Responsibility Accounting - Meaning, Roles and Responsibility Centres
Concept And Meaning:
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. The test to identify the division is that the operating performance is separately identifiable and measurable in some way that is of practical significance to the management. Responsibility accounting collects and reports planned and actual accounting information about the inputs and outputs of responsibility centers.
Role Of Responsibility Accounting
Following are the main roles or contribution of responsibility accounting:
1. Decentralization
By dividing the total organization in smaller subunits, the organization becomes more manageable.
2. Performance Evaluation
Responsibility accounting establishes a sound and fair system of performance evaluation of each manager and personnel. The performance of each responsibility center is measured and presented periodically on performance report.
3. Motivation
Responsibility accounting emphasizes on the individual achievement-based performance evaluation. Therefore, the job becomes more challenging for the employees and motivates them to use their full potentiality in achieving the results.
4. Transfer Pricing
Responsibility accounting divides the organization in different autonomous responsibility centers or subunits. In such circumstances, product or service of one division or unit can be transferred to another division or unit within the same organization charging a transfer price. This creates an inter-competitive environment to make each subunit of the organization more profitable and efficient.
5. Drop Or Continue Decision
If the organization is divided into subunits, it becomes possible to measure division wise or product wise profitability of the organization. If saving in costs exceeds the foregone revenues, the center can be discontinued.
Process of Responsibility Accounting
Responsibility accounting is a concept that views the organization in parts or sub-systems rather than in total or a single system. Of course, the ultimate goal is to achieve organization's objective but that does not come at once. Total achievement is the aggregation of the achievements individual sector.
Responsibility accounting encompasses the following steps:
1. Identifying The Responsibility Centers
The basis of responsibility accounting system is the designation of each sub-unit in the organization as a particular type of responsibility center. A responsibility center is a sub-unit in an organization whose manger is held accountable for specific financial results of sub-unit's activities. The important criteria for creating a responsibility center is that the unit of the organization should be separable and identifiable for operating purposes and its performance measurement should be possible. An organization can be broadly subdivided into four main responsibility centers as cost center, revenue center, profit center and investment center.
2. Delegation Of Authority And Responsibility Or Decentralization
To increase managerial and operational efficiency, the manger of each subunit should be assigned specific authority and responsibility for the activity of that division. No one can be held accountable without having any prior responsibility and responsibility always accompanies corresponding authority. Responsibility centers are the decision centers also, and the decision requires the power or authority.
3. Controllable Of The Object
The manger of a cost center can be held accountable only for the costs, which are controllable by him. Therefore, it is an essential part of responsibility accounting to identify the controllable and non-controllable costs. The same thing applies in the case of revenues, profits and investment.
4. Establishing Performance Evaluation Criteria
Main purpose o responsibility accounting is to measure the divisional or subunit performance. Performance evaluation is a yardstick measurement of whether the results are obtained as ought to be or not. Most often the following criteria are applied for divisional performance evaluation.
• Standard Costing
• Budgetary control
• Profitability ratios
• Valuation measures
5. Electing Cost Allocation Bases
Divisional profitability heavily depends on the bases of allocation of joint overheads and corporate overheads. Switching from one method to another of cost allocation over the products or divisions, product wise profitability change to a great deal. Remember that for decision-making purpose, such allocated overheads should be carefully treated and well understood.
Responsibility Centers For Responsibility Accounting
1. Cost Center
A cost center is an organizational sub-unit such as department or division, whose manager is held accountable for the costs incurred in that division. For example, a Power and Airco Department can can be defined as a cost center within the Operation and Maintenance Department in United Telecommunication Company. Manager of a cost center is responsible for controllable costs incurred in the department, but is not responsible for revenue, profit or investment in that center. A cost center is a responsibility center in which inputs, but not outputs are measured in monetary value.
2. Revenue Center
A manager of a revenue center is held accountable for the revenue attributed to the sub-unit. Revenue centers are responsibility centers where managers are accountable only for financial outputs in the form of generating sales revenue. A revenue center's manger may also be held accountable for selling expenses such as sales persons' salaries, commissions, and order receiving costs.
3. Profit Center
Profits are the excess of revenue over the total expenses. Therefore, the manager of a profit center is held accountable for the revenues, costs, and profits of the center. A profit center is a responsibility center in which inputs are measured in terms of expenses and outputs are measured in terms of revenues.
4. Investment Center
The manger of investment center is held accountable for the division's profit and the invested capital used by the center to generate its profits. Investment centers consider not only costs and revenues but also the assets used in the division. Performance of an investment center are measured in terms of assets turnover and return on the capital employed.
