Notes on Responsibility Accounting:- 1. Definition of Responsibility Accounting 2. Concept of Responsibility Accounting 3. Essential Features 4. Advantages 5. Major Difficulties.
- Notes on the Definition of Responsibility Accounting
- Notes on the Concept of Responsibility Accounting
- Notes on the Essential Features of Responsibility Accounting
- Notes on the Advantages of Responsibility Accounting
- Notes on the Major Difficulties Encountered in Introducing Responsibility Accounting
Notes # 1. Definition of Responsibility Accounting:
According to Charles T. Horngren, “Responsibility accounting is a system of accounting that recognises various decision centres throughout an organisation and traces costs to the individual managers who are primarily responsible for making decisions about the costs in question”.
Eric L. Kohler defines responsibility accounting as “a method of accounting in which costs are identified with persons assigned to their control rather than with products or functions”.
According to David Fanning, “Responsibility accounting is a system or mechanism for controlling the wider freedom of action that executive — decision centre managers in other words— are given by senior management and for holding those executives responsible for the consequences of their decisions”.
According to the Institute of Cost and Works Accounts of India:
“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 organisation under a specified authority in a person are developed as responsibility centres and evaluated individually for their performance.”
Responsibility accounting fixes responsibility for cost control purposes. Responsibility accounting is a method of accounting in which costs and revenues are identified with persons who are responsible for their control rather than with products or functions.
This method of accounting classifies costs and revenues according to the responsibility centres that are responsible for incurring the costs and generating the revenues.
Responsibility accounting focuses attention on responsibility centres. The responsibility centres represent the sphere of authority decision points in an organisation. A large firm is generally divided into meaningful segments, departments or divisions in order to have effective control.
These segments, departments or divisions of an organisation are called responsibility centres. Thus a responsibility centre is a specific unit of an organisation assigned to a manager who is held responsible for its operations.
In the words of Anthony and Reece:
“Responsibility centre is like an engine in that it has inputs, which are physical quantities of material, hours of various types of labour and a variety of services; it works with these resources usually; working capital and fixed assets are also required. As a result of this work, it produces outputs, which are classified either as goods, if they are tangible or as services, if they are intangible. These goods or services go either to other responsibility centres within the company or to customers in the outside world”.
Responsibility accounting is used to measure both inputs and outputs of the responsibility centre in monetary terms, wherever feasible. The total of various inputs is called cost whereas the total of outputs is called revenue.
Where monetary measurement of output is not possible (as services rendered by the accounting department to the organisation), then it may be measured in terms of total cost of goods or services transferred, or as a number of units of output.
Notes # 2. Concept of Responsibility Accounting:
Responsibility accounting involves accumulating and reporting costs on the basis of individual manager who has authority to make day-to-day decisions. Under responsibility accounting the evaluation of manager’s performance is based only on matters directly under the manager’s control. It is also termed as profitability accounting.
In this system, the accountability is established according to the responsibility delegated to various levels of management and they are made responsible to give adequate feedback in terms of delegated responsibility. The basic idea behind responsibility accounting is that each manager’s performance should be judged by how he or she manages those items and only those items under his/her control.
The best way to encourage managers to achieve the desired level of performance is to measure their performance in comparison to budgeted results. Periodic comparisons of the actual costs, revenues and investments with the budgeted costs, revenues and investments relating to individual managers can help management in ascertaining their performance.
Notes # 3. Essential Features of Responsibility Accounting:
a. Information for both output and input of resources, i.e., based on cost and revenue data for financial information.
b. Information for planned and actual performance.
c. Identification of responsibility centre.
d. Transfer pricing policy.
e. Performance reporting
f. To report reasons for deviation from original plan and to what extent.
Notes # 4. Advantages of Responsibility Accounting:
Following are the main advantages of responsibility accounting:
(i) It establishes a sound system of control because it enables top management to delegate authority to responsibility centres while retaining overall control with itself.
(ii) It forces the management to consider the organisational structure to result in effective delegation of authority and placement of responsibility. It will be difficult for individual manager to pass back unfavorable results. Thus, it facilitates decentralisation of decision making.
(iii) It encourages budgeting for comparison of actual achievements with the budgeted figures. It compels management to set realistic budget.
(iv) It increases interest and awareness among the supervisory staff as they are called upon to explain about the deviations for which they are responsible.
(v) It simplifies the structure of reports and facilitates the prompt reporting because of exclusion of those items which are beyond the scope of individual responsibility.
(vi) It is helpful in following management by exception because emphasis is laid on reporting exceptional matters to top management and consequently top management is not burdened with all kinds of routine matters.
Notes # 5. Major Difficulties Encountered in Introducing Responsibility Accounting:
Following are the major difficulties encountered in introducing a system of responsibility accounting:
(i) Generally the prerequisites for a successful responsibility accounting scheme i.e., a well-defined organisation structure, proper delegation of work and responsibility, proper allocation of costs, a proper system of reporting are absent and makes it difficult to have a responsibility accounting.
(ii) It becomes difficult to have a further analysis of expenses than provided by traditional classification of expenses. For example, wages of workman is controllable but fringe benefits included in it have to be paid under law or as per agreement with the workers’ union.
(iii) While introducing the system supervisory staff may require additional clarification especially in the responsibility reports. They must be explained properly the purpose and benefits of the new system.