Responsibility Accounting

Responsibility accounting refers to a system that undertakes the identification of

responsibility centers, subsequently determines its objectives. It also helps in the
development of processes related to performance measurement as well as the preparation
and analysis of performance reports of the identified responsibility centers.
Responsibility accounting is a type of management accounting in which a company's management,
budgeting, and internal accounting are all held accountable. The fundamental goal of this accounting is
to assist all of a company's planning, costing, and responsibility centers.
Accounting often entails the creation of monthly and annual budgets for each responsibility center. It
also keeps track of a company's costs and revenues, with reports compiled monthly or annually and
sent to the appropriate manager for review. The focus of responsibility accounting is mostly on
responsibilities centers.
Objectives of Responsibility Accounting
See below for the major objectives or principles of responsibility accounting –

• Each responsibility center is given a target, which is communicated to the relevant

management level.

• At the end of the time period, there is a comparison between the target and the actual
performance.

• The variations that are detected in the budgeted plan are examined for fixing
responsibility to the center.

• Due measures are taken by the top management which is communicated to the
responsible personnel.

• The responsibility for costs does not include the policy costs and various other
apportioned costs.
Features of Responsibility Accounting
Read on to know more about the host of responsibility accounting features, you

• Inputs and Outputs

Responsibility accounting system can be implemented only on the basis of due
information of input and output. The monetary term of inputs is costs, and outputs are
correspondingly called revenues. Hence, cost and revenue information is crucial for
responsibility accounting.
• Use of Budgeting
Apart from the data of cost and revenue, planned and actual financial data is also
required. It is only with effective budgeting that the accounting plan implementation
can be communicated to the concerned levels of management.
• Relationship between the Responsibility Accounting System and Organization
Structure
Clear lines of authority and effective organization structure is absolutely necessary for
the success of a responsible accounting system. The accounting system is
appropriately designed to be consistent with the existing organizational structure.

• Identification of Responsibility Centers

Only after responsibility centers are identified, the responsibility accounting system can
be implemented. The centers go on to represent the decision points within the
organization.
 • Performance Reporting
As the responsibility account primarily relates to control, any deviation or disruption in
the plan has to be noted and reported at the earliest. On the report of such an issue,
corrective measures have to be taken. Such information is the basis on which
‘responsibility’ or performance reports are prepared.
Different Types of Responsibility Centers
A responsibility center is a functional business entity that is given definite objectives and goals,
dedicated personnel, procedures and policies as well as the duty for generating a financial
report.
Managers are vested with specific responsibility in terms of expenses incurred or revenue
generation or the investment of funds. Let us take a look at the four types of responsibility
centers.
1. Profit center
It contributes to both revenue and expenses, resulting in profit and loss, respectively.
For example – The product line is a profit center, and the responsible person is the
product manager.
2. Cost center
The center only contributes to specific costs that have been incurred. For example –
The housekeeping department will only incur costs.
3. Revenue center
The revenue center only leads to the generation of sales. For example – Sales
department of an organization.
4. Investment center
The center is responsible for profits and returns on investment. The latter includes the
fund which is invested in the organization's operations. For example – A subsidiary
entity of a company is an investment center. The responsible person in that instance
would be the president of the subsidiary.
Responsibility Accounting Example
The following scenario acts as an example of responsible accounting –
The responsibility accounting system of the company, Lush Footwear, allows the departmental
heads to allocate the expenses and control such costs based on immediate needs. The
executive management of Lush Footwear is tracking managers’ performance, and at the same
time, there are considerably fewer top-level executives who would direct the operations.

To carry out the demarcated functions properly, the executives of Lush Footwear prints the
responsibility accounting performance reports for the analysis of the holistic performance of
all the departments. If it is seen that the statistics seem to meet the established objectives,
further responsibility accounting budgets are allocated by the top management.
Steps in the Responsibility Accounting Process
The steps for proper implementation are as follows:

• Define responsibility centers correctly.

• Setting goals and assigning responsibilities to the various responsibility centers.

• On a regular basis, keep an eye on their actual performance.

• Compare actual performance to the target on a regular basis.

• Determine the cause (or causes) of a discrepancy between actual and target
performance.

• Management makes steps to address the discrepancy. The management also informs
the responsibility center about the situation.