Responsibility accounting

MEGHA GUPTA

BBA III SEMESTER

SECTION-B

Meaning

“The essence of responsibility accounting is the accumulation of costs and revenue according to the areas of responsibility in order that deviations from standard cost data may be used by management at each level in controlling the operations and their cost.”

-William L. Ferrara

“Responsibility Accounting is a system under which costs are accumulated and reported at each level of responsibility so that the accounting and costs data may be used by the management at each level in controlling the operations and their costs.”

- R.M. Bhandari

Features The initial point of responsibility. All cost are classified according to responsibility centers. At each responsibility centers, only those cost are

collected over which the executive of that center has control.

Accounting is the organization chart which explains the functional areas of each executive

Controllable cost of each center are classified in such a way in various categories, that is provide suitable base for analysis.

Under responsibility accounting system, each executive responsibility center make a comparison of actual performance / result with predetermined target /goals and presents before the top management a report indicating his success or failure.

Responsibility centers

Responsibility Accounting as a system of control focuses attention on the responsibility centers. Any unit which is headed by a responsible manger is reoffered to as responsibility center. four types of responsibility center can be established in organization which are being discussed as under.

1. Expense Centre: A cost center is a smaller segment for which cost can be accumulated. in case of certain centers, it may not be possible to measure the output in terms of monetary units. in this the accounting system records only the cost incurred and not revenue earned. Such cost center provide services(tangible or intangible) to other departments. Normally all production centers and service centers are called as separate cost centers.

2. Revenue Centre: The revenue center is the smallest segment of activity for which only revenues are accumulated. The manager of revenue center, has the prime responsibility of generating sales revenues only. He has no control over the investment in assets or cost of producing a product. Revenue center is purely concerned with raising sales revenue and as such marketing department happens to be a revenue center.

3. Profit Centre: A profit center is a big statement of activity for which both revenues and costs are accumulated. As such, the structure of such center is measured in terms of expenses it incurs (input) and revenue it earns (output).The manager of such center holds the responsibility both for revenue and costs

4. Investment Centre: Investment center is segment of activity or area of responsibility in which the manger of the center is held responsible for the use of assets on the one hand and for profit (i.e., revenues minus expenses) on the other hand .he is responsible for maintaining a satisfactory return on the investment(i.e., assets employed) in his responsibility center.

Benefits or objectives

1. Primary control over the cost.2. Ascertain or determination the cost of products/goods

by traditional cost accounting system.3. The use of budgeting system becomes more easier due

to the divisions of the various functions/activities of the organization into responsibility centers.

4. System of awarding efficient employees and penalizing the inefficient may be introduced.

5. Due to this reports are prepared on the basis of ‘Principle of Exception’ and thus no time wasting in solving the normal problems faced by the management.

6. Paper work is enormously reduced due to systematic planning of all activities.

The essence of responsibility accounting is to communicate effectively i.e.; correct information to the right person at the right time. This requires that following steps should be taken:

1.Targets (budgets) are set and communicated to each manager/executive.

2. A continuous appraisal of actual performance is made operative and actual results are conveyed to each manager of concerned responsibility center.

3. The variances are reported to the higher management together with the names of manager of responsibility centers estimated with jobs.

4. The corrective measures are suggested/taken and communicated to the concerned managers of the centers.

Limitations

Like any other tool , responsibility accounting also suffers from some limitations which make its implementation are narrated as under:

1. There is likely to be a conflict between the individual interest and organization interest leading to serious problems in implementation of the system of responsibility accounting.

2. A lot of passive resistance may be faced if it is not judiciously applied. it may loose its basic objectives.

3. This system ignores the personal reactions of the personnel who are involved in the implementation.

4. There is need for a good reporting system without which the tool become useless and meaningless

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