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Functional Based Responsibility Accounting

This document discusses two types of responsibility accounting: financial-based and activity-based. Financial-based responsibility accounting focuses on functional organizational units and uses financial measures to evaluate performance against budgets. Activity-based responsibility accounting assigns responsibility to processes rather than units and uses both financial and non-financial metrics like cycle time and quality to evaluate continuous improvement across the organization. The key differences between the two approaches are how responsibility is assigned, what performance measures are used, how performance is evaluated, and how rewards are structured.

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Ogeb Sahaja
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203 views

Functional Based Responsibility Accounting

This document discusses two types of responsibility accounting: financial-based and activity-based. Financial-based responsibility accounting focuses on functional organizational units and uses financial measures to evaluate performance against budgets. Activity-based responsibility accounting assigns responsibility to processes rather than units and uses both financial and non-financial metrics like cycle time and quality to evaluate continuous improvement across the organization. The key differences between the two approaches are how responsibility is assigned, what performance measures are used, how performance is evaluated, and how rewards are structured.

Uploaded by

Ogeb Sahaja
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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INDAH ZAHARATUL NISSA

1810532025

FUNCTIONAL BASED RESPONSIBILITY ACCOUNTING

A. Definition of functional based responsibility accounting


A financial (functional) based responsibility accounting system assigns
responsibility to organizational units and expresses performance measures in financial
terms. Essentially, firms choose the responsibility accounting system that is compatible
with the requirements and economics of their particular operating environment. Firms
that operate in a stable environment with standardized products and processes and low
competitive pressures will likely find the less complex, financial based responsibility
accounting systems to be quite adequate.
Thus activity-based responsibility accounting is the responsibility accounting
system developed for firms operating in continuous-improvement environments. This
accounting system assigns responsibility to processes and uses both financial and
nonfinancial measures of performance, thus emphasizing both financial and process
perspectives. A comparison of each of the four elements of the responsibility accounting
model for each responsibility system reveals the key differences between the two
approaches.

B. The objective of responsibility accounting


The objective of responsibility accounting is to influence behavior in such a way
that individual and organizational initiatives are aligned to achieve a common goal or
goals.

C. Essential elements of responsibility accounting


Responsibility accounting is a fundamental tool of managerial control and is
defined by four essential elements:
1) assigning responsibility,
2) establishing performance measures or benchmarks,
3) evaluating performance
4) assigning rewards.

D. Financial-Based Responsibility Compared with Activity-Based Responsibility


1. Assigning Responsibility
Financial-based responsibility accounting focuses on functional
organizational units and individuals. First, a responsibility center is identified. This
center is typically an organizational unit such as a plant, department, or production
line. Whatever the functional unit is, responsibility is assigned to the individual in
charge. Responsibility is defined in financial terms (for example, costs). Emphasis is
on achieving optimal financial results at the local level (i.e., organizational unit level).
In an activity or process based responsibility system, the focal point changes from
units and individuals to processes and teams. Systemwide optimization is the
emphasis. Also, financial responsibility continues to be vital. The reasons for the
change in focus are simple. In a continuous improvement environment, the financial
perspective translates into continuously enhancing revenues, reducing costs, and
improving asset utilization. Creating this continuous growth and improvement
requires an organization to constantly improve its capabilities of delivering value to
customers and shareholders.

2. Establishing Performance Measures


Once responsibility is defined, performance measures must be identified
and standards set to serve as benchmarks for performance measurement. Budgeting
and standard costing are the cornerstones of the benchmark activity for a financial-
based system. This, of course, implies that performance measures are objective and
financial in nature. Furthermore, they tend to support the status quo and are relatively
stable over time.

3. Evaluating Performance
Compares performance evaluation under financial- and activity-based
responsibility accounting systems. In a financial-based framework, performance is
measured by comparing actual outcomes with budgeted outcomes. In principle,
individuals are held accountable only for those items over which they have control.
Financial performance, as measured by the ability to meet or beat a stable financial
standard, is strongly emphasized. In the activity-based framework, performance is
concerned with more than just the financial perspective. The process perspective adds
time, quality, and efficiency as critical dimensions of performance. Decreasing the
time a process takes to deliver its output to customers is viewed as a vital objective.
Thus, nonfinancial, process-oriented measures such as cycletime and on-time
deliveries become important. Performance is evaluated by gauging whether these
measures are improving over time. The same is true for measures relating to quality
and efficiency. Improving a process should translate into better financial results.
Hence, measures of cost reductions achieved, trends in cost, and cost per unit of
output are all useful indicators of whether a process has improved. Progress toward
achieving optimal standards and interim standards needs to be measured. The
objective is to provide low-cost, high-quality products, delivered on a timely basis.

4. Assigning Rewards
In both systems, individuals are rewarded or penalized according to the
policies and discretion of higher management. Many of the same financial
instruments (e.g., salary increases, bonuses, profit sharing, and promotions) are used
to provide rewards for good performance. Of course, the nature of the incentive
structure differs in each system. For example, the reward system in a financial-based
responsibility accounting system is designed to encourage individuals to achieve or
beat budgetary standards. In the activity-based responsibility system, the reward
system is more complicated: Individuals are accountable for team as well as
individual performance. Since process-related improvements are mostly achieved
through team efforts, group-based rewards are more suitable than individual rewards.
For example, standards can be set for unit costs, on-time delivery, quality, inventory
turns, scrap, and cycle time. Bonuses can then be awarded to the team whenever
performance is maintained on all measures and improves on at least one measure.
Notice the multidimensional nature of this measurement and reward system. Another
difference concerns the notion of gainsharing versus profit sharing. Profit sharing is a
global incentive designed to encourage employees to contribute to the overall
financial well-being of the organization.

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