RESPONSIBILITY ACCOUNTING

INTRODUCTION

Responsibility Accounting collects and reports planned and actual

accounting information about the inputs and outputs of responsibility
centres”. It is based on information pertaining to inputs and outputs.

The resources utilized in an organization are physical in nature like

quantities of materials consumed, hours of labour, etc., are called inputs.
They are converted into a common denominator and expressed in
monetary terms called "costs", for the purpose of managerial control. In
a similar way, outputs are based on cost and revenue data.

Responsibility Accounting must be designed to suit the existing structure

of the organization. Responsibility should be coupled with authority. An
organization structure with clear assignment of authorities and
responsibilities should exist for the successful functioning of the
responsibility accounting system. The performance of each manager is
evaluated in terms of such factors.
DEFINITION
An information system designed to a measure the performance of that
segment of a business for such a given manager is responsible is often
referred to as “responsibility accounting system”.
A responsibility accounting system should reflect the plans and
performance of each organization.  It is designed to provide timely
information for decision making and for the evaluation of performance. 
In addition to being timely such information should highlight deviations of
actual performance from planned performance so that appropriate
corrective action can be taken.  All items of expense are the
responsibility of an individual and should be charged to that individual at
the point of origin.  In other words, expenses should be viewed as the
responsibility of the manager of the organizational unit where costs
originated.  The manager at this level is authorized to incur expenses
and he is in a position to exercise direct control over them.
Charles, T. Horngreen:
“Responsibility accounting is a system of accounting that recognizes
various responsibility centres throughout the organisation and reflects
the plans and actions of each of these centres by assigning particular
revenues and costs to the one having the pertinent responsibility. It is
also called profitability accounting and activity accounting”. According to
this definition, the organisation is divided into various responsibility
centres and each centre is responsible for its costs. The performance of
each responsibility centre is regularly measured.
Features of Responsibility Accounting:

1. Inputs and Outputs or Costs and Revenues:

The implementation and maintenance of responsibility accounting
system is based upon information relating to inputs and outputs. The
physical resources utilized in an organisation; such as quantity of raw
material used and labour hours consumed, are termed as inputs. These
inputs expressed in the monetary terms are known as costs. Similarly
outputs expressed in monetary terms are called revenues. Thus,
responsibility accounting is based on cost and revenue information.

2. Planned and Actual Information or Use of Budgeting:

Effective responsibility accounting requires both planned and actual
financial information. It is not only the historical cost and revenue data
but also the planned future data which is essential for the
implementation of responsibility accounting system. It is through budgets
that responsibility for implementing the plans is communicated to each
level of management. The use of fixed budgets, flexible budgets and
profit planning are all incorporated into one overall system of
responsibility accounting.

3. Identification of Responsibility Centres:

The whole concept of responsibility accounting is focused around
identification of responsibility centres. The responsibility centres
represent the sphere of authority or decision points in an organisation. In
a small firm, one individual or a small group of individuals, who are
usually the owners may possibly manage or control the entire
organisation.

However, for effective control, a large firm is, usually, divided into
meaningful segments, departments or divisions. These sub- units or
divisions of organisation are called responsibility centres. A responsibility
centre is under the control of an individual who is responsible for the
control of activities of that sub-unit of the organisation.

4. Relationship between Organisation Structure and Responsibility

Accounting System:
A sound organisation structures with clear-cut lines of authority—
responsibility relationships are a prerequisite for establishing a
successful responsibility accounting system. Further, responsibility
accounting system must be so designed as to suit the organisation
structure of the organisation. It must be founded upon the existing
authority- responsibility relationships in the organisation. In fact,
responsibility accounting system should parallel the organisation
structure and provide financial information to evaluate actual results of
each individual responsible for a function.
5. Assigning Costs to Individuals and Limiting their Efforts to
Controllable Costs:
After identifying responsibility centres and establishing authority-
responsibility relationships, responsibility accounting system involves
assigning of costs and revenues to individuals. Only those costs and
revenues over which an individual has a definite control can be assigned
to him for evaluating his performance.

6. Transfer Pricing Policy:

In a large scale enterprise having decentralized divisions, there is a
common practice of transferring goods and services from one segment
of the organisation to another. In such situations, there is a need to
determine the price at which the transfer should take place so that costs
and revenues could be properly assigned.

The significance of the transfer price can well be judged from the fact
that for the transferring division it will be a source of revenue, whereas
for the division to which transfer is made it will be an element of cost.
Thus, there is a need of having a proper transfer policy for the
successful implementation of responsibility accounting system. There
are various transfer pricing methods in use, such as cost price, cost plus
normal profit, incremental cost basis, negotiated price, standard price,
etc. These methods of intra-company transfers have been discussed in
detail later in this chapter.

Steps for Achieving Goals of Responsibility Accounting:

1. The organisation is divided into various responsibility centres each
responsibility centre is put under the charge of a responsibility manager.
The managers are responsible for the performance of their departments.

2. The targets of each responsibility centre are set in. The targets or
goals are set in consultation with the manager of the responsibility centre
so that he may be able to give full information about his department. The
goals of the responsibility centres are properly communicated to them.

3. The actual performance of each responsibility centre is recorded and

communicated to the executive concerned and the actual performance is
compared with goals set and it helps in assessing the work of these
centres.

4. If the actual performance of a department is less than the standard

set, then the variances are conveyed to the top management. The
names of those persons who were responsible for that performance are
also conveyed so that responsibility may be fixed.

5. Timely action is taken to take necessary corrective measures so that

the work does not suffer in future. The directions of the top level
management are communicated to the concerned responsibility centre
so that corrective measures are initiated at the earliest.

The purpose of all these steps is to assign responsibility to different

individuals so that the performance is improved. In case the performance
is not up to their targets set, then responsibility may be fixed for it.
Responsibility accounting will certainly act as control device and it will
help in improving the overall performance of the business.

Advantages of Responsibility Accounting:

The advantages of responsibility accounting are:
1. It establishes a sound mechanism for control.

2. It forces the management to consider the organisational structure and

examines who is responsible for what and fix the delegation of power.

3. It encourages budgeting with which actual achievement can be

compared.

4. It increases interest and awareness of the officers as they are called

upon to explain about the deviations for which they are responsible.

5. The exclusion of items which are beyond the scope of the individual’s
responsibility simplifies the structure of the reports and facilitates
promptness in reporting.
Limitations of Responsibility Accounting:
Responsibility accounting suffers from the following-limitations:
1. The prerequisites for a successful responsibility accounting system
are:
(a) A sound organisational structure where divisions can be identified
clearly as responsibility centre.

(b) Proper delegation of work and responsibility.

(c) A proper system of reporting.

If these conditions are absent it is difficult to have a responsibility

accounting system.

2. The traditional way of classification of expenses needs to be

subjected to a further analysis which becomes difficult.
3. In introducing the system certain managers may require additional
classification particularly if the responsibility reports are different from
routine reports.

Responsibility Centres
The main focus of responsibility accounting lies on the responsibility
centres. A responsibility centre is a sub unit of an organization under the
control of a manager who is held responsible for the activities of that
centre. The responsibility centres are classified as follows:
1) Cost Centres,
2) Profit Centres and
3) Investment centres.
1) Cost Centres
When the manager is held accountable only for costs incurred in a
responsibility centre, it is called a cost centre. It is the inputs and not
outputs that are measured in terms of money. In a cost centre records
only costs incurred by the centre/unit/division, but the revenues earned
(output) are excluded form its purview. It means that a cost centre is a
segment whose financial performance is measured in terms of cost
without taking into consideration its attainments in terms of "output". The
costs are the planning and control data in cost canters. The performance
of the managers is evaluated by comparing the costs incurred with the
budgeted costs. The management focuses on the cost variances for
ensuring proper control. A cost centre does not serve the purpose of
measuring the performance of the responsibility centre, since it ignores
the output (revenues) measured in terms of money. For example,
common feature of production department is that there are usually
multiple product units. There must be some common basis to aggregate
the dissimilar products to arrive at the overall output of the responsibility
centre. If this is not done, the efficiency and effectiveness of the
responsibility centre cannot be measure.
2) Profit Centres
When the manager is held responsible for both Costs (inputs) and
Revenues (output) it is called a profit centre. In a profit centre, both
inputs and outputs are measured in terms of money. The difference
between revenues and costs represents profit. The term "revenue" is
used in a different sense altogether. According to generally accepted
principles of accounting, revenues are recognized only when sales are
made to external customers. For evaluating the performance of a profit
centre, the revenue represents a monetary measure of output arising
from a profit centre during a given period, irrespective of whether the
revenue is realized or not.
The relevant profit to facilitate the evaluation of performance of a profit
centre is the pre-tax profit. The profit of all the departments so calculated
will not necessarily be equivalent to the profit of the entire organization.
The variance will arise because costs which are not attributable to any
single department are excluded from the computation of the
department's profits and the same are adjusted while determining the
profits of the whole organization. Profit provides more effective appraisal
of the manager's performance. The manager of the profit centre is highly
motivated in his decision-making relating to inputs and outputs so that
profits can be maximized. The profit centre approach cannot be
uniformly applied to all responsibility centres. The following are the
criteria to be considered for making a responsibility centre into a profit
centre. A profit centre must maintain additional record keeping to
measure inputs and outputs in monetary terms. When a responsibility
centre renders only services to other departments, e.g., internal audit, it
cannot be made a profit centre. A profit centre will gain more meaning
and significance only when the divisional managers of responsibility
centres have empowered adequately in their decision making relating to
quality and quantity of outputs and also their relation to costs. If the
output of a division is fairly homogeneous (e.g., cement), a profit centre
will not prove to be more beneficial than a cost centre. Due to intense
competition prevailing among different profit centres, there will be
continuous friction among the centres arresting the growth and
expansion of the whole organization. A profit centre will generate too
much of interest in the short-run profit to the detriment of long-term
results.
3) Investment Centres
When the manager is held responsible for costs and revenues as well as
for the investment in assets, it is called an Investment Centre. In an
investment centre, the performance is measured not by profits alone, but
is related to investments effected. The manager of an investment centre
is always interested to earn a satisfactory return. The return on
investment is usually referred to as ROI, serves as a criterion for the
performance evaluation of the manager of an investment centre.
Investment centres may be considered as separate entities where the
manager are entrusted with the overall responsibility of inputs, outputs
and investment.
ILLUSTRATION