most of the sales offices, for example, are considered

revenue centres.

Profit Centre
A profit centre is a segment where both revenues and

costs are accumulated.

In general terms, most responsibility centres are

viewed as profit centres -- taking the difference between revenues and expenses as profit.
The manager holds responsibility for both revenues

and expenses. The main objective of profit centres manager is to maximise the centres profit

Investment Centre
Investment centre is a segment of activity for area

held responsible for both profits and investment.

For planning purposes, the budget estimate is a

measure of rate of return on investment variance.

In short, the objective function of an investment

centre is to maximise the centres return on investment.

Contribution Centre
Contribution Centre is a segment of activity or area

of responsibility for which both revenues and variable costs are accumulated.
The main objective of contribution centre manager is

to maximise the centres contribution.

Inter-Profit Centre Relations

Setting transfer price

Transfer price is the value of transfer of services or goods between different centres

Fairness in setting transfer price

Methods for fixing the transfer price

Cost based prices

cost Actual Cost of Production Full Cost Full Cost plus Mark up Standard Cost Market based prices Negotiated prices

Variable

Limitation of Responsibility Accounting

It is difficult to prepare an organisation chart,

which clearly delineates lines of responsibility and grants authority. Departments are so intermingled and interdependent that it is usually impossible to draw distinct responsibility lines. It requires proper meshing of organisational chart and chart of accounts. Individual interest may conflict with organisational interest and serious problems of implementation may occur.

Thank You