Responsibility Accounting helps management with cost and budgetary control. It focuses on the cost drivers but not on who uses or who is responsible for those drivers. On the other hand, responsibility accounting is a control system where responsibility is given to individuals to achieve particular accounting objectives. Show
In other mechanisms or control matrix, this responsibility still rests with the departmental managers, but it remains indirect. Whereas, in responsibility accounting, this is a direct one and visible with the concerned departmental head. Table of Contents
Responsibility accounting involves the budgeting and the internal accounting for every responsibility center in a firm. Its goal is to help management plan, create, and control the responsibility centers in a firm. This type of accounting primarily involves preparing monthly and annual budgets for every responsibility center. It also takes into account the cost and revenue of a firm. The management maintains the monthly, quarterly, or yearly reports, then sent to the manager responsible for that department. We can say every department in a company gets a report that includes its monthly budget, as well as the actual amount for the most recent month. The report may also have a year-to-date budget and actual spending. ExampleFor example, Mr. A is a manager who is responsible for his department. He prepares the budget and is also responsible for keeping the budget under control. So for the efficacy of such a system, management must provide him all sorts of information, good or bad, about his department. It would make him fully aware of how things are moving and the areas where his strict attention is needed. If the actual spending gets over the budget, then Mr. A has to trace the error and take corrective actions. In all, we can say that Mr. will be personally accountable for his department’s performance. Requisites of Responsibility AccountingThe following are must for efficient implementation of responsibility accounting:
Responsibility CentersThe following are the types of responsibility centers: Cost CenterIt is a unit in a company that has control over the cost only, such as the production department. The cost center does not exercise control over other functions, such as revenues or investments. A point to note is that a manager responsible for any cost center is only responsible for the controllable costs and not uncontrollable costs. Revenue CenterThis unit is only responsible for generating revenues and not any other business function. The sales and marketing departments are an example of a revenue center. Profit CenterProfit center is accountable for both costs and revenues. One example of this is the factory, whose cost is the raw material, and revenue is the products it transfers to other departments. Also, branches of a company in different regions are responsible for both costs and revenues. Investment CenterInvestment center has control over costs, revenues, and investments. Or, we can say the person is responsible for investing the assets of a company most efficiently. Such a cost center works as a separate entity, such as a corporate headquarters. A company measures the performance of an investment center by using ratios, such as ROI (return on investment), economic value-added, and more. The following are the steps for its proper implementation:
Components of Responsibility AccountingThe following are the components that help a company to implement this accounting system efficiently: Inputs and OutputsEffective implementation depends on the accuracy of information relating to inputs and outputs. The data on raw materials, such as labor hours and quantity, is input, while data on finished products is the output. Responsibility CenterIt is the most critical component. The full responsibility accounting system depends on the proper recognition of responsibility centers. Target and Actual InformationData on the target, as well as the actual performance, is fundamental to evaluate the performance of a responsibility center. Inter-relation of Organization Structure with Responsibility CenterFixing or assigning responsibility goes with a clearly defined organizational structure. Hence, for the successful implementation of responsibility accounting, clarity of organization structure is very crucial. Similarly, a company must develop this accounting system to be in line with the organizational structure. Assigning Cost and Revenue to an IndividualFor the success of this accounting system, a company must assign cost and revenue to an individual. This individual will be responsible for the responsibility center. AdvantagesThe following are the advantages of responsibility accounting:
DisadvantagesThe following are the disadvantages of responsibility accounting:
Final WordsResponsibility accounting could prove very useful if a company can implement it properly. It gives the management with all information it needs on cost and revenue to make a practical decision. Moreover, it provides more freedom for the managers to show their skills in meeting the objective of their responsibility center. RELATED POSTS
What is responsibility accounting and its importance?Responsibility accounting is a kind of management accounting that is accountable for all the management, budgeting, and internal accounting of a company. The primary objective of this accounting is to support all the Planning, costing, and responsibility centres of a company.
What is responsibility accounting and how does it impact an organization?The responsibility accounting system is a mechanism by which costs and revenue are accumulated and reported to the top management to make an effective decision. In addition, it gives freedom to individuals to amplify their skills to reduce the cost and increase the organization's revenue.
What is the most important for responsibility accounting?One of the most important phases of responsibility accounting is establishing standard costs and evaluating performance by comparing actual costs with the standard costs.
What is the importance of responsibility Centre in responsibility accounting?Helps in Decision Making: Responsibility centers help the management in decision making as the information disseminated and collected from various centers helps them plan their future actions. It helps them understand the segment-wise breakups of revenues, costs, issues, plans of action, etc.
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