RESPONSIBILITY ACCOUNTING

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”.

OBJECTIVE:

The primary objective of this accounting is to support all the Planning, costing, and responsibility centres
of a company.

Responsibility accounting focuses attention on responsibility centres. The responsibility centres

represent the sphere of authority decision points in an organisation. A large firm is generally divided into
meaningful segments, departments or divisions in order to have effective control. 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.

COMPONENTS OF RESPONSIBILITY ACCOUNTING:

1. Inputs and Outputs – The implementation of responsibility accounting based upon information
relating to inputs and outputs.
2. Identification of Responsibility Center – The whole concept of responsibility accounting depends
upon identification of responsibility center.
3. Target and Actual Information – Responsibility accounting requires target or budget data and
Actual data for performance evaluation of the responsible manager of each responsibility
center.
4. An organization structure with clear authority and responsibility is required for a successful
responsibility accounting system.
5. Assigning Cost and Revenue to an Individual –responsibility relationship, cost, and revenue
which are controllable should be assigned to individuals for evaluating their performance.

TYPES OF RESPONSIBILITY ACCOUNTING:

Following are the types of responsibility accounting

1. Cost Center: As the name suggests the
persons involved in this center are
responsible for controlling cost for the
company and they are not responsible
for any other functions in the company.
However, there are two types of costs
namely controlled and uncontrolled, a
person should be held responsible for
the controlled costs, and the
performance of each center is
evaluated by comparing the actual vs
estimated costs.
2. Revenue Center: Revenue takes care of
the revenue for the company and no
other related responsibilities, mostly
the sales related teams are accountable
for this center.
3. Profit Center: The performance of this
center is measured in terms of revenue
and cost and the team working in this
center has to make sure to report
accurate numbers. Generally, a factory
can be considered as a profit center
where the raw materials as input are a
part of the cost center and sales of the
finished goods are revenue center.
4. Investment Center: We can say that
this is a very important center to be on,
as this team has to make sure that the
assets of the company are properly
utilized in the best manner so that the
company effectively capitalize on the
deployed capital and earn handsome
revenues from the same.

EXAMPLE OF RESPONSIBILITY ACCOUNTING:

ABC Pharma Inc is engaged in the manufacturing of medicine company has decided to produce 10000
medicine in the year 2018 for which the company has defined the budget of $ 90000 at the beginning of
the year. Still, at the end of the year, it has noticed the actual cost incurred

for the production is $95000. There is an excess expenditure of $5000 over-budgeted expenditure,
which the responsibility manager has to explain why this has increased.

ADVANTAGES OF RESPONSIBILITY ACCOUNTING:

1. It urges the management to acknowledge the company structure and checks who is accountable
for what and fix the problems.
 2. It enhances attention and awareness of the managers as they have to explain the variations for
which they are responsible.
3. It helps to compare the achievements between the pre-planned goals and actual results.
4. It creates a sense of efficiency within individual employees as their work and achievements will
be reviewed.
5. It guides the management to plan and structure the future expenditure and revenue of a
company.
6. Being a cost control tool, it creates ‘cost consciousness’ among workers.
7. Individual and company goals are established and communicated in the best way.
8. It improves and controls the company’s operating activities for an effective and efficient
outcome.
9. Simplifies the report structure and guides to prompt reporting.

LIMITATIONS OF RESPONSIBILITY ACCOUNTING:

1. Generally, a prerequisite for establishing a successful responsibility accounting system (like

proper identification of responsibility center, an adequate delegation of work, proper reporting)
is missing that makes it difficult for establishing a responsibility accounting system.
2. It requires skilled manpower in each department, which increases the cost of the company.
3. The responsibility accounting system applies only to controllable costs.
4. If the responsibility and objective are not properly explained to the person, then the
responsibility accounting system will not give proper results.

CONCLUSION:

This accounting method which works as a tool to improve the efficiency and transparency of the
company is very effective to adapt, while responsibility accounting helps to segregate the operations of
the company it also enables to hire of the best talent suitable for each center.