What is Responsibility accounting?

What is Responsibility accounting?

Concept of responsibility accounting

Each and every organization has a objective. The organizational activities are directed towards achieving the objective. In this regard, the organizational structure is divided into a number of departments and units. Each department or unit is called a responsibility center. A responsibility center is led by a manager who is accountable for the activities of his center. The main objectives of dividing an organization into such responsibility centers are to control cost by assigning certain responsibilities to them and evaluating whether the assigned responsibility are discharged within the specific time and budget or not. Responsibility accounting involves the evaluation of the activities of each responsibility center and reporting this to this to the management to ensure that the assigned responsibilities are discharged properly.

Robert Anthony defines responsibility accounting as "that types of management accounting that collects and reflects both planned and actual accounting information in terms of responsibilities centers."

Charles T. Homgreen defines "responsibilities accounting is a systems of accounting that recognizes various responsibilities centers throughout the organization and that deflects the plan of each of these and centers by allocating particular recanted and cost to the one having the pertinent responsibility."

According to Colin drury, "a responsibility center may be defined as a unit of a firm where an individual manager is held responsibility for that unit's performance. The objective of responsibilities accounting is to accumulate costs and revenues for each individual responsibility centers so that the deviation from a performance target (typically the budget) can be attributed to the individual who is accumulated for the responsibility center."

From the above definitions, it can be concluded that responsibility accounting is a management accounting technique that is adopted to check whether each subunit or responsibility center has performed as determined in advance.

Prerequisites for responsibility accounting

The following are the prerequisites for an organization to adopt the responsibility accounting.

• The organizational structure should be sub-divided into smaller units or departments called the responsibility centers.

• The objective of each responsibility center must be pre-determined.

• The right and responsibilities of each center must be defined.

• There must be an environment that fosters the co-ordination and co-operation among the responsibility centers.

• Each responsibility center should be able to provide accounting information as required.

• There must be proper system of the flow of the deviation exits between the objective and responsibility.

• There must be a performance appraisal for each unit or division based on the achievement is relations to the assigned and responsibility. The performance appraisal should be connected to the reward system.

Responsibility centers

Responsibility center is the units or functions of an organization headed by a manager or chief having direct responsibilities for the performance of the center. Generally, the responsibility centers are divided into four groups as given below.

Cost center

Cost center is a segment whose manager is responsible for costs but not for revenues. A cost center can be relatively small, such as manufacturing cell, the office of the chief executive, or legal department a cost center could also be quite large such as a factory or the entire administrative areas for a large firm. Large cost center might be composed of small cost centers. For example, a factory might be segmented into many work situations, each of which is a cost center.

Identifying a responsibility center, as a cost center does not mean that its' manager is responsible only for controlling cost. A purpose department manager is responsible for evaluating and selecting vendors and it therefore responsible for the quality of manorial and components the vendor's supply.

Revenue center

Revenue centers are responsibility centers whose manager are held responsible for earning revenues but nor for the costs of generating revenues. Hospitals are the principle users of revenue center, largely because of cost allocate issues and third party reimburse (such as Medicare, novices). Some companies evaluate marketing manager by revenue and ignore costs. But any center generates costs, if only the salary of it's' manager, so revenue center exist because the organization choose not to make the manager responsible for costs.

Again, manager of revenue centers might be held responsible for non-financial goals. Companies whose strategies include remaining only a market where their products most criteria such as specified market-shares or rank will hold marketing manager responsible for such goods. International groups of industries' annual report list ranks of many of their products in their respective market as National electric company's strategy is to compete only where it is number one or two in sales.

Profit center

A profit center is a segment whose manager is responsible for revenues as well as costs. For such a center, profit, defined in various ways, is used to measured performance. In some cases, the profit calculated includes only direct costs. In other the calculation includes some (or all) indirect costs.

Investment center

An investment center is a segment whose manager is responsible not only for revenues and costs but also for the investment required to generate profits. For such centers, companies calculated return on investment. Return on investment relates profit to the resources (plant and equipment, inventory, receivables) required to earn it. The return on investment is considered as main basis for evaluating the performances of a manager.

Process of responsibility accounting

The process of responsibility accounting is mentioned below:

a. Defining responsibility centers: in the first process of responsibilities accounting, the responsibilities centers are identified. Generally, the responsibility centers established in an organization are the cost center, revenues center, profit center and investment center.

b. Delegation of authority: in the second stage, the responsibility centers are delegated the required authorities.

c. Selecting the tools for evaluation: in third stage, the bases for the performance appraisal of each center are developed. Such base may be standard costing, budgetary control, flexible budget etc.

d. Selecting the method of cost allocation: under responsibility accounting, the method of allocating the cost should be selected. There are two methods of allocating the cost to difference units or centers. They are traditional costing and activity based costing. The later is more effective in cost allocation.

Importance of responsibility accounting

The importance of responsibility accounting can be mentioned as under.

a. Based on the principles of decentralization: responsibility accounting promotes decentralization in an organization. It helps to carry out the organizational activities effectively and efficiently.

b. Effective performance evaluation: responsibility accounting makes the performance appraisal simple and effective.

c. Effective responsibility: since the head or manager of each responsibility center tries his best to discharge the responsibilities assigned to him effectively, there is a low change of deviation between the objective and achievement.

d. Motivation to employees: under responsibility accounting, the employees are more responsible toward their works. This is due to reward and a punishment system that is development under responsibility accounting.

Limitations of responsibilities accounting

The responsibility accounting plays an importance role in achieving the organizational objectives. However, it also suffers from some limitations which are given below:

a. All the organizations may not be divisible into a number of responsibility centers.

b. It is might be difficult to assign the authority and responsible to the manager of each center in an organization.

c. There may not be proper co-ordination among the responsibility centers which create which might create delay in work.

d. If a responsibility center does not performance well, it might have an adverse effect on the performance of other centers as well.

1. Write the meaning of responsibility accounting.

Each and every organization has a definite objective. The organizational activities are directed towards achieving the objective. In this regard, the organization struts is divided into a number of departments and units. Each department or unit is called a responsibility centers. A responsibility center. The manager who is accountable for the activities of his such responsibility centers are to control cost by assigning certain responsibility are discharged accounting involves the evaluation of the activities of each responsibility center and reporting this to the management to ensure that he assigned responsibility are discharged properly.

2. Enumerate any five prerequisites of responsibility accounting.

The following are the perpetuates for an organization to adopt the responsibility accounting.

• The organizational structure should be sub-divided into smaller units or departments called the responsibility centers.

• The objective of each responsibility center must be pre-determined.

• The right and responsibilities of each center must be defined.

• There must be an environment that fosters the co-ordination and co-operation among the responsibility centers.

• Each responsibility center should be able to provide accounting information as required.

3. State any four importance of responsibility accounting.

The importance of responsibility accounting can be mentioned as under.

a. Based on the principles of decentralization: responsibility accounting promotes decentralization in an organization. It helps to carry out the organizational activities effectively and efficiently.

b. Effective performance evaluation: responsibility accounting makes the performance appraisal simple and effective.

c. Effective responsibility: since the head or manager of each responsibility center tries his best to discharge the responsibilities assigned to him effectively, there is a low change of deviation between the objective and achievement.

d. Motivation to employees: under responsibility accounting, the employees are more responsible toward their works. This is due to reward and a punishment system that is development under responsibility accounting.

4. Write the limitations of responsibility accounting.

The limitations of responsibility accounting are given below.

a. All the organizations may not be divisible into a number of responsibility centers.

b. It is might be difficult to assign the authority and responsible to the manager of each center in an organization.

c. There may not be proper co-ordination among the responsibility centers which create which might create delay in work.

d. If a responsibility center does not performance well, it might have an adverse effect on the performance of other centers as well.