Responsibility Accounting 123 | Cost Accounting | Profit (Accounting)

RESPONSIBILITY ACCOUNTING Responsibility accounting occupies considerable significance .

While other control devices are applicable to the organization as a whole; Responsibility accounting represents a method of measuring the performance of various divisions of an organization. The term “division” with reference to responsibility accounting is used in a general sense to include any logical segment/component/sub- component of an organization It includes a division, a department, a branch office, a service centre, a product- line, a channel of distribution, a class of customers and so on. MEANING: INPUTS AND OUTPUTS: Responsibility accounting is based on information relating to input and outputs. The resources used are called inputs. The resources used by an organization are essentially physical in nature, such as quality of materials consumed, hours of labour, and so on When physical resources are expressed in monetary terms they are called “cost” thus inputs are expressed as cost. Similarly outputs are measured in monetary terms as “revenues” . In other words responsibility accounting is based on cost and revenue data for financial information

PLANNED AND ACTUAL: The financial information included is both actual and planned. For planning and control, it not only contains historical information about cost/revenues, but also estimated future cost and revenue data.

• Efficient responsibility centre is one which does what it does with the lowest consumption of resources • Effectiveness is related to the goals of the organization. Applied to responsibility accounting it implies how well a responsibility centre contributes to the goals of the organization Evaluation of quality of performance: • Responsibility accounting is used to measure the performance of managers and it. OBJECTIVES: Determination of contribution of a division: • The performance of a responsibility centre can be measured in terms of its efficiency and/or in terms of its effectiveness. • Responsibility accounting contains a discussion of how managers are influenced by the nature of accounting information they receive. influences the way the managers behave.RESPONSIBILITY CENTRES: Responsibility accounting focuses on responsibility centre’s. A responsibility centre is a sub-unit of an organization under the control of a manager who is responsible for the activities of that responsibility centre Responsibility centre is the unit of an organization that is separable and identifiable for operating purposes and its performance measurement should be possible. therefore. .

Expense centre. in seeking to achieve their own goals. the divisions of a firm may be classified according to the type of financial data used in the measurement of performance. responsibility accounting as a control device aims at measuring the performance of the various responsibility centre’s or divisions of an organization. This can be ensured through a system of incentives for example bonus for good performance and so on • In brief.Motivation consistent with organizational goals: • Any performance measurement system can be expected to influence the behavior of the managers affected by it • Divisional performance measurement( responsibility accounting) should be designed in such a way that. Three basic classes of divisions can be identified on these grounds. Profit centre and Investment centre. divisional managers will simultaneously work to achieve the goals of the firm this is called goal congruence. it may be noted that it is measurement and not evaluation of performance • TYPES OF RESPONSIBILITY CENTRES • • For the purpose of measuring financial performance. • • Expense/Cost Centre .

what is done in the department will be of no consequence. Responsibility accounting is based on financial information relating to inputs and outputs. but not outputs. but the revenues earned are excluded. This is mainly because it ignores the output measured in financial terms.• • An expense centre is a responsibility centre in which inputs. the implication of the expense centre is that his performance will be judged on the basis of the cost incurred in his department . In other words . In an expense centre of responsibility . the accounting system records only the cost incurred by the centre. an essential requirements is that the cost of operating the division be directly traceable to it. are measured in monetary terms. • • From the viewpoint of the measurement of performance of the divisional manager. A common feature of production departments is that they are multi-product units. There must be some common basis to . the performance measure in an expense centre is the efficiency of operation in that centre in terms of the quantity of inputs used in producing some given output. • Since the performance of an expense centre is measured by the financial measure of input only. The variance between the actual and the budget would be indicative of the efficiency of the division/ divisional manager. It means to compare actual inputs to some predetermined level that represents efficient utilization. • • Limitations • An expense centre is not a useful basis of measuring performance of responsibility centres.

in a profit centre. The difference between revenues and costs is profit. profit of other similar divisions.aggregate the dissimilar products to arrive at the overall outputof the department. some combinations of two or more of these. If this is not done. For purpose of profit centre performance. • • • Profit Centres • • A profit centre is a responsibility centre in which inputs are measured in terms of expenses and outputs are measured in terms of revenues. In other words . the efficiency and effectiveness of the responsibility centrecannot be measured. past profit in the division . management can determine whether the division was efficient in the utilization of resources and whether the division was effective in attaining its objectives. the measure of performance is broader than in an expense centre because in an expense centre the accounting system measures only one element(cost) whereas in a profit centre both elements (cost as well as revenue) are measured in monetary terms. Profit analysis can be used as a basis for evaluating the performance of a division as an entity and for evaluating the performance of a divisional manager. Both the elements of accounting information are considered. Therefore . is based on revenues and expenses directly traceable to the division and avoidable if . This objective is presumably to earn a satisfactory profit. Profit as a performance measure. In profit centre it is possible to measure the effectiveness and efficiency of performance in monetary terms. The criterion for a satisfactory profit may be budgeted profit. revenue represents a monetary measure of the output of a profit centre in a given accounting period whether or not the firm actually realizes the revenue in that period.

• • Limitations • The profit centre approach encounters certain problems. a profit centre may not offer substantial advantage. • There are two types of profit centres. one is the natural profit centre which is very much like an independent firm and the other is constructive profit centre which is made to appear as a natural profit centre. The criterion to use profit centre as a responsibility centre includes the consideration of the following points: (i) Extra record keeping is involved to measure input and output in monetary terms (ii) When a responsibility centre is required by management to provide service to other responsibility centres. (ii) Measurement of expenses. • • . however an expense centre (iv)Due to intense competition there may be friction between various profit centres. These relate to (i) Criterion for profit centres. the service department should not be a profit department (iii) If the output of a product division is fairly homogeneous . This concept of divisional profit is referred to as profit contribution as it is the amount of profit contributed directly by the division. and (iii) Transfer prices • • • Criterion for Profit Centres One problem with profit centre is that it cannot be used for all responsibility centres.the divisions were to be closed down.

• • Investment Centres • • The third type of responsibility centre is an investment centre. such expenses should not be considered since. In view of the special nature of divisional profits.the monetary amount for these interdivisional transfer is called transfer price. There is a scope for difference of opinion relating to the treatment of those expenses which relate to the organisation as a whole. The determination of an appropriate transfer price is one major problem for profit centres. A transfer price is a price used to measure the value of goods and services furnished by a profit centre to other responsibility centres within a company. when internal exchange of goods and services take place between the different divisions of a firm. they have to be expressed in monetary terms. they are not the responsibility of the division .• Measurement of expenses • Another problem with profit centres may relate to the measurement of certain type of expenses which have to be included in the computation of the profit centres. • • Transfer prices • The measurement of profit in a profit centre type of responsibility accounting is also complicated by the problem of transfer prices. In other words . It is defined as a responsibility centre in which inputs are measured in terms of . divisional manager ie they cannot be traceable / attributable to it and should be ignored in working out the profit of the division as a profit centre.

• The investment centre analysis can be used as a basis for evaluating the contribution of a division as an entity as also the performance of a divisional manager. As a responsibility centre. It may . • . The measure of performance in an investment centre is based on the relationship between the profits and the amount of assets employed in generating the profits. Investment centres consider not only the cost and revenues but also the assets used in the division. the performance of a unit would be measured in relation to the profits and the assets employed in a division. therefore be said to be an extension of the profit centre in that it covers all the elements relevant to the measurement of the overall performance of a firm. The essence of investment centre analysis is the relationship between the profits and the assets that are used to generate those profits.cost and outputs are measured in terms of revenues and in which assets employed are also measured. its various divisions.

The primary purpose of cost accounting is cost ascertainment and its use in decision making and performance evaluation. A cost accounting provides data for both financial accounting and management accounting. Comparison between the actual and budgeted cost will highlight a poor or good performance. Planning is a process of setting goals and allocating resources to achieve these goals Cost accounting is also useful for the purpose of control. . Thus cost accounting proved the basis for managerial control. Cost accounting also helps in planning. Control comprises managerial action to correct conditions that cause deviation between the actual and planned performance. as well as operations that have gone out of control and warrant corrective action. A cost is a sacrifice of resources.INTRODUCTION TO COST ACCOUNTING Cost accounting is that branch of the accounting information system which records measures and reports information about costs.

Sign up to vote on this title
UsefulNot useful