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Eric L. Kohler defines responsibility accounting as a method of accounting in which costs are identified
with persons assigned to their control rather than with products or functions.
According to David Fanning, Responsibility accounting is a system or mechanism for controlling the
wider freedom of action that executive decision centre managers in other words are given by senior
management and for holding those executives responsible for the consequences of their decisions.
Responsibility accounting fixes responsibility for cost control purposes. Responsibility accounting is a
method of accounting in which costs and revenues are identified with persons who are responsible for
their control rather than with products or functions.
This method of accounting classifies costs and revenues according to the responsibility centres that are
responsible for incurring the costs and generating the revenues.
These segments, departments or divisions of an organisation are called responsibility centres. Thus a
responsibility centre is a specific unit of an organisation assigned to a manager who is held responsible
for its operations.
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Responsibility centre is like an engine in that it has inputs, which are physical quantities of material,
hours of various types of labour and a variety of services; it works with these resources usually; working
capital and fixed assets are also required. As a result of this work, it produces outputs, which are
classified either as goods, if they are tangible or as services, if they are intangible. These goods or
services go either to other responsibility centres within the company or to customers in the outside
world.
Responsibility accounting is used to measure both inputs and outputs of the responsibility centre in
monetary terms, wherever feasible. The total of various inputs is called cost whereas the total of outputs
is called revenue.
Where monetary measurement of output is not possible (as services rendered by the accounting
department to the organisation), then it may be measured in terms of total cost of goods or services
transferred, or as a number of units of output.
Responsibility accounting involves accumulating and reporting costs on the basis of individual manager
who has authority to make day-to-day decisions. Under responsibility accounting the evaluation of
managers performance is based only on matters directly under the managers control. It is also termed
as profitability accounting.
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In this system, the accountability is established according to the responsibility delegated to various levels
of management and they are made responsible to give adequate feedback in terms of delegated
responsibility. The basic idea behind responsibility accounting is that each managers performance
should be judged by how he or she manages those items and only those items under his/her control.
The best way to encourage managers to achieve the desired level of performance is to measure their
performance in comparison to budgeted results. Periodic comparisons of the actual costs, revenues and
investments with the budgeted costs, revenues and investments relating to individual managers can help
management in ascertaining their performance.
a. Information for both output and input of resources, i.e., based on cost and revenue data for financial
information.
e. Performance reporting
f. To report reasons for deviation from original plan and to what extent.
(i) It establishes a sound system of control because it enables top management to delegate authority to
responsibility centres while retaining overall control with itself.
(ii) It forces the management to consider the organisational structure to result in effective delegation of
authority and placement of responsibility. It will be difficult for individual manager to pass back
unfavorable results. Thus, it facilitates decentralisation of decision making.
(iii) It encourages budgeting for comparison of actual achievements with the budgeted figures. It
compels management to set realistic budget.
(iv) It increases interest and awareness among the supervisory staff as they are called upon to explain
about the deviations for which they are responsible.
(v) It simplifies the structure of reports and facilitates the prompt reporting because of exclusion of those
items which are beyond the scope of individual responsibility.
(vi) It is helpful in following management by exception because emphasis is laid on reporting exceptional
matters to top management and consequently top management is not burdened with all kinds of routine
matters.
Following are the major difficulties encountered in introducing a system of responsibility accounting:
(i) Generally the prerequisites for a successful responsibility accounting scheme i.e., a well-defined
organisation structure, proper delegation of work and responsibility, proper allocation of costs, a proper
system of reporting are absent and makes it difficult to have a responsibility accounting.
(ii) It becomes difficult to have a further analysis of expenses than provided by traditional classification of
expenses. For example, wages of workman is controllable but fringe benefits included in it have to be
paid under law or as per agreement with the workers union.
(iii) While introducing the system supervisory staff may require additional clarification especially in the
responsibility reports. They must be explained properly the purpose and benefits of the new system.