Budget and Responsibility Accounting
Budget is a financial and/or quantitative statement, prepared and approved prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective. * CIMA Official Terminology
It is a plan quantified in monetary terms, prepared and approved prior to a defined period of time, usually showing planned income to be generated and/or expenditure to be incurred during that period and the capital to be employed to attain a given objective. It is a plan of future activities for an organization.
Budgeting is the whole process of designing, implementing and operating budgets. The emphasis is short-term budgeting process involving the provision of resources to support plans which are being implemented.
Budgetary control is the estabhlishment of budgets relating the responsibilities of executives the the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy or to provide a basis for its revision. * CIMA Official Terminology
Concept of Responsibility Accounting
The concept of responsibility accounting has emerged to accommodate the need for management information at a more specific level of detail than can be provided by financial accounting procedures. Responsibility Accounting is a method of accounting in which costs are identified with persons assigned to their control rather than with the products or function. Responsibility accounting is concerned with collecting and reporting planned and actual accounting information about the inputs and outputs of responsibility centres. Responsibility Accounting is the collection, summarization, and reporting of financial information about various decision centres (responsibility centres) throughout an organization; also called activity accounting or profitability accounting. It traces costs, revenues, or profits to the individual managers who are primarily responsible for making decisions about the costs, revenues, or profits in question and taking action about them. Responsibility accounting is appropriate where top management has delegated authority to make decisions. The idea behind responsibility accounting is that each manager's performance should be judged by how well he or she manages those items under his or her control. Responsibility accounting attempts to report results (actual performance) in such a way that: a. significant variances from planned performance can be identified b. reasons for variances can be determined
c. responsibility can be fixed and
d. timely action can be taken to correct problems
Responsibility accounting is based on four basic principles: * Objectives- The overall objectives of the business are divided and sub-divided into the objectives of each of its constituent parts, expressed as profit, contribution or cost.
* Controllable Costs- Responsibility accounting excludes or segregates costs which are not controlled directly by the manager. For example, in a machine shop the level of waste is directly controllable but the rent is not.
* Explanation- the results achieved in a profit centre are not all directly controllable by the profit centre manager. External factors will affect both revenues and expenditures. But responsibility accounting requires managers to explain why the actual results obtained differ from those in the forecast or budget, even if these are a result of changes in the external environment. It is the job of the manager of a responsibility centre to explain outcomes regardless of his or her personal influence over the results.
* Management by exception- the feedback of information on actual revenues and costs to the responsibility centres’ manager concentrates on the important deviations from the budget. This principle...
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