What is responsibility accounting explain its characteristics What are its advantages and shortcomings?

Definition: Responsibility accounting is an accounting system that controls cost and revenue, by delegating responsibility to individuals or groups and apportionment of responsibility centres. It aims to achieve minimum variance between actual and planned goals.

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Content: Responsibility Accounting
Objectives of Responsibility Accounting
Pre-requisites of Responsibility Accounting
Features of Responsibility Accounting
Disadvantages
Responsibility Centres
Principles of Responsibility Accounting
Advantages of Responsibility Accounting
Disadvantages of Responsibility Accounting

Responsibility Accounting focuses on monitoring and controlling costs through personal responsibility within the organization. It manages persons rather than the product’s function and performance.

It is also called Profitability Accounting and Activity Accounting.

Individuals from all the responsibility centres report the performance of their respective divisions. These reports contain relevant information about the Cost and Revenue of the department.

Content: Responsibility Accounting

Objectives of Responsibility Accounting

The objective behind maintaining accounts by way of responsibility accounting is to:

Examine the levels of responsibility.
Bifurcate organizational objectives between departments.
Create responsibility centres.
Find out the contribution of the individual departments.
Define accountability based on responsibility.
Estimate the cost and revenue of the responsibility centres.
Motivate departmental managers.

Pre-requisites of Responsibility Accounting

Rational Budget
The budget planned must be realistic. The performance evaluation is based on comparisons with these budgets.
Strong Organizational Structure
The relationships in organizations must be clearly defined. The allocation of responsibility will largely depend on the organizational structure.
Organizational Environment
A healthy organizational environment is essential for a successful responsibility accounting.
Encouragement by Top Management
The top management should be supportive and unbiased towards its employee. This leads to a motivated workforce and the successful application of responsibility accounting.
Involvement of All levels
Here, all the levels of the organization from top to bottom are part of this accounting process. Responsibility calculations at each level of the organization enhance the overall performance.
Continuous Flow of Information
An organization should have a constant flow of information. So that the budgeted objectives and essential information reaches the centres on time.
Self-motivated Team
The responsibility accounting evaluates the human factor of the organization. The workforce must be self-motivated and dedicated to the work assigned to them.

Features of Responsibility Accounting

Emphasizes People
This concept emphasizes people over the product. The basis of evaluation is the responsibility assigned to centre managers.
Sub-units
The organization is subdivided into manageable operational units called responsibility centres. Each of these centres has a responsible individual called the centre manager.
The manager of the concerned centre is responsible for the activities of that centre.
Cost and Revenue
Cost and revenue play a vital part in responsibility accounting. We measure centre performance in cost, revenue, profits and capital investments.
Controlling Technique
It can also maintain control and discipline over the organization. The organization delegates authority through responsibility centres at all levels of management.
Centre-wise Evaluation
Responsibility accounting enables critical analysis for every responsibility centre.
Comparative Evaluation
The departments conduct a comparative evaluation of the actual with budgeted targets. That helps in estimating the responsibility of the centre manager.
Reporting
Higher authorities get a clear picture of the organization through responsibility reports.

Advantages

It facilitates cost planning and control.
Delegation of authority and responsibility to make managers more responsible.
Helpful in maintaining organizational standards.
It enables prompt decision-making by taking remedial actions on time.
It is an effective tool for motivation for the organization.

Disadvantages

The managers find difficulty in classifying the costs under controllable and uncontrollable heads.
Required authority for assigned responsibility is not provided.
Generating reports for each centre consumes plenty of time in communication and analysis.
Conflict between departments may occur.
Organizations must not rely entirely on this accounting system. Some areas must need extended and detailed investigation.

Responsibility Centres

This management accounting system focuses on achieving profitability and control by dividing the organization into minor divisions. These divisions are called responsibility centres headed by managers assigned to that centre.

We can categorize responsibility centres into:

Cost Centre
Revenue Centre
Profit Centre
Investment Centre

Cost Centre

The cost or expense centre looks after all the cost-related activities. The responsibility of the cost centre manager is to control costs, excluding revenues.
The cost centre in manufacturing units can be the service and production departments. For example, the maintenance and accounts department.

Revenue Centre

The revenue centre manager is responsible for generating sales revenue in the organization. They can control the expenses of the marketing segment but do not control the costs.
The duty of the revenue centre manager is to look after the sales, promotion and product mix.

Profit Centre

A profit centre aims at profit maximization by controlling costs and revenues. The profit centre manager manages the production and marketing activities.
The managers try to reduce costs and increase revenue to maximize profits. For example, Branches of business in a different city.

Investment Centre

The manager heading the investment centre is responsible for costs, revenue and investments. The department controls activity regarding acquisition and asset management. The department also develops credit policies that impact debt collection in the organization.

Responsibility accounting refers to the system of accounting under which specific individuals are made responsible for maintaining accounts related to particular areas of organization. It is also termed as activity accounting or profitability accounting. This is a branch of management accounting where individuals in management line are given routine report depicting the overall performance of company either by department or section wise. A report includes operational result of area as well as the items for which an individual holds a responsibility of accounting.

This system of accounting identifies various responsibility centre throughout the organization and subsequently determine their plan and actions. Responsibility accounting create schemes for measuring the performance and prepare and analyze the performance reports of responsibility centres. It is primarily concerned with planning, costing and responsibility centres of organization. Various components of revenue and expense are gathered and reported in accordance with the areas of responsibility.

Principles of Responsibility Accounting

Various principles of responsibility accounting are as given below: –

Firstly, the responsibility centres within an organization are determined by dividing an organization into responsibility centres.
Every responsibility centre is provided with targets in consultation with the responsible individuals for such centres.
Now the actual performance is measured in accordance with targets.
Deviations from budgeted plan are identified in order to fix the responsibility centres.
Higher management team take corrective actions and communicate them to the responsible persons of responsibility centre for enhancing their performance.
Incentives are offered in order to induce individuals for improving the overall performance.
While determining the responsibility cost, all apportioned costs and policy costs are excluded as individual manager can’t control them. Only expenses and revenues which are under the control of manager are taken into consideration while evaluating his/her performance.
Responsible individuals are reported for action.
A proper transfer price policy should be followed for in order to get desirable result out of responsibility accounting.
Responsibility accounting do not aim to put blame on managers instead it evaluates their performance and provide feedback for improving their performance level in future.
Performance reports are the key determinants for success of responsibility accounting. These reports are also termed as responsibility reports which basically shows the performance level of various centre of responsibility.

Advantages of Responsibility Accounting

Different advantages of responsibility accounting can be well-understood from points given below: –

Responsibility accounting enables in assigning responsibility to each and every individual within the organization due to which they are held accountable for their respective work.
It leads to enhances the overall performance level of organization as when people know that they will be evaluated, they are motivated to work efficiently towards their roles.
Responsibility accounting is a key tool which assist organization in better cost planning by collecting full information regarding its cost and revenues. This information is useful in future planning of cost and revenues, fixing of standards and budgets preparation.
It also plays an efficient role in efficient decision making of company. This is not only work as a control device but also provide valuable information to management team for taking future actions.
This set of accounting simplifies the whole reporting structure thereby enabling prompt reporting by excluding all such items which are beyond the control of individual.
Responsibility accounting improve awareness and interests of supervisory staff by making them responsible and asking for explanations about the deviations in performance of company.
It facilitates in implementation of management by exception as focus is made on reporting the exceptional matters to top management team.

Disadvantages of Responsibility Accounting

The whole system of responsibility accounting becomes inaccurate in case if its prerequisites are not met. The prerequisites of this system of accounting are quite difficult to be met for every organization.
It does not do anything with uncontrollable cost and works only with such costs which are controllable.
This accounting may yield inaccurate results if a company fails to communicate properly its goals and responsibilities to peoples within the organization.
The further classification of expenses than provided by traditional classified becomes a quite difficult task.
All the personal reactions of individuals involved in implementation process is totally ignore by system of responsibility accounting.
There may be chances of loss of basic objectives of organization due to the presence of lot of passive resistance.
Sometimes, there may be conflict in between the company interest and individual interest which leads to hurdles in successful implementation of policies.