According to Charles T Horngren, “Responsibility Accounting is a system of accounting that recognizes various responsibility centres throughout the organization and that reflects the plan of action of each oft these centres by allocating particular revenues and costs to the one having pertinent responsibility.”
Responsibility Accounting is a system of control wherein costs are identified with the person responsible for them. Each centre becomes the responsibility of an individual manager. It collects and reports both planned and actual data in terms of sub-units which are recognized as responsibility centres.
Pre-requisites for Responsibility Accounting →
→ Organization should be divided into suitable responsibility centres
→ Responsibility and authority of each centre should be well defined
→ Each manager should know what is expected of him
→ The performance report must contain factors controllable by managers and should be prepared highlighting the variances and items requiring management’s attention.
Steps involved in Responsibility Accounting →
→ The essence is to communicate effectively
→ Targets are set and communicated to each manager/executive
→ A continuous appraisal of actual performance is made and actual results are conveyed to each concerned manage the variances are reported to higher management
→ The corrective measures are suggested/taken and communicated
Thus it emphasizes on fixation of responsibility on the person entrusted with the execution of specific job and thereby keeps control over the people who incur the expenses.
Responsibility Centres →
Four types of responsibility centres can be established in an organization –
— Expense Centre – Responsibility in cost centre is restricted to costs only. They provide services (tangible and intangible) for which costs are measured in monetary units. All production centres and service centres are called as separate cost centres.
— Revenue Centre – It is the smallest segment of activity for which only revenues are accumulated. It is concerned with generating sales revenue for example a marketing department.
— Profit Centre – It is a big segment of activity for which both revenues and costs are accumulated. Responsibility is measured in terms of expenses it occurs and revenue it earns. The difference between revenue and expenses is taken as profit.
— Investment Centre – In this segment of activity the manager of the centre is held responsible for the use of assets and profits. He is responsible for maintaining a good return on investment.
Advantages of Responsibility Accounting →
→ Responsibility Accounting helps in better understanding of zero based budgeting and performance budgeting.
→ All inputs and outputs are expressed in monetary terms
→ Measures the financial performance of individual responsibility centre
→ Fixation of responsibility is possible
→ Acts as a device to control over the people who incur expenses
Limitations of Responsibility Accounting →
→ Generally departments are so inter-mingled and inter-dependent that it is impossible to draw a distinct responsibility lines
→ Conflict is likely to arise between individual and organizational interest
→ It demands a good reporting and communication system to work effectively
→ It may face a lot of passive resistance and may lose its objectives the system ignores the personal reactions of the personnel who are involved in its implementation