Responsibility Accounting

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What is Responsibility Accounting?

A responsibility accounting system is an important tool in making decentralization work effectively by providing information to top management about the performance of organizational subunits. As companies became more decentralized, responsibility accounting systems evolved from the increased need to communicate operating results through the managerial hierarchy. Responsibility accounting implies subordinate managers’ acceptance of communicated authority from top management. Responsibility accounting is consistent with standard costing and activity-based costing because each is implemented for a common purpose—that of control. Responsibility accounting focuses attention on organizational subunit performance and the effectiveness and efficiency of that unit’s manager. Standard costing traces variances to the person (or machine) having responsibility for a particular variance (such as tracing the material purchase price variance to the purchasing agent). Activity- based costing traces as many costs as possible to the activities causing the costs to be incurred rather than using highly aggregated allocation techniques. Thus each technique reflects cause-and-effect relationships. A responsibility accounting system produces responsibility reports that assist each successively higher level of management in evaluating the performances of its subordinate managers and their respective organizational units. Much of the information communicated in these reports is of a monetary nature, although some nonmonetary data may be included. The reports about unit performance should be tailored to fit the planning, controlling, and decision-making needs of subordinate managers. Top managers review these reports to evaluate the performance of each unit and each unit manager. The number of responsibility reports issued for a decentralized unit depends on the degree of influence that unit’s manager has on day-to-day operations and costs. If a...
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