Types of responsibility center

Answer 1

RESPONSIBILITY ACCOUNTING

Responsibility accounting is a management control system based on the principles of delegating

and locating responsibility.The authority is delegated on responsibility centre and accounting for

the responsibility centre. Responsibility accounting is a system under which managers are given

decisions making authority and responsibility for each activity occurring within a specific area of

the company. Under this system, managers are made responsible for the activities of segments.

These segments may be called departments, branches or divisions etc., one of the uses of

management accounting is managerial control. Among the control techniques "responsibility

accounting" has assumed considerable significance. While the other control devices are

applicable to the organization as a whole, responsibility accounting represents a method of

measuring the performance of various divisions of an organization. The term 'division' with

reference to responsibility accounting is used in general sense toinclude any logical segment,

component, sub-component of an organization. Defined in this way, it includes a decision, a

department, a

branch office, a service centre, a product line, a channel of distribution, for the operating

performance it is separately identifiable and measurable is some what of practical significance to

management.

Robert Anthony defines responsibility accounting as that type of management accounting which

collects and reports both planned andactual accounting information in terms of responsibility

centers.

According to Charles T. Horongrent, Responsibility Accounting or profitability accounting or

activity accounting which means the same thing, is a system that recognizes various decision or

responsibility centers throughout the organization and traces costs (and revenue, assets and

liabilities) to the individual managers who are primarily responsibility for making decisions

about the costs in question.

Significance of Responsibility Accounting

The significance of responsibility accounting for management can be explained in the following

way:

Easy Identification:

It enables the identification of individual managers responsible for satisfactory or unsatisfactory

performance.

Motivational Benefits :

If a system of responsibility accounting is implemented, consider-able motivational benefits are

assured.

Data Availability :

A mechanism for presenting performance data is provided. A framework of managerial

performance appraisal system can be established on that basis, besides motivating managers to

act in the best interests of the enterprise.Ready-hand Information:

Relevant and up to the minutes information is made available which can be used to estimate

future costs and or revenues and to fix up standards for departmental budgets.

Planning and Decision Making:

Responsibility accounting helps not only in control but in planning and decision making too.

Delegation and Control:

The twin objectives of management are delegating responsibility while retaining control are

achieved by adoption of responsibility accounting system.

Principles of responsibility Accounting

The main features of responsibility accounting are that it collects and reports planned and actual

accounting information about the inputs and outputs of responsibility accounting.

Inputs and outputs :

Responsibility accounting is based on information relating to inputs and outputs. The resources

used are called inputs. The resources used by an organization are essentially physical in nature

such as quantity of materials consumed, hours of labour, and so on. For managerial control, these

heterogeneous physical resources are expressed in monetary terms they are called cost. Thus,

inputs are expressed as cost. Similarly, outputs are measured in monetary terms as "revenues". In

other words, responsibility accounting is based on cost and revenue data or financial information

Objectives of Responsibility Accounting :

Responsibility accounting is a method of dividing the organizational structure into various

responsibility centers to measure their performance. In other words responsibility accounting is a

device to measure divisional performance measurement may be stated as under:

1. To determine the contribution that a division as a sub-unit makes to the total

organization.

2. To provide a basis for evaluating the quality of the divisional managers performance.

Responsibility accounting is used to measure the performance of managers and it

therefore, influence the way the managers behave.

3. To motivate the divisional manager to operate his division in a manner consistent with

the basic goals of the organization as a whole.

Responsibility Centre :

For control purposes, responsibility centers are generally categorized into:

1. Cost centres

2. Profit centers

3. Investment centers.

1. Cost Centre or Expense Centre:

An expense centre is a responsibility centre in which inputs, but not outputs, are measured in

monetary terms. Responsibility accounting is based on financial information relating to inputs(costs) and outputs (revenues). In an expense centre of responsibility, the accounting system

records only the cost incurred by the centre but the revenues earned (outputs) are excluded. An

expense centre measures financial performance in terms of cost incurred by it. In other words,

the performance measured in an expense centre is efficiency of operation in that centre in terms

of the quantity of inputs used in producing some given output. The modus operandi is to

compare actual inputs to some predetermined level that represents efficient utilization. The

variance between the actual and budget standard would be indicative of the efficiency of the

division.

2. Profit Centre:

A centre in which both the inputs and outputs are measured in monetary terms is called a profit

centre. In other words both costs and revenues of the centre are accounted for. Since the

difference of revenues and costs is termed as profit, this centre is called profit centre. In a centre,

there are financial measures of the outputs as well as of the input, it is possible to measure the

effectiveness and efficiency of performance in financial terms. Profit analysis can be used as a

basis for evaluating the performance of divisional manager. A profit centre as well as additional

data regarding revenues. Therefore, management can determine whether the division was

effective in attaining its objectives. This objective is presumably to earn a "satisfactory profit".

Profit directly traceable to the division and voidable if the division were closed down. The

concept of divisional profit is referred to as 'profit contribution' as it is amount of profit

contribution directly by the division.

The performance of the managers is measured by profit. In other words managers can be

expected to behave as if they were running their own business. For this reason, the profit centre

is good training for general management responsibility .

Measurement of Expenses :

Another problem with profit centers may relate to the measure of certain type of expenses which

have to be involved in the computation of profit centres. There is a scope for difference of

opinion relating to the treatment of those type of expenses which are not traceable or attributable

should be ignored in working out the profit of the division as a profit centre.

Transfer of Prices :

A transfer price is a price used to measure the value of goods and services furnished by a profit

centre to other responsibility centers within a company. In other words, when internal exchange

of goods and services takes place between the different divisions of a firm, they have to be

expressed in monetary terms. The monetary amount for these interdivisional exchange transfers

is called the transfer prices. The measurement of profit in a profit centre type or responsibility

accounting is also complicated by the problem of transfer prices. The implication of the transfer

price is that for the selling division it will be a source of revenue, where as for the buying

division (the division which is receiving, acquiring the goods and services) it is an element of

cost. It will therefore, have a significant bearing on the revenues, costs therefore, have a

significant bearing on the revenues, costs and profits of responsibility centres. Hence, there is a

need for correct determination of transfer prices. The determination is, however, complicated

because of wide variety of alternative methods are available. They are explained as under :

Types of Transfer Price :

There are two general approaches to the determination of a transfer price :

1. Cost based and2. Market based, Based on these,

there are five basic methods of transfer price :

a) Cost

b) Cost plus a normal mark-up

c) Incremental cost

d) Market price, and

e) Negotiated price

3. Investment Centers

A centre in which assets employed are also measured besides the measurement of inputs and

outputs is called an investment centre. Inputs are accounted for in terms of costs, outputs are

calculated on investment centre. Inputs are accounted for in terms of costs, outputs are accounted

for in terms of revenues and assets employed in terms of values. It is the broadest measurement,

in the sense that the performance is measured not only in terms of profits but also in terms of

assets employed to generate profits.

An investment centre differs from a profit centre in that as investment centre is evaluated on the

basis of the rate of return earned on the assets invested in the segment while a profit centre is

evaluated on the basis of excess revenue over expenses for the period.

Controllability :

As is evident from the above description, the notion controllability is prime in a system of

responsibility accounting. A responsibility centre is accountable for controllable factors only. It

is but natural also, since how can one be held responsible for factors beyond one's control.

Therefore, it is essential to identify which costs are controllable and which costs are not

controllable.

A cost is treated as controllable only when the person responsible for incurring it can exercise his

influence over it. Costs which cannot be so influenced are termed as uncontrollable costs.

Problems in Responsibility Accounting

While implementing the system of responsibility accounting, the following difficulties are likely to be faced by the

management:

1. Classification of costs: For responsibility accounting system to be effective a proper

classification between controllable and non controllable costs is a prime requisite. But practical

difficulties arise while doing so on account of the complex nature and variety of costs.

2. Inter-departmental Conflicts: Separate departmental persuits may lead to inter-departmental

rivalry and it may be prejudicial to the interest of the enterprise as a whole. Managers may act in

the best interests of their own, but not in the best interests of the enterprise.

3. Delay in Reporting: Responsibility reports may be delayed. Each responsibility centre can

take its own time in preparing reports.

4. Overloading of Information: Responsibility accounting reports may be overloading with all

available information. This danger is inherent in the system but with clear instructions by

management as to the functioning of the system and preparation of reports, etc., only relevant

information flow in.

5. Complete Reliance will be deceptive: Responsibility accounting can't be relied upon

completely as a tool of management control. It is a system just to direct the attention of

management to those areas of performance which required further investigation.

Answer 2

Im guessing this is in regards to Accouting? Ok, the three basic types of responsibility centers are: Cost, Profit & Investment.