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“Behavioral Aspect Of Responsibility Accounting”

WHAT IS RESPONSIBILITY ACCOUNTING Responsibility accounting is the term used to described an accounting system that plans, measures, and evaluates organizational performance along lines of responsibilities. Revenue and cost are accumulated and reported by centers of responsibility. Responsibility centers are segments of the organization that are accountable for certain task. Responsibility accounting is management accounting’s answer to the common sense knowledge that business affairs can be most effectively controlled by controlling the people responsible for carrying out the operations.

RESPONSIBILITY ACCOUNTING VERSUS CONVENTIONAL ACCOUNTING Responsibilityaccounting does not involve any deviations from generally accepted accounting priciples. It differs from conventional accounting in the way operations are planned and in the way accounting, data are classified by their nature or function and are not delinated by individuals responsible for their occurance and control. Conventional accounting data are therefore of limited value to managers in monitoring the efficiency of their day-today activities. Responsibility accounting improves the relevance of accounting information by establishing a framework for planning, data accumaltion, and reporting that is accordance with each company’s specific organizational structure and hierarchy of accountabilities. Responsibility accounting, therefore, does not allocate joint cost to the segments that benefit from them but charges them to the individual in the segment that initiates and controls their occurance.

THE RESPONSIBILTY NETWORK Responsibility accounting is based on the premise that all cost are controllable and that the problem is only establishing the point of their controllabilty. Most organizations have a hierarchy of such responsibility centers. At the top is the president or chief executive officer, who is responsible to the owners for the overall profitability of the enterprise. To create an efficient responsibilty network structure, responsibilties and scopes of authority for every individual, from the top executive down to the lowest level employees, must be logical and clearly defined.

TYPES OF RESPONSIBILITY CENTERS Once delineated, individual responsibilty centers function as the framework for measuring and evaluating the performance of segment managers. Responsibility centers are grouped into four categories, each reflecting the range and disrection over revenues and expenses and the extent of controls of the manager in charge.  Cost centers are areas of responsibility that produced a produce a product or render a sevice. Cost centers are a widely used from of responsibilty centers. In manufacturing firms, both production and service departments are examples of cost centers.   Revenue centers if the primary responsibilty of segment managers is revenue generation, their segments should be treated as revenue centers. Profit centers are segments where managers have control over both revenues and expenses, managers are valuated on the basis of their efficiency in generating revenue and controlling cost.  Investment centers. Managers of investment centers are responsible for investment in asset as well as control over revenue and expenses. They are responsible for attaining spesific contribution margin and profit goals and for efficiency in asset utilization.  Correlation with organizational structrure. To function properly, responsibility centers must coincide as closely as possible with the organizational structure. The various approaches can be classified as vertical or horizontal structures. 1) Vertical structure. The overall responsibility for the production, sales and finance function are assigned to vice president, who delegate their responsibilities down the hierarchy. 2) Horizontal structure If the intention is to assign profit and investment responsibility to several viepresident, a horizontal structure for delegation of responsibilities is be suited. 3) Choice of structure The type of structure chosen will influence the network of responsibility centers, which in turn serves as a framework for data flow and reporting requirments.

FIXING RESPONSIBILITY After selecting the type of organizational structure, the next crucial task in constructing a behaviorally effective responsibility system is to delineate responsibilities.

Most people welcome responsibility and the challenges it represents. Being held responsible for something makes people feel competent and important. It implies decision making authority and may motivate them to improve their performance. Responsibility is a job satisfier, without it, morale will suffer. Individuals might have only limited discretion and control over the resources necessary to carry out the tasks for which they are responsible. Staff people who are not links in the chain of command and who have no specifically assigned responsibilities do not fit readily into any responsibility structure. PLANNING, DATA ACCUMULATION, AND REPORTING BY RESPONSIBILITY CENTERS Responsibility Budgets The characteristic of responsibility budgets is that responsibility center managers are assigned performance goals only for those revenue and cost items over which they have control. The budgetary process is most effectively started at the lowest organizational or network level for which budgets are to be prepared and then passed upward through the chain of command in a pyramid fashion. Data Accumulation This requires a three dimensional classification of cost and revenues during the data accumulation process. Costs are classified first by responsibility center; secondly, within each center, by whether they are controllable or noncontrollable; and third, by cost types, or by line items, such as salaries, supplies, materials, and rents. This type of data accumulation provides management with information pertinent to several dimensions of its operations. Responsibility Reporting The end products of responsibility accounting systems are periodic responsibility or performance reports. To enhance efficiency, responsibility reporting systems should be based on the so –called “pyramid reporting” or “telescoping”principle. Responsibility accounting’s major contribution is that it enables management to control cost and efficiency by assigning responsibility for the cost to the people who carry out the various tasks. BEHAVIORAL ASSUMPTIONS OF RESPONSIBILITY ACCOUNTING Responsibility planning data accumulation, and reporting systems are based on several assumptions concerning operational and human behavior, including : 1. Management by exception (MBE) is sufficient to control operations effectively. Managers should concentrate their attention on areas where the actual results deviate substantially from budgeted or standards goals. 2. Management by objective (MBO) will result in agreed upon budgets, standard costs, organizational goals, and workable plans for their achievement. This is management approach designed to overcome the numerous dysfunctional human responses triggered by attempts to control operations by dominance. To get optimum motivation and communication from both management by objective and the responsibility accounting system, certain favorable environmental conditions must exist or be perceived to exist. These include :

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In setting responsibility center goals, top management must provide overall direction by specifying the company’s overall objectives and goals. In the join formulation of detailed performance goals and action plans, top management and responsibility center managers must maximize the congruence between the personal needs and career aspirations of work groups and overall company goals. Motivation is enchanced if people believe that the achievement of company goals will simultaneously satisfy their personal needs. If people perceive organizational goals as compatible with their own, then they will internalize company goals and goal congruence is reached.

DIAGNOSTIC REVIEW OF THE BUSINESS DILEMMA The first positive result from the new system was the notable improvement in interdepartmental communication and cooperation during the goal setting and budget making process. The individual salespeople became more cost conscious since their performance was no longer evaluated solely on the basis of quota attainment, but also on sales generated per selling expense dollar. The plant managers attitudes improved considerably since they were no longer held responsible for operating factors that they were powerless to control. They are also felt that they had a fair chance of participating in the formulation of cost goals. Their production scheduling improved considerably since more effort went into sales palnning and the monthly sales targets furnished to them were more dependable. But best of all, their self esteem and their motivation to attain the goals they had agreed to was at an all time high. This condition was further reinforced by the new performance criteria, which rewarded them for goal attainment in production quotas and cost targets.