RESPONSIBILITY

ACCOUNTING
 MEANING AND DEFINITION OF
REPONSIBILITY ACCOUNTING
Responsibility accounting is a system of
accounting that recognizes various responsibility
centres throughout the organization 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.

Charles, T.Horngreen

Responsibility accounting is that type of

management accounting that collects and reports
both planned actual accounting information in terms
of responsibility centres.
ATURES OF RESPONSIBILITY ACCOUNTING

1. INPUTS AND OUTPUTS OR COST AND REVENUE: The

implementation and maintenance of responsibility accounting
system is based upon information relating to inputs and outputs.
Inputs expressed In the monetary term are known as cost and
output expressed in monetary terms are called revenue.

2. PLANNED AND ACTUAL INFORMATION OR USAGE 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 budget that responsibility for
implementing the plans is communicated to each level of
management.

3. IDENTIFICATION OF RESPONSIBILITY CENTRES : For effective

control ,a large firm is usually ,divided into meaningful segments
,departments or divisions of organization are called responsibility
4. RELATIONSHIP BETWEEN ORGANISATION STRUCTURE AND
RESPONSIBILITY ACCOUNTING SYSTEM :A sound organization
structure with clearcut lines of authority responsibility relationship is 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.

5. ASSIGNING COST TO INDIVIDUALS AND LIMITING THEIR EFFORTS

TO CONTROLABLE COSTS : Only those costs and revenues over
which an individual has a definite control can be assigned to him for
evaluating his performance .Responsibility accounting has an appeal
because it distinguishes between controllable and uncontrollable cost

CONTROLABLE COST : are those costs which can be controlled or

influenced by a specified person or a level of management of an
undertaking.
UNCONTROLABLE COST : are those which cannot be so controlled or
influenced by the action of specified individual or undertaking.
7. PERFORMANCE REPORTING :As responsibility account is a control
device .A control system to be effective should be such that plans must
be reported at the earliest so as to take corrective action for the future.
The deviations can be known only when performance is reported . Thus
,responsibility accounting system is focused on performance reports also
known as responsibility reports ,prepared for each responsibility unit.

8. PARTICIPATIVE MANAGEMENT: The function of responsibility

accounting system becomes more effective if participative or democratic
style of management is followed ,wherein ,the plans are laid or
budgets/standards are fixed according to the mutual consent and the
decisions reached after consulting the subordinates. It provides
motivation to the workers by ensuring their participation and self imposed
goals.

9. MANAGEMENT BY EXCEPTION : An effective responsibility

accounting system must provide for management be exception, i.e., it
should focus attention of the management on significant deviations and
not burden them with all kinds of routine matters condensed reports
requiring their attention must be sent to them particularly at higher levels
 STEPS INVOLVED IN RESPONSIBILITY
1.
ACCOUNTING
The organisation is divided into various responsibility centres each
responsibility centre is put under the charge of responsibility
manager. The manger are responsible for the performance of their
department.

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 goal of the responsibility centres are properly
communicated to them.

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

communicated to the executives 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 measure are initiated at
the earliest.
TYPES OF RESPONSIBILITY CENTRES:
1.Cost or Expense Centre: Cost centres are segments in which managers are
responsible only for the cost incurred but have no revenue responsibilities. The
performance of a cost centre is measured in terms of quantity of inputs used in
producing a given level of output. A comparison between the actual input used
and predetermined budgeted inputs is made to determine the variances which
represent the efficiency of the cost centre. Cost centres can be further classified
on the basis of
(a)Types of cost
(b)Functions performed

Expense/Cost centre
(classification on basis of type of cost)

Engineered Discretionary expense

expense centres centre
 EXPENSE OR COST CENTRE
(CLASSIFICATION ON FUNCTIONAL BASIS)

Production cost Service cost Ancillary cost Administrative Research and

centre centre and support Marketing
centre Development centre
centre centre

2.PROFIT CENTRE :
Responsibility centres may have both inputs and outputs. The inputs are
taken as cost and outputs are revenues. The difference between the
revenue and cost gives the profit. When a responsibility centre gets
revenue from output, it will be called a profit centre .When the output is
meant for outsiders ,then the revenue will be measured from the price
charged from customers and if the output is meant for other responsibility
centre ,then the management takes a decision whether to treat it as profit
centre or not.
SUITABILITY OF PROFIT CENTRE :

Establishment of profit centre may be suitable if the following conditions

are satisfied:
There exist a decentralized form of organization.
The divisional manager has access to all relevant information needed for decision
making.
The divisional manager is sufficiently independent.
Internal transfer of output from one division/centre to another division are not
significant.
A definite measure of performance is available.

ADVANTAGES OF PROFIT CENTRE :

Establishment of profit centre offers the following advantages

It encourages initiative as a manager of profit centre is subject to a lesser degree
of control of the top management.
It may improve the quality of decisions.
It quickens the decision making process as these need not be referred to top
management.
It saves time of the top management.
It enhances profit consciousness in the entire organization.
It promotes competition amongst managers of various profit centres and improves
their performance.
It helps in training divisional managers for top management responsibilities.
DISADVANTAGES OF PROFIT CENTRES:

Loss of top management control over different divisions.

Faulty decision at divisional level .
Conflict among individual interests of divisions and the organization as a whole.
Too much emphasis on short term profitability
Increased cost due to multiple requirement of facilities and personnel at each
profit centre.
Transfer pricing problems amongst profit centres.

INVESTMENT CENTRE:
An investment centre is an entity segment in which a manager can control not only
revenue and cost but also investment .The manager is made responsible for
properly utilizing the assets used in his centre and earn fair return on the amount
employed in assets in his centre .The performance of an investment centre can be
measured by relating profit to the investment base. The two commonly used
methods are as follows:

1.RETURN ON INVESTMENT/CAPITAL EMPLOYED

It establishes the relationship between profits and capital employed.The
term capital employed refers to the total investment made in the
investment centre/business .
100
RETURN ON CAPITAL EMPLOYED =
CAPITAL NET PROFIT(BEFORE TAX)
EMPLOYED
Or, ROI = NET PROFIT SALES 10
SALES CAPITAL 0
EMPLOYED

Or, ROI = NET PROFIT RETIO CAPITAL TURNOVER RATIO

(WHERE , NET PROFIT =
TOTAL ASSETS CURRENT LIABILITIES)

2.ECONOMIC VALUE ADDED/RESIDUAL INCOME APPROACH

Economic value added is a measure of performance evaluation the was
originally employed by Stern Stewart and Co . It is a popular method used
to measure the surplus value created by an investment or portfolio of
investments . It is considered to be a better measure of divisional
performance as compared to return on investment or assets . INVESTED
CAPITAL

EVA = NET OPERATING PROFIT AFTER TAX COST OF CAPITAL

Or, EVA = CAPITAL EMPLOYED (Return on investment- cost of
capital)

According to this approach an investment can be accepted if surplus(EVA)

is positive . It is only the positive EVA that will add value and enhance the
wealth oF shareholders.
ADVANTAGES OF RESPONSIBILITY ACCOUNTING
1. Assigning of Responsibility: Each and every individual in the
organization is assigned some responsibility and they are
accountable for there work. Everybody knows what is
expected of him. The responsibility can easily be identified as
satisfactory and unsatisfactory performances of various
persons are known. Nobody can shift responsibility to
anyb0ody else if something goes wrong. So, under this system
responsibility is assigned individually.

2. Improves Performance: The assigning of tasks to specific

persons acts as a motivational factor too. The persons in
charge for different activities know that their performance
will be reported to the top management. They will try to
improve their performance. On the other hand, it acts as a
deterrent for low performance also because persons know
that they are accountable for their work and they will have to
explain for their low performance.

3. Helpful in Cost Planing; Under the system of responsibility

accounting , full information is collected about costs and
4. Delegation and Control: This system enables management to
delegate authority while retaining overall control. The authority
is delegated according to the requirements of the task assigned.
On the other hand, responsibility of various persons is fixed
which is helpful in controlling their work. The control remains
with top management because performance of every cost centre
is regularly reported to it. So management is able to delegate
authority and at the same time to retain control.

5. Helpful in Decision-Making: Responsibility accounting is not

only a control device but also helpful in decision-making. The
information collected under this system is helpful to
management in planning its future actions. The past performance
of various cost centres also helps in fixing their future targets. So
this system enables management to take important decisions.
 LIMITATIONS ON RESPONSIBILITY
ACCOUNTING
THE PREREQUISITES FOR A SUCCESSFUL RESPONSIBILITY
ACCOUNTING SYSTEM ARE :
a. A SOUND ORG. STRUCTURE WHERE DIVISIONS CAN BE
IDENTIFIED CLEARLY AS RESPONSIBILITY CENTER
b. [ROPER 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
.THE TRADITIONAL WAY OF CLASSIFICATION OF EXPENSES
NEEDS TO BE SUBJECTED TO A FURTHER ANALYSIS WHICH
BECOMES DIFFICULT
.IN INTRODUCING THE SYSTEM, CERTAIN MANAGERS MAY
REQUIRE ADDITIONAL CLASSIFICATION PARTICULARLY IF THE
RESPONSIBILITY REPORTS ARE DIFFERENT FROM ROUTINE
REPORTS
 BY
PRIYA
RIFAT
IMRAN
SABARINATH SURYAPRAKASH
PRAVEEN KUMAR