Responsibility accounting is a system under which managers are given decision-making authority and responsibility for each activity occurring within a specific area of the company. Under this system managers are made responsible for the activities of segments. These segments may be called departments or divisions.
Responsibility accounting is a system of control where responsibility is assigned for the control of costs. The persons are made responsible for the control of costs. Responsibility accounting implies a system of accounting whereby the performance of various people is judged by assessing how far they have achieved the predetermined targets set for the divisions, departments or sections for which they are responsible. Each person is responsible for his area of operation. Responsibility accounting is similar to any other system of cost such as standard costing or budgetary control but with greater emphasis towards fixing of the responsibility of the persons entrusted with the execution of specific job.
Charles T. Horngren defines “Responsibility accounting is a system of accounting that recognizes various responsibility centers throughout the organization and reflects the plans and actions of each of these centers by assigning particular revenues and costs to the one having the pertinent responsibility. It is also called profitability accounting and activity accounting”.
Steps Involved in Responsibility Accounting
Responsibility accounting is used as a control device. Following steps are necessary to effect control through the responsibility accounting:
- The organization is divided into various responsibility centers. Each responsibility center is put under the charge of a responsibility manager.
- The targets or budgets of each responsibility center are set in consultation with the manager of responsibility center so that he may be able to give full information about his department. The manager of responsibility center should know as what is expected of him – each center should have a clear set of goals. The responsibility and authority of each center should be well defined.
- Managers are charged with the items and responsibility over which they can exercise a significant degree of direct control.
- Goals defined for each area of responsibility should be attainable with efficient and effective performance.
- The actual performance is communicated to the managers concerned. If it falls short of the standards, the variances are conveyed to the top management. The names of persons responsible for the variances are also conveyed so that responsibility may be fixed.
- The performance reports for each center should be prepared highlighting the variances and items requiring management’s attention. the corrective measures are suggested or taken and communicated to the concerned managers of the centers.
Advantages of Responsibility Accounting
The following are some of the advantages of responsibility accounting:
- It introduces sound system of control – a system of closer control.
- Each and every individual in the organization is assigned some responsibility and they are accountable for their work.
- Everybody knows what is expected of him. Nobody can shift responsibility to anybody else if something goes wrong.
- It is effective tool of cost control and cost reduction applied with budgetary control and standard costing.
- It facilitates the management to set realistic plans and budgets.
- It is not only a control device but also facilitates decentralization of decision-making.
- It measures the performance of individuals in an objective manner.
- It fosters a sense of cost-consciousness among managers and their subordinates.
- It helps the management to make an effective delegation of authority and required responsibility as well.
- Under the system of responsibility accounting, detailed information is collected about costs and revenues, on a continuous basis and the data is helpful in planning for future costs and revenues.
- Timely corrective action can be taken and better control over costs can be achieved.