Unit V

Responsibility Accounting

B.Com. Third Year, Sixth Semester

Prepared by
Dr. Arvind Rayalwar
Assistant Professor
Department of Commerce, SSM Beed
Contents
Meaning
Definition
BasicPrinciples
Responsibility Reporting
Benefits of Responsibility Accounting
Meaning
 One of the recent developments in the field of managerial
accounting is the responsibility accounting which is
helpful in exercising cost control. It tries to control costs
in terms of the persons responsible for their incurrence.
 The term responsibility accounting refers to an
accounting system that collects, summarizes, and reports
accounting data relating to the responsibilities of
individual managers.
A responsibility accounting system provides information
to evaluate each manager on the revenue and expense
items over which that manager has primary control
(authority to influence).
 The accounting generally includes the preparation of a monthly
and annual budget for an individual responsibility centre. It also
accounts for the cost and revenue of a company, where reports
are accumulated monthly or annually and reported to the
concerned manager for the feedback. Responsibility accounting
mainly focuses on responsibilities centres.
 For instance, if Mr X, the manager of a unit, plans the budget of
his department, he is responsible for keeping the budget under
control. Mr X will have all the required information about the
cost of his department. In case, if the expenditure is more than
the allocated budget than Mr X will try to find the error and
take necessary action and measures to correct it. Mr X will be
personally accountable for the performance of his unit.
The organization chart below demonstrates lines of
authority and responsibility that could be used as a basis for
responsibility reporting.
Definitions
 Horngreen: “Responsibility accounting is a system
of accounting that recognizes various responsibility
centres throughout the organisation and reflects the
plans and actions of each of these centres by
assigning particular revenues and costs to the one
having the pertinent responsibility. It is also called
profitability accounting and activity accounting”.
According to this definition, the organisation is
divided into various responsibility centres and each
centre is responsible for its costs. The performance
of each responsibility centre is regularly measured.
 Institute of Cost and Works Accountants of
India: “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.”
Types of Responsibility Centres
1. Cost (or Expense) Centres:
 These are segments in which managers are responsible
for costs incurred but have no revenue responsibilities.
 The performance of each cost centre is evaluated by
comparing the actual amount with the budgeted/standard
amount. Such centres may be made according to
location or person or service or type of product.
 It is essential to differentiate between controllable costs
and uncontrollable costs while judging the performance
of such centres.
 A manager responsible for a particular cost centre will
be held responsible for only controllable costs.
2. Revenue Centres: It is a centre mainly devoted to
raising revenue with no responsibility for
production. The main responsibility of managers of
such centres is to generate sale revenue. Such
managers have nothing to do with the cost of
manufacturing a product or in the area of investment
of assets. But he is concerned with control of
marketing expenses of the product.
3. Profit Centre: This is a centre whose performance
is measured in terms of both expenses it incurs and
revenue it earns. Thus, a factory may constitute a
separate profit centre and sell its production to other
departments or the sales department. Even within
the factory, the service departments (as maintenance
department) may sell their services to the production
department.
 Contribution Centre: It is a 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.
 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 utilising the assets used in his
centre. He is expected to earn a requisite return on the
amount employed in assets in his centre. Return on
investments is used as a basis of judging and
evaluating performance of various people. Many large
undertakings in the U.S.A. like General Motors etc.
follow this system of management control.
Principles of Responsibility Accounting
1. Determination of responsibility centres.
2. A target is fixed for each responsibility centre.
3. Actual performance is compared with the target.
4. The variances from the budgeted plan are analysed so as
to fix the responsibility of centres.
5. Corrective action is taken by the higher management
and is communicated to the responsibility centre i.e., the
individual responsible.
6. Offer incentive as inducement.
7. All apportioned costs and policy costs are excluded in
determining the responsibility for costs because an
individual manager has no control over these costs.
Advantages of Responsibility
Accounting
 It introduces sound system of control.
 It ensures budgeting in order to compare the result of an
operation between the budgeted figures and the actual
ones.
 It helps the management to make an effective delegation
of authority and required responsibility as well.
 It will help also to increase the interest of the managerial
executives since they are asked to explain the reasons of
derivation of actual from the budgeted figures.
 Structure of reports may be simplified.