Responsibility accounting is a management control system based on the principles of delegating and locating responsibility. The responsibility is delegated on a responsibility centre and accounting for the responsibility is on the basis of performance of the responsibility centre. For example, accountability for costs may be on the person made responsible for incurring the costs. The cost data will be compiled separately for the persons who arc responsible for their incurrence Control measures will be implemented if the persons responsible have been inefficient or wasteful in incurring costs. Thus, responsibility accounting promotes alertness amongst the persons and stimulates initiative at all levels of personnel, besides providing information for performance evaluation by responsibility centers. It is a device available to senior management to control the behavior of subordinate managers and to ensure the optimisation and congruence of their activities
The responsibility of each individual should be clearly defined in order to make him fully aware of what he is required to do and what is expected of him. The scope of his functioning and 1 lie consequences which are likely to follow in the event of his non-fulfilling the responsibility should also be made clear to him simultaneously. The plan is broken up into details for allocation of each specific responsibility and is communicated to the individual concerned. An accounting system is established to evaluate the performance of the responsibility centre. Variances of actual performances with the allotted ones are computed and analysed so as to fix up the responsibility on the concerned centre. The same is communicated to the higher levels of management also for action. Corrective actions follows.
Responsibility accounting is not limited to the system of accounts and related procedures for accumulating revenues and expenses by management responsibility rather it extends to such a system of accounts which provide the framework and data for budgeting by responsibility and reporting management performance by responsibility. The accounts should be so designed as to match the management structure of the enterprise. The essence of responsibility accounting is that it traces costs and revenues and/or assets to separate individual decision units or organisation units (called responsibility centres) each under the direct control of a manager.
PRINCIPLES OF RESPONSIBILITY ACCOUNTING
Under responsibility accounting, costs (or revenues or returns) are to be traced to the individual managers responsible for making decisions about them. As Horngren puts it. "revenues and costs are recorded and automatically traced to the individual at the lowest level of the organisation who shoulders primary day-to-day decision responsibility for the item,"
The principles' governing the responsibility accounting system maybe explained as under:
1. Costs and revenues should be traced directly to the units responsible for them. A clear-cut guideline as to the demarcation of responsibility is a pre-requisite, otherwise one departmental manager may shrug off the responsibility by passing it over to the other. Confusion as to the shouldering of the responsibility cannot lead to any decisive action by the management.
For example, if production department has to work overtime to supply goods to a customer in lime, and the reason for it is delayed procurement of material by the purchase department, the overtime cost should be charged to the purchase department and not to the production department.
2. Costs should be traced directly to the department which has the power to accept and pay for them. An example would make the point clear. Two production departments may incur the transportation costs jointly, but the manager of one production department may have (he power to decide about incurrence of the cost. Here, the burden to be shared by the oilier production department in respect of transportation costs may be unfair. A suitable mechanism of transfer pricing should be evolved so as to charge the other production department, reasonably treating it as an ‘external' customer.
3. Variances from budget and comparisons between budget and actual results must be grounded firmly in a discernibly uniform and clearly comparable system of budgeting and reporting. The responsibility for adhering to standards and the responsibility for any deviations from those standards should also be clearly distinguished. There should be uniformity in preparation and presentation of budgetary and actual data for the sake of comparison.
The implementation of responsibility accounting system is possible by taking the following steps.
(ii) Apportioned costs are required to be identified.
(iii) The budgets or targets arc set in. The targets arc communicated lo the concerned executives.
(iv) There is a continuous appraisal system of the actual performance. The actual results are communicated to the concerned executive or the responsibility centre.
(iv) The variances are reported to the higher management together with the names of the executives or the responsibility centres entrusted with the job
(v) The corrective measures arc taken and intimated to the concerned executive or responsibility centre.
(vi) Incentives arc offered at times to induce human resources to adopt to the system.
Thus, the essence of Responsibility Accounting is to communicate the right information to the right person at the right time.
Responsibility Centres. Any organisational unit accountable to higher authority for its performance of assigned functions, usually including its incurrence of specified costs under budget limiitations and control, is a responsibility centre.5 If a person is held responsible for control of costs, the centre is termed as responsibility centre. The concept of responsibility rests on the concept of profit the centre makes and costs which it can directly control. Thus all apportioned costs and policy costs arc excluded in determining the responsibility for costs. The
1. Horngen Charles T, : Introduction to Management Accounting, ed. 1981, p. 236.
2. Schallke R. W. & Jensen H. G. : Managerial Accounting—Concepts and Uses, p. 325-326.
3. Anthony Robert & Reece : Management Accounting Principles, ed. 1975, p. 470.
4. Handbook of Management Accounting : Responsibility Accounting, edited by David Fanning. p. 23.
5. Kohler E. L. : A Dictionary lor Accountants p. 408.
Main emphasis is not on ascertainment of costs, but on control of costs. Each manager is held responsible for monitoring controllable costs in his area of activity. Thus, the notion of controllability is central to the concept of responsibility accounting.
A responsibility centre should be efficient as well as effective. It is efficient if the amount of output per unit of input /the amount of input per unit of output, as the case may be, is more/less than the standard, or compared to any yardstick. It is effective when the goals of the enterprise are met. To lake an example, Mr. A maintains his scooter in tip-top condition, say, by incurring Rs. 100 per month on its maintenance and Mr. B maintains his scooter in a workable condition, say, In incurring Rs.50 per month on its maintenance. Mr. A will be called less efficient through more effective as compared to Mr. B. Whether efficiency matters more than effectiveness or vice versa depends on the management's priorities.
Take a second example. Concerns X and Y are producing identical products and their output is of the same quantity and quality. Concern A incurs a cost of Rs. 1,00,000. whereas concern B incurs a cost of Rs. 2.00,000. The profit made by concern A is Rs. 10,000; whereas concern B has earned a profit of Rs.50,000. Here concern. A is more efficient but less effective as compared to concern B. Management should strive for both the efficiency and the effectiveness and. therefore, the responsibility centre, the entire organisation in this case, should have incurred an expenditure of Rs. 1,00.000. thereby earning a profit of Rs. 1,50,000 instead of only Rs. 50,000. Sometimes an overall barometer is used to measure the efficiency and effectiveness of a responsibility centre in a combined manner by computing return on investment.