Responsibility Accounting

Topics: Management, Investment center, Profit center Pages: 6 (1342 words) Published: March 23, 2013
Management Accounting - Responsibility Accounting
Planning & control are essential for achieving good results in any business. Firstly, a budget is prepared and, secondly, actual results are compared with budgeted ones. Any difference is made responsibility of the key individuals who were involved in (i) setting standards, (ii) given necessary resources and (iii) powers to use them. In order to streamline the process, the entire organization is broken into various types of centers mainly cost centre, revenue centre, profit center and investment centre. The organizational budget is divided on these lines and passed on to the concerned managers. Actual results are collected and displayed in the same form for comparison. Difference, if any, are highlighted and brought to the notice of the management. This process is called Responsibility Accounting. RESPONSIBILITY CENTRE

Responsibility accounting involves the creation of responsibility centres. A responsibility centre may be defined as an organization unit for whose performance a manager is held accountable. Responsibility accounting enables accountability for financial results and outcomes to be allocated to individuals throughout the organization. The objective is to measure the result of each responsibility center. It involves accumulating costs and revenues for each responsibility centre so that deviation from performance target (typically the budget) can be attributed to the individual who is accountable for the responsibility centre. (Colin Drury, Management and Cost Accounting, sixth edition)  

Chapter 12
A. Definition.
- an accounting system that collects, summarizes, and reports accounting data relating to the responsibilities of individual managers.
- an accounting system which tracks and reports costs, expenses, revenues, and operational statistics by area of responsibility or organizational unit.
- the system provides information to evaluate each manager on revenue and expense items over which that manager has primary control (authority to influence).
- some reports contain only those items that are controllable by the responsibility manager.
- some reports contain both controllable and uncontrollable
- in this case, controllable and uncontrollable]e items
should be clearly separated.
- the identification of controllable items is a fundamental task in responsibility accounting and reporting.
B. Some Basic Requirements.
- to implement a responsibility accounting system, the business must be organized so that responsibility is assignable to
individual managers.
- the various managers and their lines of responsibility should be fully defined.
- the organization chart is usually used as a basis for
responsibility reporting.
- if clear lines of responsibility cannot be determined, it is very doubtful that responsibility accounting can be implemented effectively.
- while decision-making power may be delegated for many items, some decisions (related to particular revenues, expenses, costs or actions) may remain exclusively under the control of top
- several items will be directly traceable to a
particular manager's area of responsibility but not actually becontrollable by that manager. (Items such as property taxes.) - Note: the controllability criterion is crucial to the content of performance reports for each manager.

A. Absolute Control.
- theoretically, a manager should have absolute control over an item to be held responsible for it.
- absolute controllability is rare.
- frequently, external or internal factors beyond a manager's control may affect revenues or expenses under that manager's responsibility.
- the theoretical requirement regarding absolute control must often be compromised, since some degree of noncontrollability usually exists.
- the...
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