Responsibility accounting is a management control system based on the principles of delegating and locating responsibility. The authority is delegated on responsibility centre and accounting for the responsibility centre. Responsibility accounting is a system under which managers are given decisions making authority and responsibility for each activity occurring within a specific area of the company. Under this system, managers are made responsible for the activities of segments. These segments may be called departments, branches or divisions etc., one of the uses of management accounting is managerial control.
Responsibility accounting is a system of dividing an organization into similar units, each of which is to be assigned particular responsibilities. These units may be in the form of divisions, segments, departments, branches, product lines and so on. Each department is comprised of individuals who are responsible for particular tasks or managerial functions. The managers of various departments should ensure that the people in their department are doing well to achieve the goal. Responsibility accounting refers to the various concepts and tools used by managerial accountants to measure the performance of people and departments in order to ensure that the achievement of the goals set by the top management.
Responsibility accounting, therefore, represents a method of measuring the performances of various divisions of an organization.
For example, if Mr. A, the manager of a department, prepares the cost budget of his department, then he will be made responsible for keeping the budgets under control. A will be supplied with full information of costs incurred by his department. In case the costs are more than the budgeted costs, then A will try to find out reasons and take necessary corrective measures. A will be personally responsible for the performance of his department.
Responsibility accounting usually involves the preparation of annual and monthly budgets for each responsibility center. Then the company’s actual transactions are classified by responsibility center and a monthly report is prepared. The reports will present the actual amounts for each budget line item and the Variance-analysis” title=”What is variance analysis?”>variance between the budget and actual amounts.
Responsibility accounting allows the company and each manager of a responsibility center to receive monthly feedback on the manager’s performance.
The following principles of Responsibility Accounting are taken into consideration in order to:
Fix up the target on budgets or standards or estimates according to responsibility;
Evaluate the performances, i.e., to compare the actual results with the budgets for ascertaining the variances;
Analyse the variances for fixing responsibility on the responsibility centres and make reports to the top management.
Take corrective actions and communicate these to the persons concerned.
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Responsibility accounting is a system of accounting that focuses on the responsibility of managers for the costs and revenues that they control. It is a way of measuring and reporting performance that is based on the idea that managers should be held accountable for the results of their decisions.
Responsibility accounting is based on the following principles:
Accountability: Managers should be held accountable for the costs and revenues that they control.
Attribution: Costs and revenues should be attributed to the managers who are responsible for them.
Control: Managers should have the authority to control the costs and revenues that they are accountable for.
Cost allocation: Costs should be allocated to responsibility centers in a way that reflects the benefits that those centers receive from the costs.
Cost center: A cost center is a responsibility center that is responsible for costs but not for revenues.
DECISION MAKING: Responsibility accounting can be used to help managers make better decisions by providing them with information about the costs and revenues that they control.
Delegation: Responsibility accounting can be used to help managers delegate authority by clearly defining the responsibilities of each manager.
Financial reporting: Responsibility accounting can be used to prepare financial reports that are more relevant to managers’ decision making.
Goal congruence: Responsibility accounting can be used to help managers achieve organizational goals by aligning their individual goals with the organization’s goals.
Management control system: A management control system is a system of planning, organizing, directing, and controlling an organization’s activities. Responsibility accounting is an important part of a management control system.
Performance evaluation: Responsibility accounting can be used to evaluate the performance of managers by comparing their actual results to their budgeted results.
Responsibility center: A responsibility center is an organizational unit that is headed by a manager who is accountable for the costs and revenues of that unit.
Segment reporting: Segment reporting is the process of reporting financial information for different segments of an organization. Responsibility accounting can be used to prepare segment reports.
Variance analysis: Variance analysis is the process of comparing actual results to budgeted results and identifying the reasons for the differences. Responsibility accounting can be used to conduct variance analysis.
Zero-based BUDGETING:Zero-based budgeting is a budgeting method in which each budget is prepared from scratch, as if no previous budget had been prepared. Responsibility accounting can be used to implement zero-based budgeting.
Responsibility accounting is a valuable tool for managers who want to improve their decision making and performance. It can help managers to focus on the costs and revenues that they control, to make better decisions, to delegate authority, to prepare financial reports that are more relevant to their decision making, to align their individual goals with the organization’s goals, to evaluate their performance, to report financial information for different segments of the organization, to conduct variance analysis, and to implement zero-based budgeting.
Here are some examples of how responsibility accounting can be used in practice:
A manufacturing company might use responsibility accounting to track the costs of each production line. This information can then be used to identify which lines are most profitable and to make decisions about how to allocate Resources.
A retail store might use responsibility accounting to track the sales of each department. This information can then be used to identify which departments are most profitable and to make decisions about how to allocate space and staffing.
A hospital might use responsibility accounting to track the costs of each department. This information can then be used to identify which departments are most expensive and to make decisions about how to improve efficiency.
Responsibility accounting is a powerful tool that can be used to improve decision making and performance in a variety of organizations.
What is responsibility accounting?
Responsibility accounting is a system that measures the performance of each responsibility center within an organization. It is a way of assigning costs and revenues to specific individuals or departments so that managers can be held accountable for their results.
What are the benefits of responsibility accounting?
There are several benefits to responsibility accounting, including:
Improved decision-making: Responsibility accounting can help managers make better decisions by providing them with accurate information about the costs and revenues of their respective responsibility centers.
Increased accountability: Responsibility accounting can help to increase accountability by making it clear who is responsible for what.
Improved coordination: Responsibility accounting can help to improve coordination between different parts of an organization by providing managers with a common understanding of the organization’s goals and objectives.
What are the limitations of responsibility accounting?
There are a few limitations to responsibility accounting, including:
It can be difficult to assign costs and revenues to specific responsibility centers.
It can be difficult to measure the performance of some responsibility centers, such as those that are involved in research and development.
Responsibility accounting can create a focus on short-term results at the expense of long-term goals.
What are the different types of responsibility centers?
There are three main types of responsibility centers: cost centers, profit centers, and Investment centers.
Cost centers are responsible for controlling costs.
Profit centers are responsible for both costs and revenues.
Investment centers are responsible for costs, revenues, and investments.
What are the key performance indicators (KPIs) for responsibility accounting?
The key performance indicators (KPIs) for responsibility accounting vary depending on the type of responsibility center. However, some common KPIs include:
Cost per unit produced
Revenue per unit sold
Profit margin
Return on investment (ROI)
How is responsibility accounting used in practice?
Responsibility accounting is used in a variety of industries, including manufacturing, retail, and Services. It is a common tool for managing costs and revenues, and for improving decision-making and accountability.
What are some examples of responsibility accounting?
Some examples of responsibility accounting include:
A manufacturing plant that is responsible for the costs of production.
A retail store that is responsible for the costs of goods sold and the revenues from sales.
A service company that is responsible for the costs of providing services and the revenues from fees.
What are the future trends in responsibility accounting?
The future trends in responsibility accounting include:
The increasing use of activity-based costing (ABC) to assign costs to responsibility centers.
The increasing use of performance dashboards to track KPIs.
The increasing use of responsibility accounting Software to automate the process.
Which of the following is not a responsibility center?
(A) Cost center
(B) Profit center
(C) Investment center
(D) Revenue center
Which of the following is a characteristic of a cost center?
(A) The manager is responsible for both costs and revenues.
(B) The manager is responsible for costs only.
(C) The manager is responsible for revenues only.
(D) The manager is responsible for neither costs nor revenues.
Which of the following is a characteristic of a profit center?
(A) The manager is responsible for both costs and revenues.
(B) The manager is responsible for costs only.
(C) The manager is responsible for revenues only.
(D) The manager is responsible for neither costs nor revenues.
Which of the following is a characteristic of an investment center?
(A) The manager is responsible for both costs and revenues.
(B) The manager is responsible for costs only.
(C) The manager is responsible for revenues only.
(D) The manager is responsible for both costs and revenues, as well as the assets used to generate those costs and revenues.
Which of the following is a benefit of responsibility accounting?
(A) It helps to improve Communication and coordination within an organization.
(B) It helps to improve decision-making within an organization.
(C) It helps to improve control within an organization.
(D) All of the above.
Which of the following is a limitation of responsibility accounting?
(A) It can be difficult to assign responsibility for costs and revenues to individual managers.
(B) It can be difficult to measure the performance of individual managers.
(C) It can lead to dysfunctional behavior on the part of managers.
(D) All of the above.
Which of the following is a type of responsibility accounting report?
(A) A cost report
(B) A profit report
(C) An investment report
(D) All of the above.
A cost report is a report that shows the costs incurred by a responsibility center.
(A) True
(B) False
A profit report is a report that shows the revenues and costs incurred by a responsibility center.
(A) True
(B) False
An investment report is a report that shows the revenues, costs, and assets used by a responsibility center.
(A) True
(B) False