RESPONSIBILITY ACCOUNTING

DEFINATION OF RESPONSIBILITY
ACCOUNTING
• According to Charles T. Horngren, “Responsibility accounting is a system
of accounting that recognises various decision centres throughout an
organisation and traces costs to the individual managers who are
primarily responsible for making decisions about the costs in question”.

• Responsibility accounting is a system of management accounting under

which accountability is established according to the responsibility
delegated to various levels of management and a management
information and reporting system instituted to give adequate feedback
in terms of the delegated responsibility. Under this system divisions or
units of an organisation under a specified authority in a person are
developed as responsibility centres and evaluated individually for their
performance
 ESSENTIAL FEATURES OF RESPONSIBILITY
ACCOUNTING
• Inputs and Outputs or Costs and Revenues:
• Information for planned and actual
performance
• Identification of Responsibility centre
• Transfer Pricing policies
• Performance reporting
• To report reasons for deviations from original
plan and to what extent
 ADVANTAGES OF RESPONSIBILITY
ACCOUNTING
• It establishes a sound mechanism for control.
• It forces the management to consider the organizational structure
and examines who is responsible for what and fix the delegation of
power.
• It encourages budgeting with which actual achievement can be
compared.
• It increases interest and awareness of the officers as they are
called upon to explain about the deviations for which they are
responsible.
• The exclusion of items which are beyond the scope of the
individual’s responsibility simplifies the structure of the reports
and facilitates promptness in reporting.
 LIMITATIONS OF RESPONSIBILITY
ACCOUNTING
1. The prerequisites for a successful responsibility accounting system are:
(a) A sound organizational structure where divisions can be identified
clearly as responsibility centre.
(b) Proper delegation of work and responsibility.
(c) A proper system of reporting.
If these conditions are absent it is difficult to have responsibility
accounting system.

2. The traditional way of classification of expenses needs to be subjected

to a further analysis which becomes difficult.

3. In introducing the system certain managers may require additional

classification particularly if the responsibility reports are different from
routine reports.
 RESPONSIBILITY CENTERS
• A large firm is generally divided into
meaningful segments, departments, or
divisions in order to have effective control.
These segments, departments or divisions of
an organization are called responsibility centre.
• A responsibility centre is a specific unit of an
organization assigned to a manager who is
held responsible for its operations.
TYPES OF RESPONSIBILITY CENTRES
 1. Cost or Expense centre
• A cost or expense centre is a segment of an
organization in which the managers are held re­
sponsible for the cost incurred in that segment but not
for revenues. Responsibility in a cost centre is restricted
to cost.
• From functional point of view a cost centre may be any
of the following :
- Production Cost centre
- Service Cost centre
- Ancillary Manufacturing or Partly Producing Cost
centre
 2. REVENUE CENTRE
• A revenue centre is a segment of the
organization which is primarily responsible for
generating sales revenue.
• A revenue centre manager does not possess
control over cost, investment in assets, but
usually has control over some of the expense
of the marketing department
 3. PROFIT CENTRE
• A profit centre is a segment of an organisation whose
manager is responsible for both revenues and costs.
• In a profit centre, the manager has the responsibility
and the authority to make decisions that affect both
costs and revenues (and thus profits) for the
department or division.
• The main purpose of a profit centre is to earn profit.
Profit centre managers aim at both the production
and marketing of a product.
 4. CONTIBUTION CENTRE
• It is centre whose performance is mainly measured
by the contribution it earns. Contribution is the
difference between sales and variable costs. It is a
centre devoted to increasing contribution.
• The main responsibility of the manager of such a
responsibility centre is to increase contribution.
Higher the contribution better will be the
performance of the manager of a contribution
centre.
 5. INVESTMENT CENTRE
• A centre which is concerned with carrying an
adequate return on investment is known as
investment centre.
• It is a centre in which a manager can control
not only revenues and costs but also
investments. The manager of such a centre is
made responsible for properly utilizing the
assets used in his centre.