RESPONSIBILITY ACCOUNTING

CHAPTER IX

RESPONSIBILITY ACCOUNTING

Meaning & Definitions

Responsibility Accounting refers to the principles, practices and procedures under which costs and revenues are classified according to the responsibility centers that are responsible for incurring the costs and generating the revenue. It is a system of control where persons are made responsible for control of cost. Authority is given to person of the different levels so that they are able to keep up their performance. Institute of Cost and Works Accounts 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”.

Steps involved in Responsibility Accounting

Responsibility accounting is a cost control devise, which is evolved to help management in achieving organizational goals. The following prerequisites are required for its proper functioning:

1.      The organization is divided into various responsibility centers. Each responsibility centre is brought under the charge of the responsibility manger who will be responsible for the performance of that department.

2.      The area of responsibility and the authority of each centre should be well defined through an organization chart.

3.      The targets of each responsible centre are to be fixed in advance in consultation with the manager of the responsibility centre so that he will be able to give full information about his department.

4.      The actual performance of each responsible centre should be recorded and communicated with the executive concerned and the actual performance be compared with the whole set.

5.      There should be device for comparing the actual standards and reporting any variance to the top management.

6.      There should be devise for taking timely action in case there is any lapse in the part of the person in charge of any responsibility centre.

Responsibility Centers

Responsibility centre is a unit of function of an organization headed by a manager having direct responsibility for its performance. It may be defined as “the segment of a business with reference to which information will be communicated to pin-point responsibility”. Five types of responsibility centers can be established for management control purpose a cost centre, revenue centre, profit centre, investment centre and contribution centre.

1.                  Cost centre: A cost centre is a smallest segment of activity or an area of responsibility for which cost can be accumulated. Responsibility in a cost centre is restricted to cost only. Chartered institute of Management Account (CIMA) defined “a cost centre as a production, service, location, function, activity or item of equipment whose cost may be attributed to cost units”. For administrative convenience every large organization is usually divided into a number of departments such as production, marketing, finance etc.

2.      Revenue centre: Revenue centre is smallest segment of activity of an area of responsibility for which only revenues are accumulated. It is a part of that organization whose manager has the prime responsibility of generating sales revenue. CIMA defines it as “a centre devoted to raising revenue with no responsibility for production.

3.      Profit centre: It is a segment of activity or an area of responsibility for which both revenues and costs and accumulated. In general, most of the responsibility centers are considered as profit centers. Main objective of the profit centers is to maximize the profit of those centers. CIMA defined it as “a part of business accountable for cost and revenues”.

4.      Investment centre: It is a segment of activity responsible for properly utilizing the assets used in that centre. The manger of that centre is expected to earn a fair return on the assets employed in his centre. Investment centers will be used for big responsibility centers, their assets will be exclusive position of that centre. CIMA defined it as “a profit centre whose performance is measured by its return on capital employed”.

5.      Contribution centre: It is a segment of activity or an area of responsibility for which both revenues and variable costs are accumulated. CIMA defined it as “a profit centre whose expenditure is marginal or direct or direct cost basis”.

Advantages of Responsibility Accounting

Management uses responsibility accounting as a control devise. Here the performance is compared to the target set for them and proper action is taken for low results. The following are some of the advantages of responsibility accounting:

1.   Assigning of responsibility: every individual in the organization is assigned some responsibility. Everybody knows what is expected of him. The responsibility can easily be identified and satisfactory and unsatisfactory performances of various people are known so that nobody can shift responsibility to somebody else.

2.      Improves performance: Assigning of tasks to specific person has a motivational factor. As each one knows his responsibility he tries to improve the functioning of his section.

3.      Helpful in cost planning: as data is available about cost and revenue, proper planning can be effected and standards can be properly fixed.

4.      Delegation of authority: The system of responsibility accounting enables the delegation of authority while retaining the overall control at the managerial level.

5.      Helpful in decision making: The information collected under this system is helpful to the management in planning for future actions: past performance of various cost centers also help in fixing their future targets.

Limitations of Responsibility Accounting

1.It is difficult to prepare the organization chart which is highly essential for proper functioning of the system of responsibility accounting.

2.There will be serious problem of implementation as individual interest may conflict with organizational interests.

3.If it is not judiciously applied the system may face passive resistance, which may forfeit its purpose.

4.At times it ignores the personal reactions of the people who are involved in its implementation.