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Application of Responsibility Accounting

Step 1: Identifying what part of the organization have

responsibility for each objectives

Step 2: Developing measures of achievement of


Step 3: Create reports of these measures by

Organization’s subunit or responsibility centers.

Cost Centers

Revenue Centers

Profit Centers

Inventory Centers
Factors Cost Center Revenue Center Profit Center Investment Center

Controlled by Costs Revenues Costs, Revenues Costs, Revenues &

central significant control
management over investment

Not Controlled by Revenues, Costs, Investment in Investment in

central Investment in inventory & inventory &
management inventory & Fixed Assets Fixed Assets
Fixed Assets

Measured by the Costs relative to Revenue relative to Profit relative to Return on investment
Accounting some target some target some target relative to some
System target

Not Measured by the Performance on Performance on Performance on Performance on critical

Accounting critical success critical success critical success success factors other
System factors other factors other factors other than Return on
than cost than Revenue than Profit Investment
responsibility center
President's Responsibility Report
Budget Actual Variance
President’s Office $50,000 $52,000 $2,000 U
Controller 25,000 24000 1,000 F
Production Vice President 18,00,000 18,29,000 29,000 U
Sales Vice President 525000 55000 25,000 U
Total Controllable Costs $24,00,000 $24,55,000 $55,000 U

Product Vice-President’s
Responsibility Report
Budget Actual Variance
Vice President’s office $10,000 $11,000 $1,000 U
Cutting department 500,000 4,98,000 2,000 F
Machining department 9,90,000 10,00,000 10,000 U
Assembly department 3,00,000 3,20,000 20,000 U
Total Controllable Costs S18,00,000 $18,29,000 $29,000 U

Cutting Department
Responsibility Report
Budget Actual Variance
Direct Material $2,50,00 $2,53,000 $3,000 U
Direct Labor 1,00,000 90,000 10,000 F
Variable overhead 50,000 52,000 2,000 U
Fixed overhead 1,00,000 1,03,000 3,000 U
Total Controllable Costs $5,00,000 $4,98,000 $2,000 F
Advantages of Responsibilities
 It Provides a way to manage an organization
that would otherwise be unmanaged.
 Assigning responsibility to lower level managers allows higher level managers to pursue other
activity such as long term planning and policy making.

 It provides a way to motivate lower level

managers & workers.
Disadvantages of
Responsibilities Accounting
Responsibility Accounting
Return on Investment (ROI)
Formula for calculating the ROI

Net Operating Income

Average Operating Asset

Problems of ROI

When managers are told to increase ROI,

they may not know how to increase ROI

Committed costs, over which managers

has no control
Residual Income
Calculation of Residual Income
Residual Income
Average operating Assets 1,00,000

Net operating income 2000

Minimum required rate of15000

return@15% of average
operating asset
Residual Income 5000
Responsibility Accounting Measurement



Problem of ROI and RI

Calculation of EVA
Net profit after taxes 184mil
Cost of capital @9% 104mil
EVA 80mil
EVA = (ROI-WACC) x Invested capital
Qualitative measurement Tools of
Responsibility Accounting

The Balance scorecard

Control of Quality

Control of cycle time

Control of productivity
Is responsibility Accounting
building incapability

Section – I explains why and how
management can be related to

Section – II Summarizes how they

are affected by management?
Management and fragility

Fragility to Control Fragility to decision making

Political Fragility Cognitive Fragility

Pragmatic Fragility
Management and fragility

Fragility to decision making

Cognitive Fragility

Pragmatic Fragility

Fragility to make good decisions

Political Fragility
Fragility not to obeyed, not to be complied

 We want to say that the agency theory is based on a only restricted vision of fragility
related to lack of will to do. It is not covering multitude of situation where the problem is
not that the agent does not want, but his capacities are fragile.
The myth of Medusa and the
contradictory approach to management

It emphasizes the radical paralysis faced by men in front of

It shows necessity of the intervention of someone else in

relation between men and contradiction in order to help
Convince himself of his own capacity

The mediation of representation is essential in this

Being able to regard oneself as the true author of ones own

I can say
Being able to say

I Can do
Being able to do

I can narrate
An acceptable, intelligible interpretation
of a fact through narration
Typical Sense
 You are capable only when you are recognized by others
as capable.

 You are capable when you feel capable.
Relationship between Imputability &
Responsibility Accounting

In responsibility Accounting
Imputability is a relation going from the principal to
the agent.
Problems of this Concept

Responsibility for uncontrollable factors raises the

question of capacity

It does not specifically help managers to feel capable

Managers are underspecified, selfless and bodiless

Is responsibility Accounting making the
managers a complete incapable