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Responsibility Accounting

Responsibility Accounting

Responsibility Accounting is a method of accounting in which costs and revenues are identified with persons assigned to their control rather than with products or functions. Responsibility Accounting collects and reports planned and actual accounting information about the inputs and outputs of responsibility centres. centres. In Other words Responsibility accounting is based on cost and revenue data for financial information.

Basis Principles of Responsibility Accounting


1. Objectives 2. Controllable Costs 3. Explanation 4. Management by exception

Responsibility Centre

Responsibility Centre is a unit of an organisation that is separable and identifiable for operating purposes and its performance measurement should be possible. The important criterion for creating a responsibility centre is that the unit of the organisation should be separable and identifiable for operating purpose and its performance measurement should be possible.

Objectives of Responsibility Centre

i) To Provide basis for evaluation of quality of performance. (based on efficiency & effectiveness) ii) To Motivate, consistent with the basic goals of the organisation.

Responsibility Centre-Sketches Centre-


Types of Responsibility Centres Cost Centre Revenue Centre Profit Centre Investment Centre

Cost Centres

Cost Centre or Expense centre is a segment of an organisation whose financial performance is measured in terms of cost. In this type of Reporting, Revenue is excluded Cost in this case, includes fixed and variable cost but excludes Common costs

Cost Centre- Sketches Centre-

Suitability of Cost Centres

i) In Places where output (revenue) cannot be reliability measured in financial terms such as legal department, accounting department & Personnel department ii) A Unit which is producing one single product iii) To measure performance of departmental manager.

Engineered expense centers


They have the following characteristics: - Their inputs can be measured in monetary terms. - Their output can be measured in physical terms. - The optimal Rupee amount of input required to produce one unit of output can be established.

Engineered expense centers: Examples


Manufacturing operations. Warehousing, distribution, trucking and similar units in the marketing organization Accounts receivable account payable and payroll section in the controller department. Personnel record and cafeteria in the human resource department.

Discretionary expense center:

The output of discretionary expenses center cannot be measured in monetary terms. They include administration and support units research and development organization and most marketing activities. Performance is measured in terms of working within the budgets.

Revenue Centre

Revenue Centre is a segment of an organisation whose financial performance is measured in terms of Revnue. Revnue. In this type of Reporting, Cost is excluded For Eg: Sales Department Eg:

Profit Centre

Profit Centre is a segment of an organisation in which financial performance is measured on the basis of Profit.

Profit Centre

Advantage of Profit Centre


i) Profit is a powerful tool for measurement ii) Profit Centre represents a business unit iii) Profit Centre makes decentralisation possible.


i) Criteria for Profit Centre selection ii) Measurement of Expenses (allocated expenses) iii) Transfer Prices (for Inter Departmental transfers)

Investment Centre

Investment Centre is a responsibility centre whose performance is measured in relation to revenues/ profits and the assets employed in the division.

Investment Centre-Sketches Centre-

A simple summary of the responsibility centers

Revenue Center
Output measured in monetary terms

Expense/Cost Centers

Input measured in monetary terms

Profit Centers

Output measured in monetary terms

Investment Centers

Output measured in monetary terms

Performance Evaluation
Type of Responsibility Centre Cost Centre Revenue Centre Profit Centre Investment Centre Manager has control over Costs (only controllable) Revenue Principal Performance Measurement Variance Analysis

Budgets Variance Analysis Costs & Revenue Profit Cost, Revenue & ROI Investment Residual Income

What did we learn from these control system illustrations?

All responsibility centers evolve from the concept of controllability. Controllability principle states a manager should be assigned responsibility for the revenue, costs, or investment that he/she could control. Revenues, costs, or investments that do not fall under a managers control must be excluded when evaluating the manager or his/her center. Problem with this concept: In most organizations, many revenues and costs are jointly earned or incurred and differentiation the controllable from the uncontrollable is difficult.

An alternative to Controllability

Some argue that performance measures should be chosen to influence decision-making decisionbehavior. For example, if market prices for raw material is increasing, what can a manager do? Perhaps, enter into long term contract for fixed prices for raw materials. If electricity consumption cost is going up, find out how consumption can be economized (better machines, lighting, reduce waste).

Benefits of Responsibility Accounting


1. Clear defining and communicating the corporate objectives and individual goals. 2. Compels management to set realistic plans and budgets. 3. Delegation of Decision Taking 4. Exception reporting 5. Closer control. 6. Measures Performance of Individual in objective mananer

Difficulties in Implementation

1. Management may find it difficult to fix responsibility. 2.The traditional way of classification of expenses should be subjected to a further analysis which comes difficult 3. Managers may need additional clarification because of the design of responsibility report being different from routine reports.

Return on Investment (ROI)


Most common form of Performance evaluation ROI = Profit Margin ---------------- X 100 Investment RO I = Sales Revenue X Profit Margin X 100 Investment Sales Revenue


Advantages of ROI

It relates return to level of investment ROI can be analysed into other ratios which are useful for analytical purpose. It can be used for inter firm comparison


1. Problem of defining Profit & Investment 2. For Inter firm comparison, Co may not follow common accounting policies & practices for Assets & Profits. 3. Manager may only select investment with high ROI and reject projects which increase the value of the business unit

Residual Income Method

In case of Residual Income Method, Capital Charge of use of Capital (Investment) is deducted from the Divisional Profits. Residual Income = Div. Profits - Interest


Non Financial Control Measures


Market Position Productivity Product Leadership Personnel Development Employee Attitude Public Responsibility