Responsibility Accounting Meaning, Features, Types, Steps

Table of Content:-

  1. Meaning of Responsibility Accounting
  2. Definition of Responsibility Accounting
  3. Features of Responsibility Accounting
  4. Objectives of Responsibility Accounting
  5. Types of Responsibility Accounting
  6. Steps of Responsibility Accounting

Meaning of Responsibility Accounting

Responsibility accounting(RA) is related to the profit-centre manager, who must have much decentralised decision making authority and a cost-centre manager has less autonomy. There is no need for this to be the case. Although profit centres can aid decentralisation, one can exist without the other.

The use of responsibility centres arises because of the need to decentralise authority within every large organisation. The top management of most healthcare organisations can’t make all of the decisions that are needed to carry out the organisation’s activities. Delegation of authority is important for every organization.

The design of a management control system should consider two separate dimensions of control:

  1. The responsibilities of managers, and
  2. The amount of autonomy they have.

Definition of Responsibility Accounting

The systems of costing like standard costing and budgetary control are useful to management for controlling costs. In those systems, the emphasis is on the devices of control, not those who use such devices. It is a  control system that assigns accountability for cost control. People are entrusted with the responsibility of cost control.

It is a reporting system that compiles revenue, cost and profit information at the level of the individual managers who are directly responsible for these aspects. The intent is to provide this information to those most able to act upon it and judge their performance with it.

According to Anthony and Reece, “Responsibility accounting is that type of management accounting that collects and reports both planned actual accounting information in terms of responsibility centres”.

According to Charles T. Horngren, “Responsibility accounting is a system of accounting that recognizes various decision centres throughout an organization and traces costs to the individual manages who are primarily responsible for making decisions about the costs in question”.

Features of Responsibility Accounting

An analysis of the above-given definitions reveals the following important features of responsibility accounting:

1) Identification of Responsibility Centres

The whole concept of responsibility accounting focuses on identifying responsibility centres. Responsibility centres are essential components within an organization, representing areas of authority and decision making. In a small firm, one individual or a small group of individuals, who are usually the owners, may manage or control the entire organization. However, for effective control, a large firm is, usually, divided into meaningful departments, segments or divisions. Responsibility centres refer to these sub-units or divisions of the organization.

2) Relationship between Organization Structure and Responsibility Accounting System

A well-defined organizational structure is important for establishing an effective responsibility accounting system. This structure ensures clear lines of authority and responsibility relationships, which are essential for the success of the system. Additionally, responsibility accounting should be designed to suit the organisation’s organisational structure. It must be based on the current authority-responsibility relationships in the organization. The RA system should align with the organizational structure and provide financial information to evaluate the actual of each individual responsible for a specific function.

3) Inputs and Outputs or Costs and Revenues

The maintenance and implementation of the responsibility accounting system are reliant on information about inputs and outputs. It plays an important role in effectively managing and allocating responsibilities. It promotes accountability and empowers employees to take ownership of their assigned responsibilities within an organization. This system operates on the principle that each person or department is responsible for certain inputs, such as resources, and outputs, such as results or outcomes.

4) Planned and Actual Information or Use of Budgeting

Effective responsibility accounting necessitates the utilization of both planned and actual financial information. For the implementation of a reliable accounting system, it’s essential to consider not only historical cost and revenue data but also planned future data.

5) Transfer Pricing Policy

In a large-scale enterprise with decentralized divisions, it is a common practice to move goods and services from one section of the organization to another. In such situations, there is a need to determine the price at which the transfer should occur so that costs and revenues can be properly assigned.

6) Assigning Costs to Individuals and Limiting their Efforts to Controllable Costs

The responsibility system involves assigning costs and revenues to individuals. Only those costs and revenues over which an individual has definite control can be set to him for evaluating his performance. RA holds a particular attraction as it adeptly differentiates between manageable costs and those that are beyond control.

7) Participative Management

The effectiveness of responsibility accounting system becomes more effective when a participative or democratic management style is adopted. In this approach, plans are developed and budgets/standards are established through mutual agreement, and decisions are made after consulting with subordinates. This fosters a more inclusive and collaborative environment, which leads to improved outcomes and greater accountability. It motivates the workers by ensuring their participation and self-imposed goals.

8) Performance Reporting

The responsibility account is a control device. For an effective control system, it’s crucial to promptly report any deviations from established plans. This allows for timely corrective action in the future. Deviations become noticeable only upon performance reporting. Therefore, the RA system is centred around performance reports, also referred to as ‘responsibility reports,’ which are prepared for each responsibility unit.

Objectives of Responsibility Accounting

The objectives of responsibility accounting may be classified into three basic categories:

  1. Evaluation of the performance quality
  2. Motivation aligned with organisational goals
  3. Determining the Contribution of a Division

1) Evaluation of Performance Quality

Responsibility accounting measures performance and, consequently, shapes managers’ behaviour. In discussing responsibility accounting, we must take behavioural considerations into account. It is for this reason that responsibility accounting contains a discussion of how managers are influenced by the nature of the accounting information they receive.

Could a valid distinction be made between the performance of a division as an entity and the personal performance of a divisional manager? In the long run, the two may not be distinguishable. In the short term, however, a very useful and necessary distinction may be made. It is conceivable that a division may not have made a satisfactory contribution to the goals of the organisation. Yet, we may judge the manager to have fulfilled his responsibilities exceptionally well.

2) Motivation Aligned with Organizational Goals

As observed earlier, any performance measurement system can be expected to influence the behaviour of the managers affected. Divisional performance measurement should be designed so that, in seeking to achieve their own goals, divisional managers will simultaneously work to achieve the firm’s goals. This is called “goal congruence.” This can be ensured through a system of incentives, for example, bonuses for good performance, and so on. In brief, responsibility accounting as a control device aims at measuring the performance of the various responsibility centres or divisions of an organisation. Note that it measures performance rather than evaluating it. In other words, RA focuses on what and not how well the performance is.

3) Determining the Contribution of a Division

The performance of a responsibility centre can be quantified based on both its efficiency and its effectiveness. Efficiency measures the correlation between inputs and outputs, while effectiveness refers to the connection between output and the organization’s goals. Efficiency is a relative term: the lower the consumption of resources (input) to turn out a given amount of output, the greater the efficiency. A specific responsibility centre might exhibit reduced efficiency if the production costs in a given month are higher or lower than those in the preceding or following month.

Similarly, in comparison to another centre, it may be more/less efficient. In brief, an efficient responsibility centre does whatever it does with the lowest consumption of resources.

The effectiveness of an organization is directly linked to its goals. Applied to RA, it implies how well a responsibility centre contributes to the goals of the organisation. For a centre to be deemed effective, it must be capable of fulfilling the expected responsibilities and making significant contributions. In determining the contribution of each responsibility centre to the organisation as a whole, both efficiency and effectiveness are relevant, that is, a responsibility centre should be both efficient and effective.

Types of Responsibility Accounting

Management accounting provides three types of responsibility accounting systems:

1) Activity Based Responsibility Accounting System

A system for measuring and rewarding performance based on activities or processes using both financial and non-financial measures. Activity-based RA is needed in a dynamic environment that has advanced information systems and a high level of technology (if the organization is large). It is the RA system developed for those firms operating in continuous improvement environments.

2) Functional-Based Responsibility Accounting System

A functional-based RA system is formulated to assign responsibility to various organizational units and quantify performance metrics using financial terms. The development of the responsibility accounting system takes place when most companies operate in a relatively stable business environment.

3) Strategic-Based Responsibility Accounting System

A strategic-based RA system (Balanced Scorecard) translates the mission and strategy of an organization into operational objectives and measures from four different perspectives:

  • i) The financial perspective,
  • ii) The customer perspective,
  • iii) The process perspective, and
  • iv) The infrastructure (learning and growth) perspective.

Steps of Responsibility Accounting

One of the essential elements of RA is the effective communication of accurate information to the right person at the right time. To achieve this objective,  the RA should have the following steps:

Responsibility accounting follows the subsequent steps:

1) Setting targets and communicating them to each manager/executive.

2) Implementing a system for continuous evaluation of actual performance and effectively communicating the results to each concerned manager responsible for their respective areas of operation.

3) Reporting variances to the higher management along with the names of managers of concerned responsibility centres.

4) Suggesting corrective measures and effectively communicating them to the relevant centre manager.

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