ROLE OF ACCOUNTING

DEPARTMENT IN AN
ORGANISATION

BY:
ANIL V

CHAPTER OBJECTIVES
Understand the meaning and
essential features of responsibility
accounting.
Steps involved in responsibility
accounting.
Responsibility centres cost ,profit
and investment centres.
Transfer prices.
Advantages of responsibility
accounting.

MEANING AND DEFINITION OF

REPONSIBILITY ACCOUNTING
Responsibility accounting is a system of
accounting that recognizes various responsibility
centres throughout the organization 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.
Charles, T.Horngreen
Responsibility accounting is that type of
management accounting that collects and reports
both planned actual accounting information in terms
of responsibility centres.

ATURES OF RESPONSIBILITY ACCOUNTING

1.

INPUTS AND OUTPUTS OR COST AND REVENUE: The

implementation and maintenance of responsibility accounting
system is based upon information relating to inputs and outputs.
Inputs expressed In the monetary term are known as cost and
output expressed in monetary terms are called revenue.

2.

PLANNED AND ACTUAL INFORMATION OR USAGE OF

BUDGETING: Effective responsibility accounting requires both
planned and actual financial information . It is not only the
historical cost and revenue data but also the planned future data
which is essential for the implementation of responsibility
accounting system . It is through budget that responsibility for
implementing the plans is communicated to each level of
management.

3.

IDENTIFICATION OF RESPONSIBILITY CENTRES : For effective

control ,a large firm is usually ,divided into meaningful segments
,departments or divisions of organization are called responsibility

4. RELATIONSHIP BETWEEN ORGANISATION STRUCTURE

AND
RESPONSIBILITY
ACCOUNTING SYSTEM :A sound organization
structure with clearcut lines of authority responsibility relationship is a
prerequisite for establishing a successful responsibility accounting
system.Further ,responsibility accounting system must be so designed
as to suit the organisation structure of the organisation.

5. ASSIGNING COST TO INDIVIDUALS AND LIMITING THEIR EFFORTS

TO CONTROLABLE COSTS : Only those costs and revenues over
which an individual has a definite control can be assigned to him for
evaluating his performance .Responsibility accounting has an appeal
because it distinguishes between controllable and uncontrollable cost
CONTROLABLE COST : are those costs which can be controlled or
influenced by a specified person or a level of management of an
undertaking.
UNCONTROLABLE COST : are those which cannot be so controlled or
influenced by the action of specified individual or undertaking.

The following guidelines recommended by the committee of the American

accounting association in regard to assigning of costs may be followed:
a)If the person has authority over both the acquisition and use of the
services ,he should be charged with the cost of these services.
b)If the person can significantly influence the amount of cost through his
own action ,he may be charged with such cost.
c)Even if the person cannot significantly influence the amount of cost
through his own direct action ,he may be charged with those elements
with which the management desire him to be concerned , so that he will
help to influence those who are responsible.

6.
TRANSFER PRICING POLICY: In large scale enterprises having
decentralized divisions ,there is a common practice of transferring of
goods and services from one segment of the organization to another .in
such situation ,there is a need to determine the price at which the
transfer should take place so that cost and revenues could be properly
assigned .The significance of the transfer price can well be judged from
the fact that for transfering division it will be a source of revenue ,wheras

7. PERFORMANCE REPORTING :As responsibility account is a control

device .A control system to be effective should be such that plans must
be reported at the earliest so as to take corrective action for the future.
The deviations can be known only when performance is reported . Thus
,responsibility accounting system is focused on performance reports also
known as responsibility reports ,prepared for each responsibility unit.

8.
PARTICIPATIVE MANAGEMENT:
The function of responsibility
accounting system becomes more effective if participative or democratic
style of management
is followed ,wherein ,the plans are laid or
budgets/standards are fixed according to the mutual consent and the
decisions reached after consulting the subordinates. It provides
motivation to the workers by ensuring their participation and self imposed
goals.
9.
MANAGEMENT BY EXCEPTION : An effective responsibility
accounting system must provide for management be exception, i.e., it
should focus attention of the management on significant deviations and
not burden them with all kinds of routine matters condensed reports
requiring their attention must be sent to them particularly at higher levels

10. HUMAN ASPECT OF RESPONSIBILITY ACCOUNTING : The aim

of responsibility accounting is not to place blame . Instead it is to
evaluate the performance and provide feed back so that future
operations can be improved . Goals and objectives are achieved through
people and hence responsibility accounting system should motivate
people .

1.

STEPS INVOLVED IN RESPONSIBILITY

ACCOUNTING
The organisation is divided into various responsibility centres each
responsibility centre is put under the charge of responsibility
manager. The manger are responsible for the performance of their
department.

2.

The targets of each responsibility centre are set in. the targets or
goals are set in consultation with the manager of the responsibility
centre so that he may be able to give full information about his
department. The goal of the responsibility centres are properly
communicated to them.

3.

The actual performance of each responsibility centre is recorded and

communicated to the executives concerned and the actual
performance is compared with goals set and it helps in assessing the
work of these centres.

4.

If the actual performance of a department is less than the standard

set, then the variances are conveyed to the top management . The
names of those persons who were responsible for that performance
are also conveyed so that responsibility may be fixed.

5.

Timely action is taken to take necessary corrective measures so

that the work does not suffer in future. The directions of the top
level management are communicated to the concerned
responsibility centre so that corrective measure are initiated at
the earliest.

EXPENSE OR COST CENTRE

(CLASSIFICATION ON FUNCTIONAL BASIS)

Production cost Service cost

centre
centre

Ancillary cost
centre

Administrative
and support
centre

Research and
Development
centre

Marketing
centre

2.PROFIT CENTRE :
Responsibility centres may have both inputs and outputs. The inputs are
taken as cost and outputs are revenues. The difference between the
revenue and cost gives the profit. When a responsibility centre gets
revenue from output, it will be called a profit centre .When the output is
meant for outsiders ,then the revenue will be measured from the price
charged from customers and if the output is meant for other responsibility
centre ,then the management takes a decision whether to treat it as profit
centre or not.

SUITABILITY OF PROFIT CENTRE :

Establishment of profit centre may be suitable if the following conditions
are satisfied:
There exist a decentralized form of organization.
The divisional manager has access to all relevant information needed for decision
making.
The divisional manager is sufficiently independent.
Internal transfer of output from one division/centre to another division are not
significant.
A definite measure of performance is available.

ADVANTAGES OF PROFIT CENTRE :

Establishment of profit centre offers the following advantages
It encourages initiative as a manager of profit centre is subject to a lesser degree
of control of the top management.
It may improve the quality of decisions.
It quickens the decision making process as these need not be referred to top
management.
It saves time of the top management.
It enhances profit consciousness in the entire organization.
It promotes competition amongst managers of various profit centres and improves
their performance.
It helps in training divisional managers for top management responsibilities.

ADVANTAGES OF RESPONSIBILITY ACCOUNTING

1. Assigning of Responsibility: Each and every individual in the
organization is assigned some responsibility and they are
accountable for there work. Everybody knows what is
expected of him. The responsibility can easily be identified as
satisfactory and unsatisfactory performances of various
persons are known. Nobody can shift responsibility to
anyb0ody else if something goes wrong. So, under this system
responsibility is assigned individually.
2. Improves Performance: The assigning of tasks to specific
persons acts as a motivational factor too. The persons in
charge for different activities know that their performance
will be reported to the top management. They will try to
improve their performance. On the other hand, it acts as a
deterrent for low performance also because persons know
that they are accountable for their work and they will have to
explain for their low performance.
3. Helpful in Cost Planing; Under the system of responsibility
accounting , full information is collected about costs and

4. Delegation and Control: This system enables management to

delegate authority while retaining overall control. The authority
is delegated according to the requirements of the task assigned.
On the other hand, responsibility of various persons is fixed
which is helpful in controlling their work. The control remains
with top management because performance of every cost centre
is regularly reported to it. So management is able to delegate
authority and at the same time to retain control.
5. Helpful in Decision-Making: Responsibility accounting is not
only a control device but also helpful in decision-making. The
information collected under this system is helpful to
management in planning its future actions. The past performance
of various cost centres also helps in fixing their future targets. So
this system enables management to take important decisions.