Q.2. Explain the concept of Responsibility Accounting and describe its benefits.

Answer. Responsibility accounting is a system under which manager are given decision making
with authority and responsibility for each activity occurring within a specific of the company.
Under this system Manager is made responsible for the activities of segments. These segments
may be called department or divisions.

Robert Anthony defines responsibility accounting as that type of management accounting which
collects and reports both planned and actual accounting information in terms of
responsibility centers.

According to Charles T. Horongrent, Responsibility Accounting or profitability accounting or

activity accounting which means the same thing, is a system that recognizes various decision or
responsibility centers throughout the organization and traces costs (and revenue, assets and
liabilities) to the individual managers who are primarily responsibility for making decisions about
the costs in question.

A well-designed responsibility accounting system establishes responsibility centers within the

organization. A responsibility center is defined as a unit in the organization which has control
over costs, revenues, and/or investment funds. Responsibility centers can be one of the
following types:

Cost center. A cost center is the unit within the organization which is responsible only for costs.
Examples include production and maintenance departments of a manufacturing company.
Variance analysis based on standard costs and flexible budgets would be a typical performance
measure of a cost center.

Profit center. A profit center is the unit which is held responsible for the revenues earned and
costs incurred in that center. Examples might include a sales office of a publishing company,
and appliance department in a retail store, and an auto repair center in a department store. The
contribution approach to cost allocation is widely used to measure the performance of a profit
center.
Investment center. An investment center is the unit within the organization which is held
responsible for the costs, revenues, and related investments made in that center. The corporate

headquarters or division in a large decentralized organization would be an example of an

investment center.
Responsibility accounting is a method of dividing the organizational structure into various
responsibility centers to measure their performance. In other words responsibility
accounting is a device to measure divisional performance measurement may be stated as
under:
ion as a sub-unit makes to the total
organization.

performance. Responsibility accounting is used to measure the performance of

managers and it therefore, influence the way the managers behave.

consistent with the basic goals of the organization as a whole.

Responsibility accounting, also called profitability accounting and activity accounting, has
the following advantages:

management by objective, managers agree on a set of goals. The manager`s

performance is then evaluated based on his or her attainment of these goals.

standards of performance which are then used for comparison purposes.

means that the managers attention is concentrated on the important deviations

from standards and budgets.
decisions
can be made at the local level.

individual performances.

to make policy decisions and

engage in strategic planning.

advantage.

Example
An integrated textile unit showed a net profit after tax of Rs.272 million. Its ROI (Return on
Investment), was 17.5% which is much above the supposed cost of capital of 12.5%.

The company was operating three divisions: (i) Spinning Unit, (ii) Weaving Unit and (iii) a
Finishing Unit. As of now, it is not apparent who earned what. So managers of the three
departments would be asking for bonuses or rewards.

Now suppose, the company asks its accountants to prepare Division-wise P&L account and
present the same to the management for performance appraisal of the three managers.

After considering division-wise performance, who do you think deserve the bonus?

Only the manager, Spinning Division, deserves the bonus. Manager Weaving has
just broken even by earning profit equal to cost of capital. Manager Finishing was
really a drag on the companys resources and its losses were only hidden in
consolidated statements because of substantial contribution made by Spinning
Unit.
However, this is over-simplified example but it brings glaring facts to the notice of the
management and other users of the accounts.