Responsibility Accounting Systems Chapter No 2

Learning Objectives:  To discover methods of providing Top-Down and Bottom-Up information Flows.  To learn about the information systems that produce reports for internal use.  To understand how account codes are used to produce accounting reports.

Information Flow ...The flow of information occurs in both in manual and computer based system, In manual system the flow of information occurs as following:-  First transaction recorded in journal.  The entries are then posted to ledger and it further continue until the reports are prepared. ... While in computer based system the information flows occurs between the computer files, which are used in place of journal, and ledger. This information flow can be explained by the following figures…

TYPES OF INFORMATION FLOWS  The information flows are divided into the following two categories which are the following  Top Down Information Flow  Bottom Up Information Flow INFORMATION FLOWS TOP DOWN INFORMATION FLOW BOTOM UP INFORMATION FLOW

TOP DOWN INFORMATION FLOW ... An organization budgeting system is good example of top down information flow, because the management prepare and establishes the budget for all sectors of organization. Top management develop policies to meet its goals and communicated to different managers at different levels for perform their duties.  An effective budgeting system is designed to work within the organization’s structure with clear policy statements.

Organization Structure

Organizational Structure ... For good information flow system the organization should have the following characteristics:-  The structure must identify and distinguish each of its segments.  Clearly authority and responsibility must be assigned.  Each head of segment should report to one higher authority.  And clearly define subordinates for each segment and relations of all employees of the organization.

Policy statement ... The policy statement provides guidelines for the employees how to carry out a specific duty in their job description. The policy statement should be comprehensive and enforceable. Clearly mentioned the duties and responsibility and code of conduct in organization.

Bottom Up Information Flow ... When events occurs at lower level and it reported to high level authorities is called bottom up information flows. This flow of information is also called responsibility reporting system

Responsibility Centers ... Responsibility Centers is the concept of controllability. Or ... The organizational subunits which measure and controls performance by accumulating data about different activities is called a responsibility center. Or ... An organizational unit where a manager controls financial measures recorded and reported by a managerial accounting information system is called the responsibility system

Types of Responsibility Centers Responsibility Center Responsibility Center Cost Center Cost Center Profit Center Profit Center Investment Center Investment Center Cost, profit, and investment centers are all known as responsibility centers.

Cost / Expense Center ... Responsibility centers whose employees control costs, but do not control their revenues.  Examples: Production department in a manufacturing unit ... The manager at this level has to control the cost and measure the actual cost incurred with the budgeted cost to evaluate the performance.

PROFIT CENTRE ...The responsibility center, which determines the profit produce by the organization, is called profit center. ... The revenue performance is measures by comparing the actual profit with the budgeted profit during a budgetary period.

INVESTMENT CENTRE ... Its manager not only controls the center’s costs and revenues but also helps determine the amount of investment owners make in it. For example large corporations decide each year how much profit should be reinvested (Retain Earning).

DATA ACCUMULATION ... The collection of data is called data accumulation. ... When the data is collected from various organizational units it is required to categorized it for this purpose transaction encoding scheme are used. ...There three types of codes which are used to categorize the collected data these codes are the following.

Codes Responsibility Codes 1 Account Codes 2 Budget Codes 3

Responsibility Codes ... The responsibility center is a numeric codes assigned by the organization to its organizational subunits (responsibility center).  For example Factory No 1 Code is 5100, reports to Vice President of Manufacturing Code furthermore, the manager of Production Dept. B with a code of 5120, reports to the Head of factory no 1 Code 5100…

Account Codes  A code, which represents an account uniquely, is called account codes. e,g Accounts receivable may be represented by the code 011 Every organizations maintains their chart of account. ACCOUNT TITLEACCOUNT CODE Cash101 Accounts Receivable103 Land201 Building2002 Equipment203 Interest Payable205 Income Tax Payable207 Notes Payable209 Salaries Expenses305 Supplies Expenses307

Budget Codes  The budget code is a code which represents the budget amount allocated for different activities in the organization. Each budget code represents the amount allocated to a specific activity in the organization. BUDGET HEAD BUDGET CODE Computer equipmentsA-6112 Advertising and promotion A-7112 SalariesA-2011 Stationary and PrintingB-2002 Machinery and PlantsC-3215

Coding Structure  We need to used different types of coding schemes to keep the record of accounts in best way. The method used to make the different codes is called a coding structure. Different types of codes are as following:- 1.Sequential Codes:  Some times it is necessary to assign sequential codes to the different data items e.g. codes assign to checks, sales orders, requisition, purchase orders, invoices and receiving reports etc.

Continue… 2.Block Codes: such codes which used to identify separate responsibility centers and its accounts, each group e.g represents an expenditure(0), for salaries(571) and in production department A(5110). 3.Mnemonic Codes: Such codes which represents by the combination of letters and numbers, so the clerks can more easily remember the associated data item.