Managerial/

Responsibility
Accounting
Systems
Chapter 2

Muhammad Irshad
GCMS TIMERGARA DIR LOWER
Managerial Accounting Systems
Managerial accounting information systems are the accounting information systems that records,
processes and reports financial information for internal use in accordance with the preferences of
management.
Responsibility Accounting Systems
A responsibility accounting system is a managerial accounting system that provide both
responsibility reporting and performance budgeting.
Managerial accounting information systems provide top-down and bottom-up information flows.
Information flows
Accounting information systems recognize events, record them, summarize them, and reports
accounting information. In both manual and computer based systems this sequence of activities
constitutes a flow of data and information. Those who receive this information are parties both
internal and external to the organization. They use it for management or investment purposes.
The following illustration shows information flows in a manual and computer-based accounting
information systems.

Types of Information Flows

In a managerial accounting information system, information flows in two directions.
 1. Top-down Information Flow
2. Bottom-up Information Flow

Top-down information flow

A top-down information flow originated from the events that occur at the top management level in
an organization. Systems recorded those events, summarize them, and report them to employees
at lower levels. An organization budget system provides good example of top-down information
flow. Budgets provide quantitative statements that managers plan for the next accounting period.
Budgets help achieve overall organizational objectives by establishing measurable goals for each
segments of the organization.
Requirements of Effective Budgeting System
Budgeting system should be designed to be implemented within the organization structure. It
requires that top management should develop policies concerning the organization objectives and
communicate these policies with policy statements to the organization segments and set
performance goals for each segment of the organization.
Organization Structure
An organization structure provides the environment through which information flows. For an
effective budgeting system, this environment must have several characteristics. For instance,
I. The organization must establish structure that distinguish each of its segments.
II. It must issue a clear statement of authority and responsibility for the manager of each
segment.
III. Each employee must report to only one higher level manager.
IV. Top management should clearly have defined all superior-subordinates’ relationship.
Top managers communicate the organization structure by using organization chart and job
descriptions organization chart identify organization segments/departments and communicate
superior-subordinate relationship. Job descriptions assign responsibilities to employees for
specific tasks.
Policy Statements
A policy statement is another form of top-down information flow used by top-management to
communicate responsibilities to employees. A company policy statement identifies top-
management’s expectations concerning the behavior of the organization employees. Policy
statements provide guidelines for the employees on how to carry out specific duties contain in
job’s descriptions. To be effective, policy statement must be both comprehensive and
enforceable. One common example of policy statement is the code of conduct- a documents that
describe the ethical standards employees are expected to follow.
Performance Goals
Performance goals are the targets set by top-management when prepare budget for next
accounting period. An effective budgeting system require that management should established
performance goals for each segment of the organization and coordinate segments performance
goals, so that if each segment meet its goals then overall organization objectives are met. Top-
management then communicate these goals to managers of the segments by issuing periodic
budgets. Such system is called performance budgeting system. Performance budgeting system
is a managerial accounting information system that communicate budget goals from top-
management to lower level manager in the organization.
Organization structure, policy statements and performance
goals begins at top-management level and are transmitted
to lower level in the company. They represent top-down flow
in the communication of accounting information. As this
information flow to successively lower level, it become more
specific and detail. This process is called information
amplification.

Bottom- Up Information Flow

Bottom- up information flow originated with events occurring
at the lower levels in the organization structure. The system
that records these events, process them, and report them to
managers at higher levels is called responsibility reporting
system. Responsibility reporting system is defined as, a managerial accounting information
system that communicate to top management the results of events occurring at lower level in the
organization.
Often companies implement systems that provide both responsibility reporting and performance
budgeting. In this case they have responsibility accounting system. Performance budgeting
system is a managerial accounting system information system that communicate budget goals
from top management to lower level managers in the organization. Responsibility accounting
system is a managerial accounting information system that provides both responsibility reporting
and performance budgeting.
Responsibility reporting system record performance measures at each segment in the
organization. These performance measures may be monetary such as dollars of revenue or
expense, or they may be statistical such as hours worked or units produced. The performance
measure is compared with the goals established by the budgeting system. The organization then
evaluate its managers by whether actual performance differed from budgeted goals.
Responsibility Centers
A responsibility center is an organization unit where a manager controls financial measures
recorded and reported by a managerial accounting information system. In most cases, a
responsibility center is a separate department consisting of a supervisor and several employees
depending on the size of the organization. At higher level responsibility center consists of a
manager and all the responsibility center reporting to that manager.
Types of Responsibility Centers
Based on function, a responsibility center may be either
 Cost center
 Profit center
 Investment center
Cost center
The responsibility center whose only monetary performance measure is the amount of cost
incurred in that center. The manager at the responsibility center has to control the cost. Top
management evaluate the performance of the cost center manager by comparing the actual
cost incurred with the budgeted cost. For example in the figure the manager in the production
department “A” control the cost incurred in that department. Top-management
(superintendent) evaluate this manager performance by comparing the actual costs to those
budgeted for that month. The production department “A” is called cost center. Part “B” shows
an example of higher level cost centers.

Profit center
The responsibility centers such as sales offices, sales divisions or regions which generate
revenue are called profit centers. The responsibility accounting system determine the profit
produced by the center by subtracting the cost incurred from revenue generated. Such a
responsibility center is called profit center. Top management evaluate the performance of a
profit center manager by comparing actual profit with those budgeted for the profit center
during the budgeted period. For example a regional sales manager evaluate each sales office
( profit center) manger performance.
Note: for further understanding see class lecture or diagram on the following page.

Investment center
A responsibility center is known as an
investment center when its manager
not only control the costs and
revenues but also helps determine
the amount of investment owners
makes in it. For example, large
corporations
decide each
year how
much profit
should be
reinvested in each
subsidiary business
unit (SBU). If managers
of a SBU requested a portion of these retain earning then top management evaluate the SBU
by how much it can provide a return on them, that is calculate return on investment (ROI) for
the subsidiary.

Performance Report
Performance report is a report produced by a responsibility accounting system. It discloses
financial measure showing the performance of the manager in charge of a responsibility
center. The manager of a cost center controls its costs. The performance report disclose the
budgeted and actual costs attained for the budgeted period. Frequently, it shows the
difference between these amounts which is called budget variance.

A performance report at higher level cost centers summarize the budgeted and actual costs
of all the center below it in one line, as shown in the following illustration 3-10.
 Performance report for profit and investment center are similar. Total at lower level centers
become line items at the next higher level profit or investment center. However, for these
responsibility centers, the responsibility accounting system disclose four details: total
budgeted revenue, total actual revenue, total budgeted cost and total actual cost. These may
be disclosed on up to four separate performance reports for each center, as shown in the
illustration 3-11.

At each higher level, the

performance reports become less
detailed and less specific and more
highly summarized. This process is
called data reduction

DATA ACCUMULATION
Responsibility Accounting
System summarizes total for
actual & budgeted costs and
actual & budgeted revenue for
each responsibility center for
each month. A large company may have
hundreds of responsibility centers producing lot
of total. Responsibility accounting system
accumulate this much data by using
responsibility codes, accounts codes and
budget codes.
Responsibility Code
Responsibility code is a number uniquely
identifying a responsibility center. Each
responsibility center has four-digits code. By
 this method responsibility center with most zeros in its code is at higher level, as shown in the
following diagram.

President
1000

Vice Pres: & Vice President

Vice Presid:& GC Sect: & treasurer Vice Pres: Sales
Controller Manufacturing
2000 3000 6000
4000
5000

Superintendent Factory No .1 Superintendent Factory No. 2

5100 5200

Manager Prod:
Manager Prod: Deptt: A
Deptt B
5110
5120
Forman Forman
A B
5111 5112

Account Code
An account code is a number uniquely identifying a general ledger account. Account code
enables the accounting system to summarize amount recorded in that account. Chart of
account is a table containing account names and account codes.

Account Title Account Code/No

Current Assets:
Cash 11
A/c Receivables 12
Inventory 13
Property Plant & Equipment:
Land 21
Building 22
Current Liabilities:
A/c Payables 31
Account Code Structure
Account code structure in responsibility accounting combine a responsibility code with an account
code. For example, account wages & salaries a/c code (571), responsibility code of Manager
Production Department A (5110). so salaries paid to workers in Department “A” charge to account
code (5110-571). similarly, worker salaries of vice Pres: sale (6000-571) and of workers of
Forman A is charged to (5111-571).
Budget Code
Budget code is a number uniquely identifying the budgeted amount allocated to a responsibility
center. It enables the accounting system to disclose comparison of actual & budgeted amount on
a performance report. While designing budgeting system, analyst add one digit to distinguish b/w
budgeted & actual amount. For example, suppose 0 digit for actual & 9 digit for budgeted amount.

Production Department A
 Head/account Actual amount account code Budgeted amount account
code
Salaries & Wages 5110-0-571 5110-9-571

Types of coding structures

Sequential Codes
When data items are encoded in sequence called sequential codes. For example, a check with
check No. 10035 is issued immediately after check No. 10034. Similarly, sequential codes are
assigned to sales orders, requisitions, invoices etc
Mnemonic Codes
This coding structures identify data items with combinations of letters and numbers. For example,
A& B 101. Companies may use when developing costumers or product codes. The code
identifying a costumer is a short hand version of the costumer name.
Block Codes
When data items are identified by using block of codes (also called group) then such type of
coding structure called block codes. block code is of the form XXXX-X-XXX. The first 4 digits’
block, identifies the responsibility center controlling the transaction. The 2nd block contains one
digit and designates either actual or budgeted amounts. The 3rd block contains three digits and
identifies a general ledger account. For example, a transaction coded 5110-0-571 represents an
actual expenditure (code 0) for salaries & wages (code 571) in prod: Deptt: A (code 5110).
Financial Reporting and Responsibility Accounting
The performance reports produced by Responsibility accounting system are useful for managerial
purposes. However, their forms & contents are inadequate for financial accounting because don’t
comply the GAAP. AIS must produce financial statements from the data maintain by the
responsibility accounting system.
A responsibility accounting system maintains detail total of actual & budgeted costs, actual &
budgeted revenue. The responsibility accounting system record totals in a separate account
identified by a unique a/c code for each responsibility center in the organization. At the end of a
financial reporting period it classifies the totals in these accounts by financial statement category.
This allows the accounting information system to produce information for both managerial &
financial reporting purposes.