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What is Responsibility Accounting? Explained with Example

What is Responsibility Accounting?

A system that identifies responsibility centers and then determines its goals is referred to as responsibility accounting.

It also assists in the creation of performance measurement methods, as well as the generation and assessment of progress reports for the specified functional areas.

Accounting often entails the creation of monthly and yearly budgets for each responsibility centre.

It also keeps track of a firm’s costs and revenues, with financial reports compiled monthly or yearly and sent to the appropriate manager for review.

Example of Responsibility Accounting

Consider the following scenario –

Posh Footwear’s responsibility accounting method lets supervisors distribute resources and control costs depending on immediate demands.

Posh Footwear’s upper team monitors managers’ competence while also reducing the number of top-level executives who would oversee operations.

The executives of Posh footwear track the manager’s performance records to examine the overall work of all divisions to carry out the delineated functions correctly.

If the numbers appear to achieve the set objectives, upper management allocates different responsibility accounting budgets.

Process Step by Step

Responsibility Accounting is broken down into steps or formulas below –

  • Decide who is responsible for what and where the money is going or cost center.
  • There should be a clear target for each of the responsibility centers.
  • Track each responsibility center is performing in real-time.
  • Evaluate your current performance to your desired outcome.
  • The difference between actual and target performance is examined.
  • Following the variance analysis, each center’s duty should be determined.
  • Corrective action is taken by management, and it must be reported to the Persons of Responsibility Center.

Types of Responsibility Centers

Controlling costs, income, and investments is how a responsibility center is characterized.

1. Cost Center

A division of the company that is solely responsible for the cost. Revenues and investments are outside its control. Production departments, maintenance departments, accounting departments, legal departments, and so forth are examples. The variance analysis of costs is used to evaluate cost centres.

2. Revenue Center

The sales and marketing department, for example, has authority over income creation but not over costs and investment. Revenue centres are assessed using revenue variance analysis.

3. Profit Center

Both revenues and costs are under its control. Branch offices in various geographic regions are one example. Measurement of segment income is used to assess profit centre performance (based on controllable revenues and costs).

4. Investment Center

A division in charge of revenues, costs, and investments (assets such as inventory, receivables, fixed assets, etc.). Because investment centres are granted the power to decide their investments, they function as a separate organization. Company headquarters and subsidiaries are two examples. Different profitability criteria, such as return on investment, economic value-added, residual income and others, evaluate investment centres.

The Benefits of Responsibility Accounting

  1. It improves the managers’ attention and focuses since they must explain the changes for which they are accountable.
  2. Each employee will feel more efficient as their efforts and accomplishments are evaluated.
  3. It makes it easier to compare the achievements of pre-planned goals with actual outcomes.
  4. It assists management in planning and structuring a company’s future expenditures and revenues.
  5. The report structure is simplified, and prompt reporting is facilitated.
  6. As a cost-control technique, it instills in employees a sense of “cost consciousness.”
  7. It encourages managers to recognize the business structure, determine who is responsible for what, and resolve issues.
  8. Personal and organizational goals are set and conveyed in the most effective way possible.
  9. It enhances and regulates the company’s operational activities to achieve a more effective and efficient result.

What Are the Limitations?

  1. The responsibility centres cannot be easily identified without a sound organizational structure.
  2. Likely, an organizational chart won’t be able to be drawn out so that the lines of responsibility and power are clearly defined.
  3. There may be times where organizational and individual interests collide. Policy execution is likely to be hampered by such a dispute.
  4. The chosen person’s responses are likely to be felt during the policy implementation process, leading to passive resistance. Such acts may have a negative influence on the organization’s goals.
  5. The technology will only be helpful if an excellent reporting system is implemented.
  6. It may be time-consuming to conduct a new examination of the traditional methods of expense classification.

Final Words

The responsibility accounting system is a technique for accumulating and reporting costs and income to senior management to make successful decisions.

It allows individuals to demonstrate their abilities to save costs and increase income for corporations.

Organizations divide their departments into separate responsibility centres in a responsibility accounting system, which concentrates on only those divisions whose productivity is falling short of expectations.

Simultaneously, this accounting method is only appropriate for large organizations because each responsibility centre demands more talent and labour.