What is Responsibility Accounting?
Responsibility accounting is a system of accounting where specific persons are made responsible for the accounting of specific area and cost control. If that cost increases then the person will be held responsible and answerable. In this type accounting system, responsibility is assigned on the basis of a person’s knowledge and skills and the proper authority is given to that person so that he can make a decision and show his performance.
Steps of Responsibility Accounting
Below are the steps or formula of Responsibility Accounting.
- Define responsibility or cost center.
- Target should be fixed for each responsibility center.
- Track the actual performance of each responsibility center.
- Compare actual performance with a Target performance.
- The variance between actual performance and target performance are analyzed.
- After analysis of variance responsibility of each center should be fixed.
- Corrective action is taken by the management and the same should be communicated to the individual Persons of responsibility center.
Types of Responsibility Center
Below are the types of responsibility center.
Type #1 – Cost Center
These are the center in which individual persons are responsible only for cost control, they are not responsible for any other functions. In this center, it is essential to differentiate the controllable costs and uncontrollable costs. A person responsible for a particular cost center will be held responsible only for controllable cost. Performance of each center is evaluated by comparing the actual cost VS targeted cost.
Type #2 – Revenue Center
Revenue center takes care of revenue with no other responsibility. Mainly sales teams of the company are responsible for these centers.
Type #3 – Profit Center
These are the center whose performance is measured in terms of cost and revenue. Generally, Factory of the company is treated as a profit center where consumption of raw material is a cost and finished product sell to its other department is revenue.
Type #4 – Investment Center
A manager responsible for these centers is responsible for utilizing the assets of the company in the best manner so that the company can earn a good return on capital employed.
Examples of Responsibility Accounting
Below are examples of Responsibility Accounting.
Example #1 – Cost Center
Below is the responsibility report on the cost of production.
4.9 (1,067 ratings)
ABC Pharma Inc is engaged in manufacturing of medicine company has decided to produce 10000 medicine in the year 2018 for which company has defined the budget of $ 90000 at the beginning of the year but at the end of the year, it has noticed the actual cost incurred for the production is $95000. There is an excess expenditure of $5000 over-budgeted expenditure which responsibility manager has to explain why this has increased.
It may be possible that Govt. has increased the rate of electricity charges and water charges because of which overhead has increased.
Manger has used superior quality of material, therefore, the cost of material has increased but at the same time, it takes less no. of manpower hour due to which labor cost has decreased.
Example #2 – Revenue Center
Below is the responsibility report of revenue center of Samsung Inc.
Samsung Inc has targeted revenue of $ 95000 from their electronic segment for the year ended 2018 but at the end of the year they have achieved revenue of $ 93000, there is a decrease of $2000 in their revenue.
In the below report it has been seen that company has achieved their target in Television and washing machine division whereas they have outperformed in Microwave and Mobile division but their Refrigerator and Air conditioner division has not achieved the targeted revenue due to which their electronic division target fall short by $2000 for which Manager of a Revenue center will be responsible and he has to explain about the underperformance of these two divisions.
Components of Responsibility Accounting
Below are the Components of Responsibility Accounting:
- Inputs and Outputs – The implementation of responsibility accounting based upon information relating to inputs and outputs. The resource utilized in an organization like qty of raw material consumed, Labor hours consumed are termed as Inputs and finished product generated are termed as outputs.
- Identification of Responsibility Center – The whole concept of responsibility accounting depends upon identification of responsibility center. The responsibility center defines the decision point in the organization. In small organization generally, one person who is probably owners of the firm can manage the entire organization.
- Target and Actual Information – Responsibility accounting requires target or budget data and Actual data for performance evaluation of the responsible manager of each responsibility center.
- Responsibility between Organization Structure and Responsibility Center – An organization structure with clear authority and responsibility required for a successful responsibility accounting system. Similarly, the responsibility accounting system must be designed as per the organization structure.
- Assigning Cost and Revenue to an Individual – After defining the authority – responsibility relationship, cost, and revenue which are controllable should be assigned to individuals for evaluating their performance.
Advantages of Responsibility Accounting
Following are some advantages of Responsibility Accounting
- It establishes a system of control.
- It is designed according to the organization structure.
- It encouraged to budget for comparison of actual achievements with the budgeted data
- It encourages the interest and awareness of in-office staff as they have to explain about the deviation of their assigned responsibility center.
- It simplifies the performance report because it excludes those items which are beyond the control of individuals.
- It is helpful for top management for taking an effective decision.
Disadvantages/Limitations of Responsibility Accounting
- Generally, a prerequisite for establishing successful responsibility accounting system like proper identification of responsibility center, proper delegation of work, proper reporting is missing that makes difficult for establishing responsibility accountings system.
- It requires skilled manpower of each department which increases the cost of the company.
- Responsibility accounting system applies only on controllable cost.
- If the responsibility and objective are not properly explained to the person then responsibility accounting system will not give proper result.
The responsibility accounting system is a mechanism by which cost and revenue accumulated and reported to the top management to take the effective decision. It gives freedom to individuals to show their skill for reducing the cost and increasing the revenue of the organizations.
In responsibility accounting system organization divide their department in different – different responsibility center which helps an organization to focus on only those departments whose performance is not as per target.
At the same time this accounting system is useful only for the big organization because it requires very skill and more manpower for each responsibility center, For effective responsibility accounting system, it is required that all the managers are aligned with the company objective and they know their responsibility.
This has been a guide to what is Responsibility Accounting. Here we discuss the key components of responsibility centers along with examples and responsibility center types. We also discuss the advantages and disadvantages. You can learn more about accounting from the following articles –