Definition of Responsibility Accounting
Responsibility accounting pertains to the act of identifying and locating the centers of responsibility accounting and their goals; this allows the business to analyse and create a performance evaluation for all of the responsibility centers. In addition, these centers are responsible for reporting income and expenses depending on the area of responsibility.
- Accountability is fixed and, to name a few, is based on defined entities such as cost centers, profit centers, and investment centers.
- Internal accounting, budgeting challenges, and management concerns are all handled by responsibility accounting, a type of management accounting.
- The primary goal is to support all of its centers and assist them with costing and planning.
- The accounting refers to creating an annual or monthly budget assigned to or tailored for a specific center. This accounting approach accounts for a company's revenue and costs, with quarterly and annual reports compiled and then presented to the manager for review or comment.
- In responsibility accounts, a certain individual is assigned to look into a specific area of accounting and cost control so that the person may be held accountable for any cost increases.
- In this accounting, tasks and responsibilities are assigned based on an individual's knowledge and skillset, and suitable power may be granted to that person to make decisions for that department on his own.
History of Responsibility Accounting
Responsibility accounting was first established in the 1920s with the goal of handling all levels of power in any organization's administration. The economic activities of firms were greatly diversified during the 1950s and 1960s, raising the requirement for accountability accounting and decentralisation.
Accounting for Responsibility's Goals
The key aims or principles of responsible accounting are listed below -
- Goals are set for each responsibility center and communicated to the appropriate management level.
- At the end of the period, the target performance is compared to the actual performance.
- Budget plan changes are being considered to assign responsibility to headquarters.
- Top management takes appropriate steps, which are communicated to the appropriate individuals.
- Policy costs and various other allocations are not included in the cost allocation.
Steps in the Responsibility Accounting Process
The steps involved in responsibility accounting are outlined below
- Identifying the cost center or responsibility.
- Monitoring each responsibility center's actual performance.
- Making a comparison between actual and desired results.
- Checking for discrepancies between actual performance and target performance
- After variance analysis, assigning responsibilities to each center
- Communicating corrective measures to each center's individuals.
Characteristics of Responsibility Accounting
Business should be aware of a few accounting characteristics: -
- Inputs and Outputs
Only accurate input and output data can be used to construct a reliable accounting system. Costs are the monetary phrase for inputs, and revenues are the monetary term for outputs. As a result, cost and revenue data are essential for responsibility accounting.
- Budgeting Is Used
Financial data, both planned and real, is necessary for addition to cost and revenue data. Only through proper budgeting can the accounting plan's implementation be communicated to the appropriate management levels.
- Relationship Between Organizational Structure and The System of Accountability
A reliable accounting system cannot succeed without clear lines of authority and an effective organizational structure. The accounting system is developed to complement the existing organizational structure.
- Identifying The Centers of Responsibilities
The system of accountability can only be used after the defined responsibility center. The centers are then used to symbolize the organization's decision points.
- Reporting On Performance
Since the responsibility account is primarily concerned with control, any deviation from the plan must be recorded and reported as soon as possible. Corrective actions must be made in response to such a report. The preparation of responsibility or performance reports is based on this information.
Responsibility Accounting (Example)
The following is an example of responsibility accounting:
Let's look at a cost center example:
- Amgen, a well-known pharmaceutical company, plans to make Polio vaccines in batches of 100,000 in three phases. The business anticipated that all three phases would cost $25 million and take six months to complete.
- However, the corporation ended up spending $26.5 million once the vaccine was produced. Thus, the responsibility account manager must justify the extra cost to management. There could be various reasons for this, including increasing raw material costs, increased per unit electricity costs, or any new government policy that raises costs.
Accounting for Different Types of Accountabilities
There are several types of responsibility centers; we'll go through each one in-depth below:
- Center of Cost: As the name implies, the people who work in this center are in charge of cost management for the company, but they are not in charge of any other functions.
However, there are two sorts of expenses: controlled and uncontrolled. A person should be held accountable for the controlled costs, and each center's performance is assessed by comparing actual and predicted costs.
- Revenue Center: This center is responsible for the company's revenue and has no other responsibilities. Sales teams primarily staff it.
- Profit Center: The center's success is measured in revenue and cost, and the team responsible for this center needs to ensure accurate data is reported. A factory can generally be considered a profit center, with raw materials as inputs falling under the cost center and finished goods sales falling under the revenue center.
- Investment Center: This is a critical center to be a part of, as this team is responsible for ensuring that the firm's assets are appropriately employed so that the company may efficiently capitalize on the deployed cash and produce handsome earnings.
Responsibility Accounting Prerequisites
As crucial as effective responsibility accounting is, a corporation must also meet certain requirements.
- The first is to have a well-defined organizational structure, with clearly defined staff levels and efficient authorization within the company.
- The metrics used to examine and evaluate performance must be specified and described to the entire team.
Responsibility Accounting's Benefits
- The most important benefit of responsibility accounting is that every accounted individual understands their tasks and obligations to the organization, which helps maintain transparency in the company.
- Since separate departments are responsible for distinct tasks inside the firm, the odds of information mishandling or misreporting are quite remote.
- It certainly complements and improves the accuracy of managers who paint carefully with numerous centers, as they're accountable for each motion inside that center.
Responsibility Accounting's Drawbacks
- There may be times when an individual's interest and an organization's interest are at odds. Such strife is likely to wreak havoc on policy implementation.
- The coverage implementation system can stumble upon reactions from the targeted individual, which might also subsequently generate passive resistance.
- An organizational chart may not be able to be established so that the grant of power and responsibility boundaries are demarcated. Such acts might also have a bad effect on the organization's goals.
- The tool can only be useful if an excellent reporting system exists.
- The responsibility centers cannot be readily identified without a good organizational structure.
- It can be time-ingesting to behavior a new exam of conventional price category methods.
The following are a number of the negative aspects of obligation accounting:
- Meeting the necessities of a green obligation accounting gadget, can now and then be challenging. The system was utterly destabilized as a result of it.
- The system raises the company's costs because it necessitates highly skilled management.
- This accounting method records controllable expenses and excludes uncontrollable ones.
- If a company fails to communicate a person's goals and responsibilities effectively, the system may fail to generate the desired results.
The responsibility accounting is a way for collecting and reporting prices and sales to senior control to make knowledgeable decisions. Furthermore, it lets personnel enlarge their abilities to lessen prices and boom sales for their organizations. Organizations organize their divisions or departments into multiple responsibility centers in a responsibility accounting system, which allows them to focus on only those whose performance falls short of expectations.
At the same time, this accounting system is only applicable to large organizations since it necessitates a higher level of ability and a larger workforce in the responsibility center. For an efficient responsibility accounting system, all managers must be aligned with the company's goal and understand their responsibilities.