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Chapter 1: The Problem Rationale and Background

1.1 Introduction

The airline industry can be considered important to any country. It provides fast transportation of

goods and passengers across nations, employs a large amount of employees, and contributes to GDP.

In 2014 based on Tony Tyler, IATA’s (International Air Transport Association) director general and

CEO, aviation provides 58 million jobs and contributes an estimated 2.4 trillion dollars in GDP. And in

2016, IATA revealed that International passenger traffic rose 6.7% compared to 2015. All regions

recorded year-over-year increases in demand. Asia Pacific carriers specifically had increased demand of

8.3% compared to 2015, making it the second-fastest increase among regions.

Like any company, airline incurs cost from operating and non-operating departments. This

information is provided through accounting system such as management accounting and responsibility

accounting. According to Sojack (as cited in Zimnicki, 2016) management accounting is a system of

collection, classification, aggregation, analysis and presentation of financial and non-financial

information that supports managers in decision-making and control. On the other hand, responsibility

accounting system is an accounting system designed to measure the performance of each segment within

a business. This system uses responsibility centers, which are subunits of a company, wherein a manager

has authority and responsibility (Akenbor & Nkem, 2013).

Responsibility accounting prepares annual and monthly budgets for each responsibility center.

Actual transactions are then categorized by each responsibility center and a monthly report is prepared.

The reports will present the actual amounts for each budget line item and the difference between them

(“What is Responsibility Accounting,” n.d.). This attempts to adapt the activity of information gathering

and internal reporting to the organizational structure of the business. This way, the effectiveness of

managers can be evaluated on the basis of expenses incurred or revenue earned which are directly under

their control (Akenbor & Nkem, 2013).

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Knowing the importance of airlines to a country, this study will answer the question, “What is the

impact of responsibility accounting in airline industry in the Philippines?” Specifically, it aims: (a) to

identify the commonly used model of responsibility accounting; (b) to analyze which responsibility centre

is the most relevant in airline industry; (c) to compare the profitability among users of different models of

responsibility accounting; (d) to identify the impact of responsibility accounting based on its elements;

and (e) to differentiate the profitability between users and non-users of responsibility accounting.

1.2 Theoretical Framework

Foundations are important. In order to have a successful research, there must be a solid guide and

foundation. And one of the research guides is its theoretical framework. According to Maxwell (2005),

“the point is not to summarize what has already been done in the field. Instead, it is to ground your

proposed study in the relevant previous work and to give the reader a clear sense of your theoretical

approach to the phenomena that you propose to study”.

One of the issues in organizations today is the question of centralization versus decentralization

(Schoute, 2008). Responsibility accounting is an underlying concept of accounting performance

measurement systems. Large diversified organizations, if not impossible to manage as a single segment,

are difficult to manage thus they must be decentralized or separated into manageable parts (Martin, n.d.).

Because of this, firms decide to create responsibility centers. A responsibility center is an organizational

unit headed by a manager who is responsible for its activities (Schoute, 2008). Anthony and Govindarajan

distinguished the responsibility centers into four basic types: Revenue Center, Cost Center, Profit Center

and Investment Center (as cited in Schoute, 2008).

According to Abo and Mohamad, responsibility Accounting is defined as the system that collects

information and prepares reports regarding the costs and the revenues of every responsibility centers of

the company which enables the higher administration to plan and control the performance of these centers

(as cited in Owino, Munene, & Ntayi, 2016). It is very important to business as it has many advantages
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and some of those are related to profitability such as: (1) improves performance, (2) helpful in cost

planning, (3) helpful in decision making.

1.3 Conceptual Framework

This study aimed to identify the impact of responsibility accounting based on its different elements

in maximizing profitability. Figure 1 showed the different elements of responsibility accounting and each

of their relationship in maximizing profitability of airline industry.

Figure 1. The conceptual framework showed the relationship of responsibility elements, such as

responsibility centers, performance reports, cost allocation bases, behavioral effects and segmented

reporting, in maximizing profitability.

In this research, responsibility accounting serves as the independent variable that showed its impact

in maximizing profit of those airline companies who exercise and do not exercise in applying it.

There are five variables used in this study namely, responsibility centre, performance reports, cost

allocation bases, behavioral effects and segmented reporting.

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Responsibility centre is used as a variable to know its effect in maximizing profitability of

companies in the airline industry. Performance report is also used as a variable to observe the way the

managers of airline companies in budgeting actual and budgeted amounts of costs to maximize profit.

Cost allocation is used as a variable to be a basis of maximizing the profitability of airline industry.

Behavioral effect of managers is used as a variable to observe its effect to profit of companies under

airline industry. Lastly, segment reporting is used as a variable as one of the elements of responsibility

accounting to know its effect in maximizing profitability of airline companies.

In this study, profitability served as the dependent variable which the elements of responsibility

accounting showed their effects in maximizing it.

1.4 Problem Statement

This study aims to find out how responsibility accounting affects the airline industry in the

Philippines. In order to look further into how the system works and how it affects the profitability of the

companies, the following questions are asked:

1. What is the most common model of responsibility accounting used by airline industry?

2. What is the most relevant responsibility centre in airline industry?

3. What is the significant relationship of profitability and responsibility accounting?

4. What is the significant difference in profitability between users and non users of responsibility

accounting?

1.5 Significance of the Study

This study may be useful for airline companies who would want to change their approach when it

comes to controlling their cost in order to improve their profit and cost management. This may also help

those who are becoming recognized in the industry, they may look into responsibility accounting as an

opportunity to grow and take risks for their company.

1.6 Scope and Limitations

This study determines the impact of responsibility accounting in airline companies in the
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Philippines according to the perspective of the managers. This covers the models of responsibility

accounting, relevant responsibility centers in the airline industry and profitability comparison between

users and non users of the system. This research focuses on the practice of responsibility accounting

in Philippine airline companies which may not be applicable to other industries and foreign countries.

Information from different companies might be limited and confidential which leads to some assumptions

and estimated calculations made as a consideration.

1.7 Hypothesis

This study predicts that a) there will be a specific model of responsibility accounting that airline

industry uses; b) cost centre is the most relevant responsibility centre used in airline industry; c)

responsibility accounting system increases profitability of the company; d) users of responsibility

accounting has higher profit than those who are non users of the system.

1.8 Definition of Terms

According to Ritika (2015), responsibility accounting is defined as “that divide revenues and costs

into areas of personal responsibility, in order to ascertain performance attained by persons to whom

authority has been assigned.” It is a good tool for control in large size organizational structure.

Fowzia (2011) stated that responsibility centre is a subunit of an organization under the control of a

manager having direct responsibility for its activities. There are four responsibility centers namely cost

center, revenue center, profit center and investment center.

Performance report is defined as a budget that compares actual and budgeted amounts of

controllable costs for a department and its manager (What is a Responsibility Accounting Performance

Report, n.d.).

As defined by Raiborn and Kinney (2013), cost allocation is the assignment, using some reasonable

basis, of any indirect cost to one or more cost objects.

According to Hilton and Platt (2015), responsibility accounting has a significant influence to

behavior whether it is positive of negative depending on how it is implemented.

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Hollie and Yu (2015) stated that segment reporting focuses on the way the chief operating decision-

maker organizes segments within an organization for making operating decisions and assessing firm

performance.

As defined by Alahyari (2014), profitability is a measure to analyze whether a business has been

successful or not.

Chapter 2: Review of Related Literature

Responsibility accounting exists in the business world for quite sometime. Limited studies were

conducted in both developed and developing countries around the world. Bangladesh, Thailand and China

are three of the few Asian countries who conducted studies about responsibility accounting and how it

works on the management set up of their countries. The effectiveness of responsibility accounting in

different industries were reviewed to further understand how responsibility accounting works in an

industry and if there were differences observed on how the system works on different countries.

Many authors believe that responsibility accounting is the strength of management accounting. In

the early 1950s, John Higgins formulated the concept of responsibility centers and accounting. Each

responsibility center should have an interconnection between the functional responsibilities of managers

and people who make managerial decisions (Olga, 2013).

One person is not enough in order to evaluate the overall organization and implement important

decisions. This raises the need for management function to lead, motivate and plan for the organization

(Atu, Kingsley, Endurance, Sunny, & Ozele, 2014).

Responsibility accounting is a system used in performing managerial functions such as gathering

information and reporting internal data of the business. Through the process, managers can be evaluated

by using expenses as the basis for their performance effectiveness because they have control over the

information that they would report (Akenbor & Nkem, 2013).

Responsibility accounting involves the preparation of annual and monthly budgets for each

responsibility center. The actual amounts for each budget item are presented in reports and are used to

measure the variance. This allows the company and the managers of responsibility centers to receive
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feedback on their performance (Garg, 2015). Malodia (2011) also considered responsibility accounting

as a tool for evaluation which helps in measuring different divisions’ performance of profit and nonprofit

organizations.

Zimnicki (2016) stated that responsibility accounting fulfills its role by providing information about

a given area and the activities that the manager can control that allows the assessment of their

effectiveness. It also states that the heart of responsibility accounting’s information system is internally

separated into areas called responsibility centers.

According to Hansen and Mowen (2005), responsibility accounting models are defined by four

essential elements namely 1) Assigning responsibility 2) Establishing performance measures or

benchmarks 3) Evaluating performance and 4) Assigning rewards.

In a study conducted in Zimbabwe, an effective responsibility accounting was considered to be a

system which measures the plans, budget, actions and actual results of each responsibility center

(Nyakuwanika, Gutu, Zhou, Tagwireyi, & Chidoko, 2012).

Noreen, Brewer & Garrison (2008) disclosed that one of the goals of an effective responsibility

accounting system is to make sure that nothing “falls through cracks”, and that the organization can react

quickly and appropriately to variations between the actual and planned goals.

In a study conducted in service industry in Bangladesh by Fowzia (2011), it was found out that

responsibility accounting is one of the best tools to minimize adversities met in managing an

organization. It was also found that those organizations in Bangladesh use different models of

responsibility accounting.

A research in Vietnam by Tuan (2017) applied responsibility accounting as the basis for developing

internal resources, enhancing the competitiveness and improving the firm’s performance in general. It has

shown the development and level of responsibility accounting according to several elements.

In a study conducted by Bromwich and Wang (1991) in China as cited in Sulaiman, Ahmad, and

Alwi (2004), 54 % of the accountants of Chinese firms who use responsibility accounting considers this
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system to be of practical value.

A study was made in food processing and beverages business in Thailand about the effectiveness of

responsibility accounting on having an impact towards goal attainment. It was found out that there were

partially significant positive effects among the relationship between responsibility accounting and the

other elements that they relate to the system such as information advantage, organizational productivity,

business excellence, employee involvement, goal achievement, best managerial accounting practice,

accounting system quality, decentralization orientation, technological usefulness, and environmental

heterogeneity (Bunnoon, Ussahawanitchakit, Janjarasjit, 2013).

Another study was conducted in Bangladesh which focused about the use of responsibility

accounting in garments industry. The study states that the elements of responsibility accounting such as

assigning responsibility, establishing performance measures, evaluating performance, assigning rewards

and responsibility center are essential in order to achieve the satisfactory level in using the system. The

researchers used survey method in gathering data for their study (Fakir, Islam, & Miah, n.d.).

Manufacturing firms in Nigeria encountered problems in using responsibility accounting but the

researchers believe that responsibility accounting is still a useful system to ease pricing decisions, plans

and allocates resources effectively and to motivate segment managers of the organization. It was

recommended by the researchers that management in manufacturing companies must have sufficient

effort to combat the issues that concerns the use of effective responsibility accounting in order to make it

work and see the results in the companies’ performance (Akenbor & Nkem, 2013).

Through the limited studies that the researchers gathered, it was found out that responsibility

accounting has huge impact on the management of an organization especially in the aspects of controlling

costs and resources and even in pricing decisions. It was also found out that the effectiveness of

responsibility accounting may vary in every country and in every industry. As what was stated in

Akenbor and Nkem (2013), in order to make responsibility accounting work, management must have the

effort and motivation to decrease the problems encountered in using the system and experience the benefit
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that responsibility accounting may give to an organization.

Chapter 3: Research Methodology

Research Design

This study used a descriptive method through survey to gather information about the impact of

responsibility accounting in airline industry in the Philippines.

Study Locale

This study was based on 8 airline companies in the Philippines namely; Cebu Pacific, Philippine

Airlines, Air Asia, Cebgo, Zest Air, PAL Express, TigerAir Philippines and Skyjet Philippines.

Population and Sampling

The respondents were chosen from the airline companies in the Philippines through purposive

sampling. This may include managers, accountants, staffs and employees. In order to conduct this

sampling strategy, the population was defined, listed all the members of the population and then selected

the sample according to the purpose of the study. Airlines in the Philippines are classified into two

categories: passenger airlines and cargo airlines. The researchers chose the passenger airlines and

gathered data specifically on the operational managers of 8 Philippine-based airline companies. Purposive

sampling was used to be able to get the best answers to the survey questions.

Research Instrumentation

This study used the survey method through the use of Google Forms sent through e-mail to 8 local

airline companies in the Philippines. The survey form had three parts. The first part was for the

confidential information of the company such as yearly income, number of flights in a month and

estimated total number of passengers in a year. The second part was about the knowledge of the managers

in responsibility accounting. The third part was for the companies who apply responsibility accounting in
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their system wherein they would answer questions that would encompass the elements of the

responsibility accounting.

Data Gathering Procedure

The survey forms were distributed to operational managers of 8 local airline companies in the Philippines.

The survey was done with the use of Google Forms which has three parts. The second part was the

defining part wherein companies who are users and non-users of responsibility accounting will be

classified before proceeding to the last part of the survey.

Statistical Treatment of Data

Having the data gathered, its next step is to have it analyzed and interpreted. To be able to

interpret the responses of operational managers to the questionnaire effectively, the researchers employed

several statistical treatment. Frequencies, percentage, means and t-tests are the tools used to interpret the

data. To test the hypothesis, the chi square formula was used.

Ethical Consideration

The respondents were asked for their consent before answering the given questionnaires used in

conducting the survey. The confidentiality of the gathered information was assured to be used for

academic purposes only.

The literatures used were from the internet and were made sure that they were cited correctly

using APA 6 format to avoid issues such as plagiarism.

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