Responsibility Accounting

Responsibility Accounting is a specific technique of managerial control wherein responsibilities of various individuals or groups are identified in terms of work, revenue or cost so that the concerned person or group may be held responsible for cost variances, if any. The main objective of this approach is that each person should be given work according to his ability and aptitude and each work should be assigned to persons possessing the ability, experience and capacity required for that work. On the whole responsibility accounting is a system of management accounting that recognizes various responsibility centers throughout the organization. It reflects that plans and actions of each of these centres by assuming particular revenues and costs to the one having pertinent responsibility. Responsibility Accounting is that type of Management Accounting that collects and reports both planned and actual accounting information in terms of responsibility centres Robert N. Anthony Responsibility Accounting is a system under which costs are accumulated and reported at each level of responsibility so that the accounting and costs data may be used by the management at each level in controlling the operations and their costs. R. M. Bhandari This concept (i.e. responsibility accounting) encompasses an accounting system in which the information and data are gathered and reported in a manner closely related to the responsibility structure of the enterprise. Anderson

Steps involved in Responsibility Accounting

Responsibility accounting is adopted as a mechanism of control as it helps the management in achieving organizational goals. From this point of view, the following steps are involved in this accounting: 1. Division into Responsibility Centres: First of all, the organization is divided into responsibility centres. Each centre is put under the charge of a responsibility manger, who is held responsible for the performance of his department. 2. Determination of Targets: The budget or targets of each responsibility centre are set in. It is done in consultation with the manager of the responsibility centre, so that he may be able to supply necessary facts and figures about his department. It is also necessary that the targets of responsibility centres are properly communicated to them. 3. Recording and Appraisal of Performance: The actual performance of each responsibility centre is recorded and communicated to the manager concerned. Moreover, the actual performance is compared with the goals set in the budget. This step helps in evaluation of performance of these centres. 4. Communication of poor performance: If the actual performance of a centre is less than the standard set down, the variances are communicated to the top management. The names of those persons, who are responsible for such performance, are also conveyed so that responsibility may be fixed.

5. Corrective Action: Necessary corrective measures are taken at proper time, so that the work does not suffer in future. The information of such measures is given to concerned responsibility may be fixed for it.

Responsibility Centres
A responsibility centre is a sub-unit of an organization under the control of a manager who is held responsible for the activities of that centre. This responsibility may be in form of quantum of production, optimum utilization of resources, efficiency in cost of production or quantum of sales. The responsibility centres for control purposes may be classified into three types: 1. Expense Centre or Cost Centre, 2. Profit Centre, 3. Investment Centre, 4. Revenue Centre. 1. Expense Centre: These are centers in which managers are responsible for costs incurred but have no revenue responsibilities. The performance of each centre is evaluated by comparing the actual amount of expenses/cost with the budgeted amount. It may be mentioned that while judging the performance of such centres, it is essential to differentiate between controllable and noncontrollable costs because a manager responsible for a particular cost centre is responsible for controllable costs only. 2. Profit Center: Such centre is also called contribution Margin Centre. It is a centre whose performance is measured in terms of both expenses incurred and revenue it earns taking the difference between revenues and expenses as profit. The manager of such centre holds responsibility of both, for revenue and expenses. 3. Investment Centre: It is the centre whose performance is measured not by profits only but is related to investments affected also. In other words, the manager of the centre is held responsible for cost and revenue as well as investment in assets, which are being used at the centre. The return on investment(ROI) serves as a criterion for the performance evaluation of the manager of an investment centre.

Advantages of Responsibility Accounting

1. 2. 3. 4. 5. 6. 7. 8. 9. Assignment of Responsibility. Improvement in Performance. Helpful in Cost Planning. Delegation and Control. Helpful in Decision Making. Cost Control. Basis of Appraisal of Managers. Awareness among Supervisory Staff. Management by Exception.