Module 5.

1
Responsibility Accounting
 Module Objectives
▪ Understand the meaning and essential
features of responsibility accounting
▪ Differentiate responsibility centers
(cost, profit, and investment centers)
▪ Determine basis of transfer pricing
▪ Enumerate advantages of
responsibility accounting
 Responsibility Accounting
▪ Is a system of accounting that recognizes various
responsibility centers throughout the organization and
assigns particular revenues and costs to the one having
pertinent responsibility – Charles T. Horngreen
▪ a system of control where responsibility is assigned for
the control of costs
 Essential Features
1. Inputs and Outputs (or Cost and Revenue) –
responsibility is based upon information relating to
inputs and outputs; inputs expressed in monetary terms
are known as costs, while outputs are known as
revenues.
2. Planned and Actual Information or Usage of Budgeting –
it is through budget that responsibility for implementing
plans is communicated to each level of management
 Essential Features
3. Identification of Responsibility Centers – a large firm is
divided into meaningful segments, departments, or
divisions called responsibility centers; these may be
categorized as (1) cost center, (2) profit center, and (3)
investment centers
4. Relationship between Organization Structure and
Responsibility Accounting System – a sound structure
with clear-cut lines of authority is ideal
 Essential Features
5. Assigning Cost to Individuals and Limiting their Efforts to
Controllable Costs – only those cost and revenues over
which an individual has a definite control can be
assigned to him for evaluating his performance
• Controllable cost – cost which can be controlled or
influenced by a specified person or level of management
• Uncontrollable cost – cannot be controlled or influenced
by the action of specified individual or undertaking
 Essential Features
6. Transfer Pricing Policy – in common practices of
transferring goods and services from one segment to
another, there is a need to determine the price at which
the transfer should take place so that cost and revenue
could be properly assigned.
7. Performance Reporting – performance is reported by
each responsibility unit to identify deviations and
corrective actions
 Essential Features
8. Participative Management – plans are laid and
standards are fixed according to the mutual consent and
the decisions reached after consulting subordinates
9. Management by Exception – management focuses on
significant deviations and not the burden of routine
matters; condensed reports requiring attention must be
sent to particularly higher levels of management
 Essential Features
10. Human Aspect of Responsibility Accounting – the aim is
to evaluate the performance and provide feedback so
that future operations can be improved, it is not to
place blame; goals and objectives are achieved through
people and hence, responsibility accounting system
should motivate people.