Responsibility Accounting By: Bharat Charanjeet Jaideep Singh Karan Surbhi Rajput

Contents Responsibility Accounting Need Steps Involved Responsibility Centers Types Advantages

Responsibility Accounting Acc to Charles T. Horngen “ Responsibility Accounting is system of accounting that recognizes various responsibility centers throughout the organization and that reflects the plan of action of each of these centers by allocating particular revenues and costs to the one having the pertinent responsibility”

NEED OF RESPONSIBILITY ACCOUNTING What is expected of him? What has been his performance? Plan and allocate resources. Control operations. Evaluate the performance of center managers.

Steps Targets for each centre is set. The actual performance is continuously appraised. Actual results are communicated to the responsibility manager. Thus, the variances are reported to the higher management. The corrective measures are taken and intimated to the concerned executives.

RESPONSIBILITY CENTRES Responsibility centre refers to any organization unit that is headed by responsible manager. Large complex businesses are divided into responsibility centers enabling managers to have a smaller effective span of control. Example: a specific store in a chain of grocery stores.

TYPES OF RESPONSIBILITY CENTRE There are four types of centers… Investment Centre Profit Centre Expense Centre Revenue Centre

EXPENSE CENTRE or cost centre Only input is measured in the monetary terms. Its financial responsibility is to control and report costs only. The performance of responsibility centre is evaluated by comparing the cost incurred with the budgeted cost. Ex-production department in manufacturing unit

REVENUE CENTRE This centre is primarily responsible for generating sales revenue. It doesn’t possess control over cost, investment in assets, but over some of the expenses of marketing department. Ex-Marketing manager of product line.

PROFIT CENTRE The centre which is responsible for both cost (input) and revenue (output) and thus for profit. Output of this centre may be either meant for internal consumption or for outside customers. Ex-

INVESTMENT CENTRE Responsibility center whose manager and employee control revenue,costs,and the levels of investment. In this centre the expense, revenue and assets employed are measured. Return on Investment is used as the performance evaluation criteria. Ex- Vice President (Investments) of mutual funds company may also be in charge of an investment centre.

Manager in-charge is responsible for the proper utilization of the assets. He formulates the credit policy and inventory policy. He is expected to earn satisfactory return on the assets employed in his responsibility centre.

ADVANTAGES OF RESPONSIBILITY ACCOUNTING Introduces sound system of control Each and every employ is assigned some responsibility and he is accountable for that. Effective tool for controlling cost along with the budgetary control. Timely corrective measures can be taken and better control over costs can be achieved. It also facilitates decentralization of decision making.

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