Professional Documents
Culture Documents
RESPONSIBILITY
ACCOUNTING
INTRODUCTION
Responsibilty accounting is one of the basic components of a good control system. The
main characteristic feature of this control system is that it is relevant to measurement of
performance of divisions of an organization while other control systems are applicable to
the organization as a whole. Budgeting and variance analysis are thus part of the
responsibility accounting process.
Responsibility accounting is also defined as “ that segregates revenues and costs into
areas of personal responsibility in order to assess performance attained by persons to
whom authority has been assigned”
Easy Identification:
Motivational Benefits :
Data Availability
Ready-hand Information:
Classification of costs:
Inter-departmental Conflicts:
Delay in Reporting:
Responsibility reports may be delayed. Each responsibility centre can take its
own time in preparing reports.
Overloading of Information:
The main features of responsibility accounting are that it collects and reports planned and
actual accounting information about the inputs and outputs of responsibility accounting.
RESPONSIBILITY CENTRE
The basic idea of responsibility accounting is that large diversified organizations are
difficult, if not impossible, to manage as a single segment. Thus they must be
decentralized or separated into smaller manageable parts. The parts or segments are
reffered to as responsibility centres.
A responsibility centre “is a division for which a manager is held responsible”. CIMA ,
London has defined as “ a segment of the organization, where an individual manager is
held responsible for its segment’s performance.”
1. Cost centre
2. Profit centre
3. Investment centre
4. Revenue centre
2. Profit Centre:
Measurement of Expenses :
Another problem with profit centers may relate to the measure of certain
type of expenses which have to be involved in the computation of profit centres. There is
a scope for difference of opinion relating to the treatment of those type of expenses which
are not traceable or attributable should be ignored in working out the profit of the
division as a profit centre.
Transfer of Prices :
A transfer price is a price used to measure the value of goods and services
furnished by a profit centre to other responsibility centers within a company. In other
words, when internal exchange of goods and services takes place between the different
divisions of a firm, they have to be expressed in monetary terms. The monetary amount
for these interdivisional exchange transfers is called the transfer prices. The measurement
of profit in a profit centre type or responsibility accounting is also complicated by the
problem of transfer prices. The implication of the transfer price is that for the selling
division it will be a source of revenue, where as for the buying division (the division
which is receiving, acquiring the goods and services) it is an element of cost. It will
therefore, have a significant bearing on the revenues, costs therefore, have a significant
bearing on the revenues, costs and profits of responsibility centres. Hence, there is a need
for correct determination of transfer prices. The determination is, however, complicated
because of wide variety of alternative methods are available. They are explained as under
1. Market based, Based on these, there are five basic methods of transfer price :
a) Cost
b) Cost plus a normal mark-up
c) Incremental cost
d) Market price, and
e) Negotiated price
3. Investment Centres
It has been stated earlier that in large companies, particularly those which produce and
sell a wide variety of products, it is appropriate to divide the company into separate
divisions and all the divisional managers to operate with a great deal of independence. By
creating various divisions, a decentralized organization structure will be created and each
division will be a responsibility centre. Where divisional manager has authority and
responsibility for making capital investment decisions, the division will be a an
investment cntre. But where the manager is responsible only for costs and revenues
obtained from operations, the division will be a profit centre. In responsibility
accounting, the profitability of each responsibility centre is measured. In the fig a
divisionalised organization structure is shown, where the company is manufacturing &
selling a number of products. For each product a division has been created under the
charge of a divisional manager. each division is a responsibility centre of which
performance will be separately measured and compared with other responsibility centres
for managerial decisions.
Divisional organization structure
A functional organization structure has been shown for each division with separate
departments forproduction,purchase, marketing and finance, . these departmental
managers will be responsible for activities under their respective functions such a
purchase, production etc. it may not be practicable to divisionalise the entire company.
These may be certain common functions such as industrial relations, research and
development , etc. which will be under the central administration of the corporate head
quarters. The chief executive will have the responsibility of providing these central
services to all the divisions.
Measurement
1. VARIANCE ANALYSIS
2 PROFIT
The absolute amount of profit revealed by a profit centre can also be used
as a measure to judge its performance. However, this is not considered to be very
reliable measure of performance because the costs charged for computing profit may
include direct divisional costs plus apportioned fixed overhead. Such allocation
beings in the element of subjectivity.
3.RETURN ON INVESTMENT
ROI has reversed the conclusion because it proves that performance of division B is
better than A as it’s ROI is 25% as compared to 20% of A .
4. RESIDUAL INCOME
Residual income may be defined as the profit of a division less cost of
capital charge on the investments used by the division. It is also known as economic
value added(eva) method where EVA is profit minus the cost of invested capital in
the division.
Suppose, a division is Rs. 500000 and average capital invested is RS. 20,00,000 in the
division for the year. If the cost of capital is 10% , residual income will be calculated
as follows;-
Residual income tells how much a division’s profit exceeds its cost of capital.
.