Responsibility Accounting

Responsibility accounting is a method of accounting in which costs and revenues are identified with persons assigned to their control rather than with products or functions. It classifies costs and revenues according to the responsibility centres that are responsible for incurring the cost and generating the revenues.

Definition of Responsibility Accounting

According to the Institute of Cost and Works Accountants of India (ICWAI) Responsibility Accounting is a system of management accounting under which accountability is established according to the responsibility delegated to various levels of management and management information and reporting system instituted to give adequate feed back in terms of the delegated responsibility.

Classification of Cost under Responsibility Accounting

by the responsibility centres. within each responsibility centre whether controllable or non-controllable, and within the controllable classification by cost elements in sufficient detail to provide useful basis for analysis.

Responsibility Accounting is based on four basic principles. Objectives. The overall objectives of the business are dividend and sub-dividend into the objectives of each of its constituent parts, expresses as profit, contribution or cost. Controllable costs. Responsibility Accounting excludes or segregates costs which are not controlled directly by the manager. For example, in a machine shop the level of waste is directly controllable but the rent is not. Explanation. The results achieved in a profit centre are not all directly controllable by the profit centre manager. External factors will affect both revenue and expenditures. But Responsibilities Accounting requires managers to explain why the actual results obtained differ from those in the forecast or budget.

Basic Principles of Responsibility A/c

 Management by exception. The feedback of information on actual revenues and costs to the responsibility centre manager concentrates on the important deviations from the budget. This is the principle of management by exception whereby the attention of managers is focused on exceptions to the norm so that they do not waste time on those parts of the reports that reflect smoothly running phases of operations.

Centres of Control
Based on cost allocation and profit measurement, managerial units are classified into the following :
Cost centre Revenue centre Responsibility centre Profit centre Investment centre

Cost Centre or Expenses 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. In this method we 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.

Contd.

Classification of Cost Centres

Production cost centre: A cost centre where production is done e.g., Assembly department, Finishing departments etc. Service costs centre : A cost centre which render services to production centres, e.g., Personnel, Accounting, Repair shop, Boiler plant etc. Ancillary manufacturing centres : Such as those concerned with producing packing materials etc.

Revenue Centre
Revenue centre is a centre devoted to raising revenue with no responsibility for production e.g., a Sales centre. It is a responsibility centre in which a manager is only held responsible for the level of revenue or outputs of a centre, as measured in monetary terms, but not responsible for the costs of the goods or services that the centre sells.

Responsibility Centre
Responsibility centre is a unit or function of an organization headed by a manager having direct responsibility for its performance. Responsibility centre is a personalized group of cost centres under the control of a responsible individual. Under responsibility centre approach, the accounting system generates information on the basis of managerial responsibilities, allowing that information to be used directly in motivating and controlling each Manager's actions incharge of responsibility centre. The purpose of assigning costs to responsibility centres is to permit cost control which can be achieved by personalizing responsibility for costs to the managers in-charge of responsibility centres.

Profit Centre
A Profit centre is any sub-unit of an organization to which both revenues and costs are assigned, so that the profitability of the subunit may be measured. For a profit centre organization to be established, it is necessary to have units of the organization to which both revenues and costs can be separately attributed. Managers of profit centres should also be responsible for revenues as well as costs, which implies that there should be sufficient decentralization of authority within the company to permit profit centre managers to make decision about selling prices and output levels at those prices. If a share of 'head office 'overheads is charged to the profit centre, these non-controllable costs should separately and kept distinct from directly attributable costs.

Investment Centres
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.