UDC 657

INTRODUCTION OF RESPONSIBILITY ACCOUNTING SYSTEM IN GEORGIAN

COMPANIES

Kharkhelauri Khatuna

PhD in Business Administration

Associate Professor of Georgian Technical University

kh.kharkhelauri@gtu.ge

Khinikadze-Gvaramia Tamar

PhD in Business Administration

Assistent Professor of Georgian Technical University

t.khinikadze@gtu.ge

Bibichadze David

PHD in business administration

Associate Professor

D.bibichadze@auditex.ge

Abstract:

The responsibility accounting system is a mechanism by which costs and revenue

are accumulated and reported to the top management to make an effective decision. In
addition, it gives freedom to individuals to amplify their skills to reduce the cost and
increase the organization’s revenue. In a responsibility accounting system, organizations
divide their departments into different responsibility centers, which help them focus on
only those whose performance is not as per target. At the same time, this responsibility
accounting system is valid only for the big organization because it requires skill and more
workforce for the responsibility center. For an effective responsibility accounting system,
it is necessary all the managers must be aligned with the company objective and know
their responsibility.

Keywords: direct and indirect costs; Distribution base for indirect costs;
controllable expenses; responsibility centers;

Introduction

The capabilities of a large company, as a whole, are necessary to manage its

departments or divisions. Departmental management accounting has two main objectives.
The first is to create a department accounting system, the manager determines the
information to evaluate the profitability or performance of the department. Second, create
a responsible accounting system to control costs and expenses and evaluate the work of
managers responsible for their management.

Related literature

The departmental accounting system is an accounting and information system that

records the activities (business) and financial information of these departments. Large
organizations cannot plan, organize and control through only one centralized accounting
system. Because of this, corporations are divided into many departments or centers of
responsibility, such as shipping and procurement, sales, manufacturing, and other
departments. Many companies also apply decentralization according to the type of
primary product or service provided. For example, the company Microsoft has separate
Windows, Xbox, and Microsoft Office departments. Each of these departments, in turn,
represents a responsibility center that is an identified segment within the company, whose
head has the authority and accountability for the activities and assets of this unit. ( Wild
& SHaw, 2012)

Each responsibility center has its own accounting system, on the basis of which
reports are compiled for internal and external users, how profitable and effective the
activity of a particular department is. This report allows you to compare the budget data
on the costs and revenues of a particular responsibility center with actual results, evaluate
and analyze individual deviations (changes).

Responsibility center reports should only include controllable costs, because

department heads are not authorized to manage costs incurred for activities outside of
their delegated authority.

Management uses these reports to evaluate the performance of departments and

make decisions such as whether to merge several of them or cancel any of them in order
to improve both the financial and non-financial results of the corporation in the future.
(Horngren, Sundem, Burgstahler, & Schatzberg, 2014)

Depending on what types of activities the responsibility center has the right to
carry out, they are classified as cost, income, profit and investment centers.

Responsibility accounting is a method that establishes a system of control and

accountability, it also requires skilled manpower, which increases its cost.

Below are the steps involved in responsibility accounting:

 Defining responsibility or cost center.

 Tracking the actual performance of each responsibility center.
 Comparing actual performance with the target performance.
  Analyzing the variance between actual performance and target performance
 Fixing responsibilities for each center after variance analysis
 Communicating corrective actions to the individuals of each center.

Evaluating the performance of a department, management always considers what type

of responsibility center a particular department represents. Centers that generate income
and incur costs are profit centers. The performance of their managers is measured by their
ability to generate maximum income at minimum cost. Investment centers are
additionally responsible for the effective management of assets, and the performance of
their managers is assessed by using the center's assets to maximize profits. The department
that only incurs costs and does not receive revenue is the cost center, and their leaders are
responsible for controlling costs, and therefore for keeping them in the desired range. The
manufacturing department of a manufacturing company and its service departments, such
as finance, advertising, and purchasing departments, are cost centers.They need to be
serviced as they provide services such as maintenance and operations to all other
departments. (Horngren, Datar, & Rajan, 2012)
The accounting for department expenses, it should be borne in mind that when
an enterprise calculates profits by departments, there may be resistance in these
calculations when trying to regularly allocate expenses to operating (production)
departments. With regard to direct and indirect costs, as you know, direct costs are costs
that can be attributed to the cost object. Direct costs are included directly and in full in
the costs incurred for the facility. This structural subdivision is the object of expenses in

.
the accounting of expenses by departments (department, branch, department, shop, etc.)
For example, the wages of those employees who are employed only in one specific
structural unit and spend all their working time here will be directly and fully included in
the costs of this object (department, unit). (Kharkhelauri, 2017) Indirect costs are costs
incurred for the benefit of the general, and not just one specific department. It is
impossible and/or undesirable to trace these costs to each department (there would be
more cost to track them than the benefit gained from such identification). For example, if
there are several departments in the same building, then they all use their own lighting,
ventilation and heating, etc. Indirect costs of this kind need to be distributed among
departments according to their share of the use of this common good, so that we get real

information about profitability each of them .

In the ideal case, the distribution of indirect costs is carried out according to one
common cause-and-effect relationship for costs, that is, you first need to determine the
basis for the distribution of costs, since there is no standard rule for calculating the base,
because allocation of costs is based on several factors, and the importance of these factors
varies from agency to agency and organization.
 The cost allocation requires a decision to be made and the staff agrees to that
decision, when the allocation process is perceived as unfair, employee dissatisfaction
increases. Therefore, it is important to carefully develop and explain the system for
allocating costs between departments.

We often fail to identify a causal relationship that is common to the entire

organization. We then allocate each indirect cost separately according to the basis that is
more appropriate for determining the benefit share. Measuring the proportion of benefits
derived from indirect costs to a department can be difficult.

Suppose a company wants to allocate all indirect costs among three different
departments according to their footprint. To allocate this cost, we first calculate the share
of the area occupied by each of them in the entire building, then divide these costs among
the costs accordingly. Of course, whichever department occupies part of the entire space,
it should be assigned the appropriate share (percentage) of the costs. When the
distribution of indirect costs is completed, they are then divided accordingly from the
total profit of the departments to determine the net profit of each of them. But the
distribution of all indirect costs on one common base often does not make sense. Indirect
wages, as the salaries of those employees who, in our case, serve all three departments,
should be distributed in accordance with the fact that these employees trust the services
of each department. For example, the salary of a trainer, which is spent by employees of
all three departments, should be distributed by hours of work. If these trainings are held
in each department, but if the training training groups are staffed by employees from all
three departments, then this cost is divided according to the share of employees in each
department .

As for the building rent, depreciation, property tax insurance and other expenses,
as we mentioned above, they will be distributed according to the share of the area
occupied by each department in the whole building. In addition to this, there is another
area that all departments use. For example, parking, ground floor, stairwell, etc. The cost
of maintaining and storing this space is desirable depending on the number of users and/or
the flow of employees of each department. This method can be used to allocate
maintenance costs for elevators.

In order to receive expenses and/or revenues of the service department, operations

departments (enterprises) need support/assistance from departments such as human
resources, finance, advertising, and purchasing. These types of departments are usually
expense departments, which means they don't generate income. A departmental cost
accounting system can summarize and report the costs incurred directly by service
departments to achieve a specific goal. The system then allocates the costs of the service
departments to the operating (production) departments that benefit from their services.
This goal is achieved, for example, by the traditional two-stage cost allocation method.
First, let's split the serious production overheads into one most appropriate distribution
across departments. Then we will allocate the indirect costs of the department for
manufactured products or services rendered through the sales base.

The introduction of international accounting standards in the post-Soviet space is being

successfully implemented, including in Georgia. In parallel with this process, for the
effective management of organizations, it became necessary to introduce approaches and
concepts of management accounting, which are based on the best practices of doing
business in countries with developed market economies.

Consequences and their Judgment

We conducted a relevant study to determine how the cost accounting system is

being implemented in Georgian companies by responsibility centers.

The research is based on the principle of stratified selection, namely: from the data
posted on the official website of the Ministry of Georgia at www.reportal.ge, where
companies are grouped according to the types of economic activity they carry out, we
selected companies from ten regions.

The companies were selected based on the information of the Statistical Service of
Georgia, from the areas with the highest specific share in the gross domestic product.
(Geostat, 2022)

Wholesale and retail trade; repair

of motor vehicles and motorcycles
17% Real estate activities
20%
Manufacturing
Construction
5% 11% Transportation and storage
Public administration and defence;
compulsory social security
5%
Agriculture, forestry and fishing
5% 10%
Information and communication
5%
Financial and insurance activities
10%
6% Arts, entertainment and recreation
7% Other service activities

We selected 5 companies based on the principle of group selection and sent the
questionnaire. 22% of the respondents said to participate in the survey (did not answer).

The purpose of the survey was to determine the awareness of the cost accounting
system according to the responsibility centers; Studying the state of its implementation
and determining the reasons hindering the implementation process.
 As a result of the survey, it was determined that 10% of the respondents use a cost
accounting system based on responsibility centers and less than a year has passed since the
transition to this system. 10% are not at all familiar with the mentioned cost accounting
system, 20% are partially familiar with it. Whether the companies plan to improve the
knowledge of their personnel in this direction, the answers and their ranking look like
this:

Although only 10% of

respondents use this accounting
system, 30% believe that their team has enough information and knowledge in this
direction and they no longer need any kind of training. When asked whether they plan to
implement the mentioned accounting system in the company, only 10% gave a positive
answer. The result of asking the question to find out the reason for this attitude is as
follows:

50% of respondents name the main challenge of implementing the mentioned system: Not
having the practice of drawing up the budgets of individual departments, Although 40% of
respondents are large companies. Half of them believe that there is no need to account for
these features according to the principle of expenses. It should be noted that their

importance Arts, entertainment and recreation belong to the field .

Conclusion

In order to make optimal decisions for the effective management of companies, it is

necessary to have a complete and detailed description of expenses, their grouping,
distribution and redistribution according to different signs. One of the successful systems
for this is the implementation of the cost accounting system based on responsibility
centers.

As can be seen from the results of our research, this process has just started in
Georgia. The top management of the companies is not familiar enough, or not at all
familiar with the mentioned accounting system. They do not know the advantages of this
system compared to a single, centralized accounting system, so they do not plan to switch
to this system in the near future.

It should also be noted that a certain part of the respondents is ready to train and
improve their knowledge in this direction. Which will undoubtedly contribute to the
successful activity of companies and the development of business in general.

Bibliography
Wild, J. j., & SHaw, K. W. (2012). Manajerial Accounting. Irwin.

Geostat. (2022). Gross Domestic Product of Georgia - IV Quarter, 2022 (PRELIMINARY). Tbilisi:
National Statistical Office of Georgia.

Horngren, C. T., Datar, S. M., & Rajan, M. v. (2012). Cost Accounting: a Managerial Emohasis.

Horngren, C. T., Sundem, G. L., Burgstahler, D., & Schatzberg, J. (2014). Introduction to management
accounting. New Jersey: Pearson.

Kharkhelauri, K. (2017). Decentralization and cost accounting by responsibility center. International

scientific conference “Globalization andcurrent challenges in business” (pp. 396-401). Tbilisi:
GTU.