You are on page 1of 19

RESPONSIBILITY

ACCOUNTING

Manira Eliza Abraham


Roll No : 9
MCom
CONTENTS
 Meaning
 Role of responsibility accounting
 Responsibility centers
 Case study
 Conclusion
MEANING
• Responsibility Accounting is a system of control
where
responsibility is assigned for the control of costs.

• The persons are made responsible for the control of


costs.
According to Charles T. Horngren,
“Responsibility accounting is a system of
accounting that recognizes various decision
centers throughout an organization and traces
costs to the individual managers who are
primarily responsible for making decisions about
the costs in question”.
ROLE

 Decentralization
 Performance Evaluation
 Motivation
 Transfer Pricing
 Drop Or Continue Decision
RESPONSIBILITY
CENTERS
Responsibility centers are identifiable segments within a company
for which individual managers have accepted authority and
accountability.
CENTER

 A cost center is an organizational sub-unit such as department or


division, whose manager is held accountable for the costs incurred
in that division.

 Manager of a cost center is responsible for controllable costs


incurred in the department, but is not responsible for revenue,
profit or investment in that center.

 A cost center is a responsibility center in which inputs, but not


outputs are measured in monetary value.
CENTER
 Profits are the excess of revenue
over the
total expenses.
 Therefore, the manager of
a profit center
is held accountable for the
revenues,
costs, and profits of the center.
 A profit center is a
responsibility center
in which inputs are measured in
INVESTMENT CENTER

∆ The manager of investment center is


held accountable for
the division's profit and the invested
capital used by the
center to generate its profits.
∆ Investment centers consider not only
costs and revenues
but also the assets used in the division.
∆ Performance of an investment center are
measured in
terms of assets turnover and return on
the capital
About
 Out To Lunch is a rapidly growing fast-food restaurant

chain.
 Its business model revolves around a uniquely flavored
hamburger and a very simple menu consisting of a
hamburger, fries, and drinks.
 It provides simple “round number” pricing, few
products, and rapid service.
 Out To Lunch also has a catering service for sporting
events, corporate outings, and similar occasions.
Organization Chart
The VP of Operations will focus on summary data from store,
catering, and procurement management.

The presence of fixed costs that are not traceable to any specific
operating segment ($1,300,000). Even though this cost is not
assigned to a specific segment, it remains a cost for which the VP of
Operations is responsible.
 Some stores are performing much better than others.

 The senior manager certainly want to focus on store E


immediately.

 Also there is $1,500,000 of fixed costs associated with


store
operations that is not traceable to any specific location;
nevertheless, the senior manager of store operations
must control
this cost, and it is subtracted in calculating the overall
margin.

 Thus, the total fixed cost for all store operations is


 The report provides detail to show if the objectives are met.
 The unfavorable variances are highlighted in red.

 Location A did not meet the budgeted goal for hamburger sales.
But, the profit objectives were nevertheless exceeded because
the product mix of fries and drinks produced offsetting higher
margins.

 Location A also managed to contain other variable costs.


CONCLUSION
 The CEO would have access to all reports from within the
organization, but would mostly focus on reports emanating from
each vice president. Management will tend to focus on areas where
corrective measures are necessary. This is generally referred to
as management by exception.

 The preceding reports separated fixed expenses between those


that were traceable to a specific business unit and common
fixed costs. Great care must be taken in distinguishing between
the two. Effective performance evaluations require a clear
alignment of responsibility and accountability.
PROCESS

1) Organisation is divided into responsibility centers.


Each responsibility center is put under the charge
of a responsibility manager.
2) The target of each responsibility center are set in
consultation with the manager of responsibility
center.
3) The actual performance of each responsibility center
is recorded and communicated to the executive
concerned.
4) If the actual performance of the department is less
than the standard set, then the variances are
conveyed to the top management.
5) Timely action is taken to take necessary corrective
measures.