Explain the concept of responsibility accounting?

Answer 1

• Collection, summarization, and reporting of financial information about various decision centers (responsibility centers) throughout an organization; also called activity accounting or profitability accounting. It traces costs, revenues, or profits to the individual managers who are primarily responsible for making decisions about the costs, revenues, or profits in question and taking action about them. Responsibility accounting is appropriate where top management has delegated authority to make decisions. The idea behind responsibility accounting is that each manager's performance should be judged by how well he or she manages those items under his or her control.

Responsibility and Cost Centers

The concept of responsibility accounting has emerged to accommodate the need for management information at a more specific level of detail than can be provided by financial accounting procedures. Responsibility accounting attempts to report results (actual performance) in such a way that: (1) significant variances from planned performance can be identified, (2) reasons for variances can be determined, (3) responsibility can be fixed, and (4) timely action can be taken to correct problems.

Under this approach, pertinent costs and revenues are assigned to various organizational units--departments, bureaus, and programs--designated as responsibility centers. In the private sector, responsibility centers may take several forms:

(1) A cost center is the smallest segment of activity or area of responsibility for which costs are accumulated.

(2) A profit center is a segment of a business, often called a division, that is responsible for both revenue and expenses.

(3) An investment center, like a profit center, is responsible for both revenue and expenses, but also for related investments of capital.

Outside of relatively large corporations, the cost center is the most common building block for responsibility accounting. In fact, the terms cost center and responsibility center are often used interchangeably. Responsibility accounting placing emphasis on specific costs in relation to well-defined areas of responsibility. Managers often inherit the effects of their predecessors' decisions. Long-term effects of such costs as depreciation, long-term lease arrangements, and the like, seldom qualify as controllable costs on the performance report of a specific manager.

Most models that measure performance in the private sector are tied to profits--for example, profit percentage (profit divided by sales), return on investment (profit divided by initial investment), or residual income (profit minus a deduction for capital costs). Profits are seldom a viable measure at the cost center level, however. Rather, performance is most often measured by comparing actual costs against a budget. A variance is defined as the difference between the amount budgeted for a particular activity and the actual cost of carrying out that activity during a given period.Variances may be positive (under budget) or negative (over budget).

Performance data can be developed for management purposes independent of the budget and control accounts. This kind of performance reporting has been used in the justification of resource requests and in the assessment of cost and work progress where activities are fairly routine and repetitive. Under this approach, units of work are identified, and changes in quantity (and, on occasion, quality) of such units are measured as a basis for analyzing financial requirements. The impact of various levels of service can be tested, and an assessment can be made of changes in the size of the client groups to be served. This approach is built on the assumption that certain fixed costs remain fairly constant regardless of the level of service provided and that certain variable costs change with the level of service or the size of the clientele group served. Marginal costs for each additional increment of service provided can be determined through such an approach. With the application of appropriate budgetary guide-lines, these costs can then be converted into total cost estimates.

Variances, budgeted results, and other techniques of responsibility accounting are relatively neutral devices. When viewed positively, they can provide managers with significant means of improving future decisions. They can also assist in the delegation of decision responsibility to lower levels within an organization. These techniques, however, are frequently misused as negative management tools--as means of finding fault or placing blame. This negative use stems, in large part, from a misunderstanding of the rationale of responsibility accounting.

Passing the buck is an all-too-pervasive tendency in many large organizations. This tendency is supposedly minimized, however, when responsibility is firmly fixed. Nevertheless, a delicate balance must be maintained between the careful delineation of responsibility, on the one hand, and an overly rigid separation of responsibility, on the other. Many activities may fall between the cracks when responsibility is too strictly prescribed. This problem is particularly evident when two or more activities are interdependent. Under such circumstances, responsibility cannot be delegated too far down in the organization, but must be maintained at a level that will ensure cooperation among the units that must interact if the activities are to be carried out successfully.