RESPONSIBILIT

Y
ACCOUNTING
GROUP 3
Senon, Melissa
Bermudez, Jellian Jenz
Gasapo, Ron Lennox
Manuel, Jasmine Barbie
CONTENTS OF THIS CHAPTER

1. Concept of Responsibility Accounting

2. Principles of Responsibility Accounting
3. Implementation in Organizational Settings
4. Evaluating Performance through
Responsibility Accounting
 CONCEPT OF
CENTRALIZATION
Organizational Structure in
which decision making is
made strictly at the top
management level
 CONCEPT OF
DECENTRALIZATION
 Authority is delegated
throughout the organization (i.e.
given to subordinate managers).
 CONCEPT OF
SUB-OPTIMIZATION
The practice of focusing efforts
on one component of a whole
and improving that one
component and ignoring the
impact on the other components
and on the whole.
 CONCEPT OF
GOAL CONGRUENCE
 A situation where the goals of
each part of the organization are
aligned with the overall goals set
by top management.
CONCEPT OF
RESPONSIBIL
ITY
ACCOUNTIN
G
Concept of Responsibility Accounting
Responsibility accounting refers to a system that
undertakes the identification of responsibility
centers, subsequently determines its objectives. It
also helps in the development of processes related
to performance measurement as well as the
preparation and analysis of performance reports of
the identified responsibility centers.
What is
Responsibility
Accounting, and
How Does it Work?
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.
• It is used to measure performance of divisions of an organisation
rather than organisation as a whole.

• 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.

• Proper authority is given to the persons so that they are able to

keep up their performance. In case the performance is not
according to the predetermined standards then the persons who are
assigned this duty will be personally responsible for it. In
responsibility accounting the emphasis is on men rather than on
systems.
• Responsibility Accounting collects and reports planned and actual
accounting information about the inputs and outputs of
responsibility centres.

• Responsibility Accounting must be designed to suit the existing

structure of the organization.

• Responsibility should be coupled with authority. An organization

structure with clear assignment of authorities and responsibilities
should exist for the successful functioning of the responsibility
accounting system. The performance of each manager is evaluated
in terms of such factors.
Responsibility Accounting-
Meaning & Definition
 • Responsibility accounting is a system of management
accounting under which accountability is established
according to the responsibility delegated to various levels of
management and a management information and reporting
system instituted to give adequate feedback in terms of the
delegated responsibility.

• Under this system, divisions or units of an organisation

under a specific authority in a person are developed as
responsibility centres & evaluated individually for their
performance.
Institute of Cost and Works Accountants of India defines
Responsibility accounting as “a system of management
accounting under which accountability is established
according to the responsibility delegated to various levels of
management and a management information and reporting
system instituted to give adequate feedback in terms of the
delegated responsibility. Under this system divisions or units
of an organisation under a specified authority in a person are
developed as responsibility centres and evaluated
individually for their performance.”
2. PRINCIPLES
OF
RESPONSIBILI
TY
ACCOUNTING
 According to Charles T.
Horngren, “Responsibility accounting is a
system of accounting that recognises various
decision centres throughout an organisation
and traces costs to the individual managers
who are primarily responsible for making
decisions about the costs in question”.
 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”.
•The individual managers of centres are held
responsible for the incurrence and control of
costs relating to their responsibility centres.
 •Responsibility and authority should be
clearly defined to get the desired results of
responsibility accounting; thus responsibility
accounting refers to the principles, practices
and procedures under which costs and
revenues are classified according to persons
responsible for incurring the costs and
generating the revenues.
 •Responsibility accounting is based on the
basic principle that an executive will be held
responsible only for those acts over which he
has control.If certain items are not within the
control of a particular centre, these should not
be included in the report of that centre.
Principles of responsibility accounting are as
follows:

1. Determination of responsibility centres.

2. A target is fixed for each responsibility
centre.
3. Actual performance is compared with the
target.
Principles of responsibility accounting are as
follows:
4. The variances from the budgeted plan are
analysed so as to fix the responsibility of
centres.
5. Corrective action is taken by the higher
management and is communicated to the
responsibility centre i.e., the individual
responsible.
Principles of responsibility accounting are as
follows:
6. Offer incentive as inducement.
7. All apportioned costs and policy costs are
excluded in determining the responsibility for
costs because an individual manager has no
control over these costs.
Principles of responsibility accounting are as
follows:

8. Report to responsible individual for action.

9. Transfer Pricing Policy. To get the
desirable result of responsibility accounting, a
suitable transfer pricing policy should be
followed.
3.
Implementation
in
Organizational
Settings
 To implement responsibility accounting in a
company, the business entity must be
organized so that responsibility is assignable
to individual managers. The various company
managers and their lines of authority (and the
resulting levels of responsibility) should be
fully defined.
The manager’s level in the organization also
affects those items over which that manager
has control. The president is usually
considered a first-level manager. Managers
(usually vice presidents) who report directly
to the president are second-level managers.
 Notice on the organization chart that
individuals at a specific management level
are on a horizontal line across the chart. Not
all managers at that level, however,
necessarily have equal authority and
responsibility. The degree of a manager’s
authority varies from company to company.
 Management uses responsibility accounting
as a control device. As a control device,
responsibility accounting emphasizes
responsibility centers. A responsibility centre
is a subunit of an organization under the
control of a manager having direct
responsibility for its activities.
For control purposes there are mainly five
responsibility centers:

(a) Cost center: A responsibility center, the

manager of which is accountable for the
subunit’s costs.
(b) Revenue center: A responsibility center,
the manager of which is accountable for the
subunit’s revenue.
(c) Profit center: A responsibility center, the
manager of which is accountable for the
subunit’s profit.
(d) Investment center: A responsibility
center, the manager of which is accountable
for the subunit’s profit and the capital
invested to generate that profit.
 (e) Contribution margin center: A
responsibility center, the manager of which is
accountable for the subunit’s contribution
margin, i.e., revenue minus variable cost.
4. Evaluating
Performance
through
Responsibility
Accounting
How Do Companies Use Responsibility Accounting to Evaluate
Performance in Cost, Revenue, and Profit Centers?

 Responsibility accounting performance reports focus on responsibility

and controllability.
 Responsibility accounting performance reports capture the financial
performance of cost, revenue, and profit centers.
 Because responsibility accounting performance reports are used for
performance evaluation, the focus is only on what the manager has
responsibility for and control over.
 Performance reports are prepared for each segment of a business.
Performance reports include all the expenses the segment manager
may or may not be able to control. For example, allocated corporate
costs will be included in the performance report, but they are not
controlled by the segment manager.
 Responsibility reports are also prepared for each segment of a
business. Responsibility reports only include expenses that the
manager has control over because these reports are used to evaluate
the performance of the segment manager. If a segment manager
cannot control a cost, it is not included in the responsibility report.
For example, allocated corporate costs will not be included in the
responsibility report.
Responsibility Centers

1. Cost Center
2. Revenue Center
3. Profit Center
4. Investment Center
Cost Centers Focus on
costs or expenses.
 Cost center responsibility
reports typically focus on
the flexible budget
variance—the difference
between actual results and
the flexible budget.
 Revenue Centers Focus on
revenues.
 Focus on flexible budget variance and
sales volume variance for revenue.
 The sales volume variance is due to
volume differences—selling more or fewer
units than planned.
 The flexible budget variance is due to
differences in the sales price—selling units
for a higher or lower price than planned.
 Profit Centers Focus on
generating revenues and
controlling costs.
 Focus on flexible budget variances for
revenues and expenses.
 Managers of profit centers are responsible
for both generating revenue and
controlling costs, so their performance
reports include both revenues and
expenses.
Investment Centers?

The financial evaluation of investment

centers must measure two factors:

(1)how much operating income the

segment is generating and
(2) how efficiently the segment is using its
assets.