RESPONSIBILITY ACCOUNTING

Responsibility accounting occupies considerable significance .While 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 a general sense to include any logical
segment/component/sub- component of an organization
It includes a division, a department, a branch office, a service centre, a
product- line, a channel of distribution, a class of customers and so on.
MEANING:
INPUTS AND OUTPUTS:
Responsibility accounting is based on information relating to input and
outputs. The resources used are called inputs. The resources used by an
organization are essentially physical in nature, such as quality of materials
consumed, hours of labour, and so on
When 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 for financial information

PLANNED AND ACTUAL:

The financial information included is both actual and planned. For planning
and control, it not only contains historical information about cost/revenues, but
also estimated future cost and revenue data.
RESPONSIBILITY CENTRES:
Responsibility accounting focuses on responsibility centre’s. A
responsibility centre is a sub-unit of an organization under the control of a
manager who is responsible for the activities of that responsibility centre
Responsibility centre is the unit of an organization that is separable and
identifiable for operating purposes and its performance measurement should be
possible.

OBJECTIVES:
Determination of contribution of a division:

• The performance of a responsibility centre can be measured in terms of its

efficiency and/or in terms of its effectiveness.

• Efficient responsibility centre is one which does what it does with the
lowest consumption of resources

• Effectiveness is related to the goals of the organization. Applied to

responsibility accounting it implies how well a responsibility centre contributes
to the goals of the organization

Evaluation of quality of performance:

• Responsibility accounting is used to measure the performance of managers

and it, therefore, influences the way the managers behave.

• Responsibility accounting contains a discussion of how managers are

influenced by the nature of accounting information they receive.
Motivation consistent with organizational goals:

• Any performance measurement system can be expected to influence the

behavior of the managers affected by it

• Divisional performance measurement( responsibility accounting) should be

designed in such a way that, in seeking to achieve their own goals, divisional
managers will simultaneously work to achieve the goals of the firm this is called
goal congruence. This can be ensured through a system of incentives for example
bonus for good performance and so on

• In brief, responsibility accounting as a control device aims at measuring the

performance of the various responsibility centre’s or divisions of an organization.
it may be noted that it is measurement and not evaluation of performance
• TYPES OF RESPONSIBILITY CENTRES

• For the purpose of measuring financial performance, the divisions of a firm

may be classified according to the type of financial data used in the
measurement of performance. Three basic classes of divisions can be
identified on these grounds. Expense centre, Profit centre and Investment
centre.

• Expense/Cost 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 and outputs. In an
expense centre of responsibility , the accounting system records only the
cost incurred by the centre, but the revenues earned are excluded.

• Since the performance of an expense centre is measured by the financial

measure of input only, an essential requirements is that the cost of
operating the division be directly traceable to it.

• From the viewpoint of the measurement of performance of the

divisional manager, the implication of the expense centre is that his
performance will be judged on the basis of the cost incurred in his
department , what is done in the department will be of no consequence. In
other words , the performance measure in an expense centre is the
efficiency of operation in that centre in terms of the quantity of inputs used
in producing some given output. It means to compare actual inputs to some
predetermined level that represents efficient utilization. The variance
between the actual and the budget would be indicative of the efficiency of
the division/ divisional manager.

• Limitations

• An expense centre is not a useful basis of measuring performance of

responsibility centres. This is mainly because it ignores the output
measured in financial terms. A common feature of production departments
is that they are multi-product units. There must be some common basis to
 aggregate the dissimilar products to arrive at the overall outputof the
department. If this is not done, the efficiency and effectiveness of the
responsibility centrecannot be measured.

• Profit Centres

• A profit centre is a responsibility centre in which inputs are measured in

terms of expenses and outputs are measured in terms of revenues. Both the
elements of accounting information are considered. In other words , in a
profit centre, the measure of performance is broader than in an expense
centre because in an expense centre the accounting system measures only
one element(cost) whereas in a profit centre both elements (cost as well as
revenue) are measured in monetary terms. The difference between
revenues and costs is profit. For purpose of profit centre performance,
revenue represents a monetary measure of the output of a profit centre in a
given accounting period whether or not the firm actually realizes the
revenue in that period. In profit centre it is possible to measure the
effectiveness and efficiency of performance in monetary terms. Profit
analysis can be used as a basis for evaluating the performance of a division
as an entity and for evaluating the performance of a divisional manager.
Therefore , management can determine whether the division was efficient
in the utilization of resources and whether the division was effective in
attaining its objectives. This objective is presumably to earn a satisfactory
profit. The criterion for a satisfactory profit may be budgeted profit, past
profit in the division , profit of other similar divisions, some combinations
of two or more of these. Profit as a performance measure, is based on
revenues and expenses directly traceable to the division and avoidable if
 the divisions were to be closed down. This concept of divisional profit is
referred to as profit contribution as it is the amount of profit contributed
directly by the division.

• There are two types of profit centres, one is the natural profit centre
which is very much like an independent firm and the other is constructive
profit centre which is made to appear as a natural profit centre.

• Limitations

• The profit centre approach encounters certain problems. These relate to

(i) Criterion for profit centres, (ii) Measurement of expenses, and (iii)
Transfer prices

•
• Criterion for Profit Centres

• One problem with profit centre is that it cannot be used for all
responsibility centres. The criterion to use profit centre as a responsibility
centre includes the consideration of the following points: (i) Extra record
keeping is involved to measure input and output in monetary terms (ii)
When a responsibility centre is required by management to provide service
to other responsibility centres, the service department should not be a
profit department (iii) If the output of a product division is fairly
homogeneous , a profit centre may not offer substantial advantage,
however an expense centre (iv)Due to intense competition there may be
friction between various profit centres.

•
• Measurement of expenses

• Another problem with profit centres may relate to the measurement of

certain type of expenses which have to be included in the computation of
the profit centres. There is a scope for difference of opinion relating to the
treatment of those expenses which relate to the organisation as a whole. In
view of the special nature of divisional profits, such expenses should not
be considered since, they are not the responsibility of the division ,
divisional manager ie they cannot be traceable / attributable to it and
should be ignored in working out the profit of the division as a profit
centre.

• Transfer prices

• The measurement of profit in a profit centre type of responsibility

accounting is also complicated by the problem of transfer prices. A
transfer price is a price used to measure the value of goods and services
furnished by a profit centre to other responsibility centres within a
company. In other words , when internal exchange of goods and services
take place between the different divisions of a firm, they have to be
expressed in monetary terms.the monetary amount for these inter-
divisional transfer is called transfer price. The determination of an
appropriate transfer price is one major problem for profit centres.

• Investment Centres

• The third type of responsibility centre is an investment centre. It is

defined as a responsibility centre in which inputs are measured in terms of
 cost and outputs are measured in terms of revenues and in which assets
employed are also measured. Investment centres consider not only the cost
and revenues but also the assets used in the division. As a responsibility
centre, the performance of a unit would be measured in relation to the
profits and the assets employed in a division. The essence of investment
centre analysis is the relationship between the profits and the assets that
are used to generate those profits. It may , therefore be said to be an
extension of the profit centre in that it covers all the elements relevant to
the measurement of the overall performance of a firm, its various
divisions.

• The investment centre analysis can be used as a basis for evaluating the
contribution of a division as an entity as also the performance of a
divisional manager. The measure of performance in an investment centre
is based on the relationship between the profits and the amount of assets
employed in generating the profits.

•
 INTRODUCTION TO COST ACCOUNTING
Cost accounting is that branch of the accounting information system which
records measures and reports information about costs. A cost is a sacrifice of
resources.
The primary purpose of cost accounting is cost ascertainment and its use in
decision making and performance evaluation.
A cost accounting provides data for both financial accounting and
management accounting.
Cost accounting also helps in planning. Planning is a process of setting
goals and allocating resources to achieve these goals
Cost accounting is also useful for the purpose of control. Control comprises
managerial action to correct conditions that cause deviation between the actual
and planned performance. Comparison between the actual and budgeted cost will
highlight a poor or good performance, as well as operations that have gone out of
control and warrant corrective action.
Thus cost accounting proved the basis for managerial control.