The insTiTuTe of charTered

accounTanT of india

Topic- responsibility accounting

guided bY
ca VidYa Mundra MaM
submitted by
madhu kumari
cro0604159
pc.no.7

ACKNOWLEDGEMENT
I would like to express my special thanks of gratitude to my mentor CA Vidya Mundra mam who gave
me the golden opportunity to do this wonderful project on the topic (RESPONSIBILITY ACCOUNTING),
which also helped me in doing a lot of Research and I came to know about so many new things I am
thankful to them.

I am over helmed in all humbleness and gratefulness to acknowledge my depth to all those who have
helped me to put these ideas, well above the level of simplicity and into something concrete.

Any attempt at any level can 't be satisfactorily completed without the support and guidance of my
friends.

I would like to thank my friends who helped me a lot in gathering different information, collecting data
and guiding me from time to time in making this project, despite of their busy schedules ,they gave me
different ideas in making this project unique.

I hereby declare that all the information and data provided in this project are true and correct to the
best of my knowledge.

Thanking you

TABLE OF CONTENT
Executive summary

Introduction

hi

A STUDY ON RESPONSIBILITY ACCOUNTING

ABSTRACT/EXECUTIVE SUMMARY
Responsibility accounting is a system of
dividing an organization into similar units,
each of which is to be assigned particular
responsibilities. These units may be in the
form of divisions, segments departments,
branches, product lines and so on. Each
department is comprised of individuals who
are responsible for particular tasks or
managerial functions. The managers of various concepts and tools used by managerial
accountants to measure the achievement of the goals set by the top management.

Responsibility accounting therefore, represents a method of measuring the

performances of various division of an organization. The test to identify the division is
that the operating performance is separately identifiable and measurable in some way
that is of practical significance to the management. Responsibility accounting collects
and reports planned and actual accounting information about the inputs and outputs of
responsibility centers.

INTRODUCTION

MEANING OF RESPONSIBILITY
Responsibility refers to an obligation to perform certain functions in order to achieve certain
results..
MEANING OF ACCOUNTING
Accounting, which is often just called "accounting," is the process of measuring,
processing, and sharing financial and other information about businesses and
corporations. What is accounting? Accounting is the processor keeping the accounting
books of the financial transactions of the company.

Responsibility Accounting is a system of accounting where specific individuals are made
responsible for accounting in particular areas of cost control. In this accounting system,
responsibility is assigned based on knowledge and skills. If the costs increase, the
person assigned is held accountable and answerable.

Responsibility accounting is a type of management accounting in which a company's

management, budgeting, and internal accounting are all held accountable. The
fundamental goal of this accounting is to assist all of a company's planning, costing, and
responsibility centers.

Accounting often entails the creation of monthly and annual budgets for each
responsibility center. It also keeps track of a company's costs and revenues, with reports
compiled monthly or annually and sent to the appropriate manager for review. The
focus of responsibility accounting is mostly on responsibilities centers.

For example, if Mr X, a unit manager, plans his department's budget, he is accountable

for keeping it under control. Mr X will have all of the necessary information about his
department's costs. Mr X will look for the problem and take the necessary actions and
processes to correct it if the expenditure exceeds the allocated amount. Mr X will be
held personally accountable for the performance of his unit.

There are many authors who gave the definition of responsibility accounting…….
ACCORDING TO CHARLES T. HORGEN
“Responsibility accounting is system of accounting that recognizes various
responsibility centers throughout the organisation and that reflects the plan of
action of each of these centers by allocating particular revenues and costs to the
one having the pertinent responsibility”.
ACCORDING TO ROBERT N ANTONY
“Responsibility accounting as that type of management accounting that type of
management accounting that collects and reports both planned and actual
accounting information in term of responsibility centre”.
ACCORDING ERIC TO KOHLER
“A method of accounting in which costs are identified with persons assigned to
their control rather than with producers or function”.
ACCORDING TO KOHLER E.R
“Responsibility accounting is the maintaining of accounts in such a way that the
performance and level of achievement of various persons responsible for different
works is studied”.

TYPES OF RESPONSIBILITY ACCOUNTING

There are three types of responsibility accounting.
1. Activity based RESPONSIBILITY ACCOUNTING
2. Functional based RESPONSIBILITY ACCOUNTING
3. Strategic based RESPONSIBILITY ACCOUNTING

 Explanation of Activity based RESPONSIBILITY ACCOUNTING

An activity-based responsibility accounting system assigns responsibility to

processes and uses both financial and nonfinancial measures of performance.
Activity- Based Responsibility Accounting System. It is the responsibility
accounting system developed for those firms operating in continuous
improvement environments ..

 Functional based RESPONSIBILITY ACCOUNTING

A functional-based responsibility accounting system assigns responsibility to

organizational units and expresses performance measures in financial terms. It is
the responsibility accounting system that was developed when most firms were
operating in relatively stable environments.

 Strategic based RESPONSIBILITY ACCOUNTING

A strategy-based responsibility accounting system translates the strategy of the

organization into operational objectives and measures.

Objectives of Responsibility Accounting 

See below for the major objectives or principles of responsibility accounting –
 Each responsibility center is given a target, which is communicated to the relevant
management level. 
 At the end of the time period, there is a comparison between the target and the
actual performance.
 The variations that are detected in the budgeted plan are examined for fixing
responsibility to the center. 
 Due measures are taken by the top management which is communicated to the
responsible personnel.
 The responsibility for costs does not include the policy costs and various other
apportioned costs.

Features of Responsibility Accounting

 Inputs and Outputs 

Responsibility accounting system can be implemented only on the basis of due
information of input and output. The monetary term of inputs is costs, and
outputs are correspondingly called revenues. Hence, cost and revenue
information is crucial for responsibility accounting.

 Use of Budgeting 
Apart from the data of cost and revenue, planned and actual financial data is also
required. It is only with effective budgeting that the accounting plan
implementation can be communicated to the concerned levels of management.

 Relationship between the Responsibility Accounting System and Organization

Structure 
Clear lines of authority and effective organization structure is absolutely necessary
for the success of a responsible accounting system. The accounting system is
appropriately designed to be consistent with the existing organizational
structure. 

 Identification of Responsibility Centers

 Only after responsibility centers are identified, the responsibility accounting
system can be implemented. The centers go on to represent the decision points
within the organization. 

 Performance Reporting 
As the responsibility account primarily relates to control, any deviation or
disruption in the plan has to be noted and reported at the earliest. On the report
of such an issue, corrective measures have to be taken. Such information is the
basis on which ‘responsibility’ or performance reports are prepared. 

 Different Types of Responsibility Centers

A responsibility center is a functional business entity that is given definite objectives and
goals, dedicated personnel, procedures and policies as well as the duty for generating a
financial report.
Managers are vested with specific responsibility in terms of expenses incurred or
revenue generation or the investment of funds. Let us take a look at the four types of
responsibility centers. 

1. Cost Centre:- A cost or expense centre is a segment of an organisation in which

the managers are eld re-sponsible for the cost incurred in that segment but not for
revenues. Responsibility in a cost centre is restricted to cost. For planning purposes, the
budget estimates are cost estimates; for control purposes, performance evaluation is
guided by a cost variance equal to the difference between the actual and budgeted costs
for a given period. Cost centre managers have control over some or all of the costs in
their segment of business, but not over revenues. Cost centres are widely used forms of
responsibil-ity centres.

2. Revenue Centre:- A revenue centre is a segment of the organisation which is

primarily responsible for generating sales revenue. A revenue centre manager does not
possess control over cost, investment in assets, but usually has control over some of the
expense of the marketing department. The performance of a revenue centre is
evaluated by comparing the actual revenue with budgeted revenue, and actual
marketing expenses with budgeted marketing expenses. The Marketing Manager of a
product line, or an individual sales representative are examples of revenue centres.

3. Profit Centre:- A profit centre is a segment of an organisation whose manager is

responsible for both revenues and costs. In a profit centre, the manager has the
responsibility and the authority to make decisions that affect both costs and revenues
(and thus profits) for the department or division. The main purpose of a profit centre is
to earn profit. Profit centre managers aim at both the production and marketing of a
product..

4. Investment Centre:- An investment centre is responsible for both profits and

investments. The investment centre manager has control over revenues, expenses and
the amounts invested in the centre’s assets. He also formulates the credit policy which
has a direct influence on debt collection, and the inventory policy which determines the
investment in inventory.

 Steps in the Responsibility Accounting Process

The steps for proper implementation are as follows:

 Define responsibility centers correctly.
 Setting goals and assigning responsibilities to the various responsibility centers.
 On a regular basis, keep an eye on their actual performance.
 Compare actual performance to the target on a regular basis.
 Determine the cause (or causes) of a discrepancy between actual and target
performance.
 Management makes steps to address the discrepancy. The management also
informs the responsibility center about the situation.
 Advantages of Responsibility Accounting :

1) Assigning of Responsibility

As part of accountability accounting, each person of an organization is given

responsibilities that they must take on. They are held accountable for any lapses in their
tasks if they fail to perform the tasks they are entrusted with.

Since the responsibilities of every person are clearly stated and their performance is
evaluated periodically is straightforward and efficient for the supervisor. If there is an
error, it can identify by culprit. This helps determine the performers from non-
performers. It is one of the main advantages of responsibility accounting.

2) Improves Performance

Every person has a clear understanding of their obligations and the fact the eye of the
supervisor monitors them, and supervisors. Also, they are expected for them to do their
best. They also know that if they perform poorly or perform lower than what they would
like, they are asked to explain. This knowledge is an element to ensure they are
performing at their best. It is the major advantages of responsibility accounting.

3) Helpful in Cost Planning

The cost planning process of an organization is made simpler by responsibility

accounting, and the relevant data about revenues and costs are available to upper
management through the system. Therfore, the information is helpful in
  The plan concerning revenues and costs
 setting standards and
 Budget preparation.

4) Delegation and Control

Accounting for responsibility can help meet some of the primary goals of management
accounting, namely—the delegation of authority and exercising control over the entire
organization. The foundation of delegating power is determined by the requirements of
the job and duties allocated according to the position’s requirements. We can count this
in advantages of responsibility accounting. The system includes regular reports on the
performance of each individual and each cost center. This guarantees that complete
control is left to the top management.

5) Helpful in Decision-Making

The accountability accounting system’s reporting mechanism assures an uninterrupted

transmission of pertinent information about various cost centres to upper management.
This information is the primary input to making decisions and planning for the future.
Decision-making is the key factor of every business and it gives beneficial for
responsibility accounting.

 Disadvantages of Responsibility Accounting

In a business, the introduction of the responsibility system accounting benefits, with the
following flaws:

1) Difficult Process

The line that separates costs/revenues that are controllable and those that are not is
not clear enough, and it isn’t easy to differentiate between these two. Since this is a
requirement for a reliable responsibility-based management system for accounting, this
presents the biggest problem.

2) Requires More Effort

A responsible centre could operate effectively according to its particular way (protecting
its interests while doing the work given to it). However, some of its actions may not align
with the organization’s overall goals because of conflicts of interest.

To diffuse an issue, management must be on guard and assertive in ensuring effective

coordination and synchronization of different divisions.

3) Provides Irrelevant Information

Information from various sources, such as in the form of accountability accounting

reports, may contain information that needs to be more pertinent. This is a challenge in
sorting relevant information from irrelevant ones. The effort is necessary when
preparing accountability accounting reports containing only relevant data.

4) Time Consuming

Feedback reports, presented to the management to take the appropriate and timely
actions, sometimes get delayed because the whole process is lengthy. The corrective
measures are implemented at the time, and the issues are aggravated. Time
consumption is the biggest disadvantages of responsibility accounting.

The weaknesses of accountability accounting, as outlined above. It can be addressed at

the level of management to make this system efficient as well as efficient while getting
the most benefit from it.

Importance of Responsibility Accounting

It establishes a sound system of cost control.
• It makes the staff cost conscious.
• It is framed as per the needs of the an organisation
• It is possible to compare the actual performance with the set standards.
• It leads to the effective delegation of authority.
• It helps focus on the responsibility centre which does not perform well