RESPONSIBILITY ACCOUNTING
“Responsibility Accounting collects and reports planned and actual
accounting information about the inputs and outputs of responsibility centers”.It
is based on information pertaining to inputs and outputs. The resources utilized
in an organization are physical in nature like quantities of materials
consumed, hours of labour, etc., are called inputs. They are converted into a
common denominator and expressed in monetary terms called “costs”, for the
purpose of managerial control. In a similar way, outputs are based on cost and
revenue data.
Responsibility Accounting must be designed to suit the existing
structure of the organization. Responsibility should be coupled with authority.
An organization structure with clear assignment of authorities and
responsibilities should exist for the successful functioning of the
responsibility accounting system. The performance of each manager is evaluated
in terms of such factors.
RESPONSIBILITY CENTRES
The main focus of responsibility accounting lies on the
responsibility centres. A responsibility centre is a sub unit of an
organization under the control of a manager who is held responsible for the
activities of that centre. The responsibility centres are classified as follows:
1) Cost Centres,
2) Profit Centres and
3) Investment
centres.
1) Cost
Centres
When the manager is held accountable only for costs incurred in a
responsibility centre, it is called a cost centre. It is the inputs and not
outputs that are measured in terms of money. In a cost centre records only
costs incurred by the centre/unit/division, but the revenues earned (output)
are excluded form its purview. It means that a cost centre is a segment whose
financial performance is measured in terms of cost without taking into
consideration its attainments in terms of “output”. The costs are the planning
and control data in cost canters. The performance of the managers is evaluated
by comparing the costs incurred with the budgeted costs. The management focuses
on the cost variances for ensuring proper control. A cost centre does not serve
the purpose of measuring the performance of the responsibility centre, since it
ignores the output (revenues) measured in terms of money. For example, common
feature of production department is that there are usually multiple product
units. There must be some common basis to aggregate the dissimilar products to
arrive at the overall output of the responsibility centre. If this is not done,
the efficiency and effectiveness of the responsibility centre cannot be
measure.
2) Profit
Centres
When the manager
is held responsible for both Costs (inputs) and Revenues (output) it is called
a profit centre. In a profit centre, both inputs and outputs are measured in
terms of money. The difference between revenues and costs represents profit.
The term “revenue” is used in a different sense altogether. According to generally
accepted principles of accounting, revenues are recognized only when sales are
made to external customers. For evaluating the performance of a profit centre,
the revenue represents a monetary measure of output arising from a profit
centre during a given period, irrespective of whether the revenue is realized
or not.
The relevant profit to facilitate the evaluation of performance of a
profit centre is the pre–tax profit. The profit of all the departments so
calculated will not necessarily be equivalent to the profit of the entire
organization. The variance will arise because costs which are not attributable
to any single department are excluded from the computation of the department’s
profits and the same are adjusted while determining the profits of the whole
organization. Profit provides more effective appraisal of the manager’s
performance. The manager of the profit centre is highly motivated in his
decision-making relating to inputs and outputs so that profits can be
maximized. The profit centre approach cannot be uniformly applied to all
responsibility centres. The following are the criteria to be considered for
making a responsibility centre into a profit centre. A profit centre must
maintain additional record keeping to measure inputs and outputs in monetary
terms. When a responsibility centre renders only services to other departments,
e.g., internal audit, it cannot be made a profit centre. A profit centre will
gain more meaning and significance only when the divisional managers of
responsibility centres have empowered adequately in their decision making
relating to quality and quantity of outputs and also their relation to costs.
If the output of a division is fairly homogeneous (e.g., cement), a profit
centre will not prove to be more beneficial than a cost centre. Due to intense
competition prevailing among different profit centres, there will be continuous
friction among the centres arresting the growth and expansion of the whole
organization. A profit centre will generate too much of interest in the
short-run profit to the detriment of long-term results.
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