Responsibility Accounting

Definition 1
 “Responsibility accounting is a system of
accounting that recognizes various decision
centers throughout an organization and
traces costs to the individual managers who
are primarily responsible for making
decisions about the costs in question.”
 CHARLES T. HORNGREN.
Definition 2
 Responsibility accounting is “ a system of
management accounting under which accountability is
established according to the responsibility delegated
to various levels of management and a management
information and reporting system instituted to give
adequate feedback in terms of the delegated
responsibility. Under this system, divisions or units of
an organization under a specified authority in a person
are developed as responsibility centers and evaluated
individually for their performance.” ICWAI
Fundamental Aspects/Essential Features
1. Used as a control device
2. Costs & Revenues (Inputs & outputs) – Based on
costs and revenue information. Input costs of raw
material, labor hours.. Outputs are revenues.
3. Use of Budgeting – Resp.acc requires both planned
& actual information. Fixed / flexible budgets and
profit planning are incorporated.
4. Identification of Responsibility centers – They
represent the sphere of authority or decision points
in an organization- cost centre, profit centre,
investment center.
5. Organization Structure & Responsibility
accounting system – orgn structure with clear
cut lines of authority is a prerequisite. R.A
system should parallel the orgn structure.
6. Assigning costs to individuals – only those
costs & revenues an individual has definite
control can be assigned to evaluate
performance. [Controllable & Uncontrollable
costs]
7. Transfer Pricing – price at which transfer of
goods should take place so that costs and
revenues can be properly assigned.
8. Performance reporting – Responsibility
reports are prepared for each responsibility
unit.
9. MBO
10. HR aspect of R acctg – provide feedback
for future operations and motivate people –
used in positive sense and improve
performance. – should consider needs,
interests etc.
Steps in Responsibility Accounting
 Divide orgn into responsibility centers, each
under charge of resp. managers who are
responsible for the performance of their
depts.
 Set targets for each resp center- consult
manager
 Record actual performance and
communicated to concerned manger and
compared with goals set.
 Variances are conveyed to top management
to fix responsibility.
 Timely action taken to correct deviations.
Responsibility Performance
Reporting
 Purposes:
1. To determine the degree of performance in
the area of responsibility for which the
responsibility manager is directly
responsible.
2. To formulate measures to improve the
performance of the responsibility center
manager.
Performance measurement of different
centers.
 Cost center – measured in terms of quantity
of inputs used in producing given output.
Comparison of actual with budget is made to
determine variances. [variance analysis]
 Profit center – achievement of budgeted
profit, contribution margin, Net profit,
controllable profit, PBT, PAT.
 Investment centre – ROI method and RI
method [EVA method.]
Measurement techniques..

 Variance analysis – cost variance analysis &

revenue variance analysis.
 Division Contribution Margin – Total division
revenue less the direct costs. – controllable &
un-controllable costs are identified. Very
useful for resource allocation and overall
corporate planning and policy decisions.
Investment decisions are made with the help
of CM
 Division net profit – Net profit margin is
considered after related revenues, direct and
indirect costs.
 ROI = Net profit / Capital employed x 100.

(or) Divisional profit / Divisional Investment x

100
 RI method [EVA] = PAT – [Cost of Capital x

capital invested].