What is Responsibility Accounting?
An accounting system of control whereby assignment of responsibility for controlling costs. In this evaluation of the performance of various heads or managers takes place. This is based on effectiveness in the achievement of predetermined targets set for divisions and departments, for which they are responsible.
It involves the collection and reporting of accounting information for various units headed by a manager. The information may include both actual and budgeted costs and revenue. Moreover, the reporting is performed to indicate the person responsible for incurring the cost and earning revenue. Here data is classified as per the area of responsibility.
Further, the basic concept behind this system is that the performance of the managers should be evaluated on the basis of the area of activity for which they are responsible.
In other words, responsibility accounting is a tool of management control that tends to report the performance of the managers responsible for their respective units.
In this more emphasis is given to fixing the responsibility of the managers. These managers are entrusted with a specific task or responsibility.
Here, managers are given authority and responsibility of the decision-making of their area of operation. Therefore, the managers are responsible for the activities of their department.
- Focuses on responsibility centers.
- Gives emphasis to the communication of information to different decisional centers.
- Involves human factor management
- Customized as per the structure of the organization so that communication flow follows the principles of the organization.
- Collects and reports accounting data of various responsibility centers.
Features of Responsibility Accounting
- Establishment of Responsibility Centre: Responsibility Accounting stresses on setting up responsibility centers. For this purpose, an organization is subdivided on the basis of a specific area of activity. All the costs are classified and allocated as per these centers.
- Identification of Responsibility: On setting up responsibility centers, these are assigned to various heads who are specialized in the concerned area of activity. The responsibility with regard to these centers is clearly defined.
- Comparison of Actual and Planned Performance: The aim of responsibility accounting is to compare the actual and planned performance of each center. This way variations can be corrected by taking the right measures. With the help of this system performance of the division can be measured. Also, the performance report is submitted to the top management by the manager of the center.
- Based on Cost and Revenue: Responsibility Accounting takes into account information relating to the inputs and outputs. Here inputs refer to the costs, i.e. resources consumed be it material or labor hours, and output implies the revenues earned. Both are expressed in monetary terms.
- Assignment of cost: Based on controllability costs are classified, so as to control them. In the same manner, determination of the responsibility of the respective manager takes place as per controllable and non-controllable costs. Only those costs which are controllable in nature are assigned, so as to hold liable the concerned person. Controllable costs are the costs that can be controlled by the person in charge. Whereas uncontrollable costs are the costs that are not under the control of management.
- Aid to control: Performance reports submitted by various center heads acts as an aid to control the operations and costs.
Objectives of Responsibility Accounting
The various objectives of responsibility accounting is to:
- Ascertain the contribution of the responsibility center
- Provide a basis for evaluating the quality of a manager’s performance.
- Motivate the divisional manager to operate the center effectively.
- Establish accountability.
The process of responsibility accounting involves the following steps:
- First of all, division of organization into different responsibility centers takes place. And one manager is appointed for each center, who is in charge of the center.
- After that targets or budgets are set for each center. These targets are set after consulting with the manager of the concerned center. This is to ensure that all the required information about the department is available. Also, the manager knows what is expected of him. This ensures the clarity of goals. In this way, the determination of authority and responsibility takes place.
- Then, the managers are charged with the items and responsibilities so that they can get aware of their span of control.
- Goals set for various centers need to be attained with effective performance.
- After that, communication of actual performance to the managers of the center takes place. In case of any discrepancy between actual and standard performance, the variances are communicated to top management. Also, the name of managers who are responsible for the concerned centers is also conveyed. This helps in fixing responsibility.
- Preparation of performance report to each center to indicate the variances and items that need attention.
Design of Responsibility Accounting
Setting Up Responsibility Centres
The initial step of responsibility accounting involves the division of the organization into different responsibility centers. Now you must be wondering what is the responsibility centre? A responsibility center is the smallest area of activity that is under the control of a manager, who is in charge of that division. One must take care while planning and executing the establishment of the center. Further, factors like organizational structure, authority-responsibility relationship, factory layout, and production process should be taken as a base.
The manager should be given charge of the concerned responsibility center. The top management delegates authority to that manager. This helps in exercising control and making decisions. In this way, he is deemed responsible for attaining the objectives established for the center. These objectives can be related to cost, revenue, profit, or return on investment.
Measurement and Evaluation of Performance
Various objectives are specified for different responsibility centers. These objectives are in the form of targets and standards. Measurement and evaluation of actual performance for the period can be done on the basis of pre-determined criteria. This criterion can be the comparison of:
- Actual and budgeted data.
- Various centers of the organization.
- Present and past data.
- With competitors.
It is an indispensable part of the responsibility accounting. The report comprises data like the volume of production, per unit cost, quantity sold, profit earned, return on investment, capital invested, and so forth. Immediate reporting is advisable so that the top management can take necessary action.
- Divisionalized organization structure should be present in the organization.
- Well Defined areas of responsibility at all the levels of management.
- Simple and clear delegation of authority and responsibility.
- Active participation of managers of responsibility centers to prepare budgets.
- Holding managers responsible for such activities over which they exercise a substantial degree of control.
- Establishing targets that are attainable in practice.
- Actual and accurate collection of information on a periodic basis.
- Separation of controllable and uncontrollable factors.
- Use of Performance Report for timely evaluation.
- In case of any discrepancies take necessary measures to correct them.
Above all, responsibility accounting is all about collecting and reporting planned and actual accounting data. This data is related to the cost and revenues of the responsibility centers.