What steps need to be taken to set up a system of responsibility accounting in an organisation?

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Concept of Responsibility Accounting

Responsibility accounting refers to a system that undertakes the identification of responsibility centers, subsequently determines its objectives. It also helps in the development of processes related to performance measurement as well as the preparation and analysis of performance reports of the identified responsibility centers. 

What is Responsibility Accounting, and How Does it Work?

Responsibility accounting is a type of management accounting in which a company's management, budgeting, and internal accounting are all held accountable. The fundamental goal of this accounting is to assist all of a company's planning, costing, and responsibility centers.

Accounting often entails the creation of monthly and annual budgets for each responsibility center. It also keeps track of a company's costs and revenues, with reports compiled monthly or annually and sent to the appropriate manager for review. The focus of responsibility accounting is mostly on responsibilities centers.

For example, if Mr X, a unit manager, plans his department's budget, he is accountable for keeping it under control. Mr X will have all of the necessary information about his department's costs. Mr X will look for the problem and take the necessary actions and processes to correct it if the expenditure exceeds the allocated amount. Mr X will be held personally accountable for the performance of his unit.

Objectives of Responsibility Accounting 

See below for the major objectives or principles of responsibility accounting –

• Each responsibility center is given a target, which is communicated to the relevant management level. 

• At the end of the time period, there is a comparison between the target and the actual performance.

• The variations that are detected in the budgeted plan are examined for fixing responsibility to the center. 

• Due measures are taken by the top management which is communicated to the responsible personnel.

• The responsibility for costs does not include the policy costs and various other apportioned costs.

Features of Responsibility Accounting

Read on to know more about the host of responsibility accounting features, you

• Inputs and Outputs 

Responsibility accounting system can be implemented only on the basis of due information of input and output. The monetary term of inputs is costs, and outputs are correspondingly called revenues. Hence, cost and revenue information is crucial for responsibility accounting.

• Use of Budgeting 

Apart from the data of cost and revenue, planned and actual financial data is also required. It is only with effective budgeting that the accounting plan implementation can be communicated to the concerned levels of management. 

• Relationship between the Responsibility Accounting System and Organization Structure 

Clear lines of authority and effective organization structure is absolutely necessary for the success of a responsible accounting system. The accounting system is appropriately designed to be consistent with the existing organizational structure. 

• Identification of Responsibility Centers 

Only after responsibility centers are identified, the responsibility accounting system can be implemented. The centers go on to represent the decision points within the organization. 

• Performance Reporting 

As the responsibility account primarily relates to control, any deviation or disruption in the plan has to be noted and reported at the earliest. On the report of such an issue, corrective measures have to be taken. Such information is the basis on which ‘responsibility’ or performance reports are prepared. 

Different Types of Responsibility Centers

A responsibility center is a functional business entity that is given definite objectives and goals, dedicated personnel, procedures and policies as well as the duty for generating a financial report.

Managers are vested with specific responsibility in terms of expenses incurred or revenue generation or the investment of funds. Let us take a look at the four types of responsibility centers. 

1. Profit center 

It contributes to both revenue and expenses, resulting in profit and loss, respectively. For example – The product line is a profit center, and the responsible person is the product manager.

1. Cost center 

The center only contributes to specific costs that have been incurred. For example – The housekeeping department will only incur costs.

1. Revenue center 

The revenue center only leads to the generation of sales. For example – Sales department of an organization.

1. Investment center 

The center is responsible for profits and returns on investment. The latter includes the fund which is invested in the organization's operations. For example – A subsidiary entity of a company is an investment center. The responsible person in that instance would be the president of the subsidiary.

Responsibility Accounting Example

The following scenario acts as an example of responsible accounting –

The responsibility accounting system of the company, Lush Footwear, allows the departmental heads to allocate the expenses and control such costs based on immediate needs. The executive management of Lush Footwear is tracking managers’ performance, and at the same time, there are considerably fewer top-level executives who would direct the operations. 

To carry out the demarcated functions properly, the executives of Lush Footwear prints the responsibility accounting performance reports for the analysis of the holistic performance of all the departments. If it is seen that the statistics seem to meet the established objectives, further responsibility accounting budgets are allocated by the top management. 

Steps in the Responsibility Accounting Process

The steps for proper implementation are as follows:

• Define responsibility centers correctly.

• Setting goals and assigning responsibilities to the various responsibility centers.

• On a regular basis, keep an eye on their actual performance.

• Compare actual performance to the target on a regular basis.

• Determine the cause (or causes) of a discrepancy between actual and target performance.

• Management makes steps to address the discrepancy. The management also informs the responsibility center about the situation.

Test your Knowledge – 

Now that you have some idea about the topic of responsibility accounting, how about testing your newly gained knowledge! Find out if you are able to answer the following quiz.

i. Responsibility accounting undertakes the collection as well as reporting of costing information on -

(a) Cost center basis 

(b)Department basis 

(c) Product basis 

(d) Function basis 

ii. Responsibility accounting covers the following –

(a) All employees

(b) Chief Executive Officer and Chief Financial Officer 

(c) Middle Managers 

(d) Managers 

You can find the solutions to the quiz at the end of the article.

Advantages of Responsibility Accounting

• Responsibility accounting establishes a robust mechanism for cost control 

• To achieve the objectives of cost control, the organizational structure is re-assessed by the management to consider attribution of responsibility as well as engaging in power delegation 

• Budgeting is put in place which helps in the comparison of actual achievement on the ground

• The awareness among designated personnel is enhanced, which is likely to lead to greater productivity. They will also be held accountable for their actions, and any deviation will necessarily call for an explanation 

• Reporting structure and timings are facilitated because such items are excluded which is beyond the purview of individual responsibility of the designated personnel.

• It encourages managers to recognise the company's structure, determine who is responsible for what, and resolve issues.

• Because managers must explain the deviations for which they are accountable, it enhances their attention and awareness.

• It makes it easier to compare the accomplishments of pre-planned goals with real outcomes.

• Individual employees will feel more efficient as their efforts and accomplishments are evaluated.

• It assists management in planning and structuring a company's future expenditures and revenues.

• As a cost-control technique, it instills in employees a sense of 'cost-consciousness.'

• Individual and organizational goals are set and conveyed in the most effective way possible.

Disadvantages of Responsibility Accounting 

• There could be instances of individual interest and organizational interest to be at loggerheads. Such conflict is likely to create problems for policy implementation

• An organizational chart may not be possible to be established in such a manner where the grant of authority and the responsibility lines are clearly demarcated 

• The policy implementation process is likely to experience the reactions from the designated person as well, which may eventually cause passive resistance. Such actions may negatively impact the organizational objectives

• The tool can only be effective if an outstanding reporting system is put in place 

• In the absence of a sound structure of the organization, the responsibility centers cannot be clearly identified.

• Fresh analysis of the conventional methods of the classification of expenses may be cumbersome.

• The downsides of responsibility accounting are as follows:

•  It can be difficult to meet the requirements of an efficient responsibility accounting system at times. It completely destabilized the system.

• Because it needs the presence of highly trained management, the system increases the company's costs.

• This accounting system only accounts for controllable costs and ignores uncontrollable expenses.

• If a corporation fails to adequately communicate a person's goals and responsibilities, the system may fail to produce correct outcomes.

Objectives of Social Responsibility Accounting 

It will be useful for you to know that, connected to the inherent principles of responsibility accounting, an important concept of social responsibility accounting has emerged. Before we determine what the objectives of social responsibility accounting are, let us know a little bit about the concept.

Social responsibility accounting, even though used generally in the context of corporate social responsibility, involves the communication of the environmental and social effects of a firm’s economic steps. It is usually done with respect to a specific interest group or towards the society at large. The focus on multinational corporations and the tools mostly include – public hearing, public audit, social audit, use of complaint box and citizen charter and public expenditure tracking survey.

Let us now look at the underlying objectives of social responsibility accounting.

• The communication will disclose and measure the 'costs' and 'benefits' caused to society due to the firm's production-related activities

• The organization may use it as an assessment for the impact of its performance on communities, people and the environment 

• It leads to the creation of a favorable image of the organization and helps to attract investors. In continuation of this aspect, it will also facilitate the inflow of capital from multiple sources to the organization

• It lends an overall conducive effect on society with the firm committing to improving its business processes

If you are keen to learn more about responsibility accounting, do not forget to install Vedantu’s app on your device, and check the online materials available on the platform. 

Did you know?

Among all the different kinds of responsibility centers such as cost centers, profit centers, revenue centers and investment centers – profit centers enjoy maximum autonomy. If business unit managers are not given sufficient autonomy, they will not be able to undertake critical operating decisions connected with profit generation. 

There are a multitude of decisions that may have to be taken within a short period of time. Such decisions may range from pricing, product mix, purchase, and inventory, among others.

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