RESPONSIBILITY ACCOUNTING

Responsibility Accounting collects and reports planned and actual accounting informa-tion about the inputs and outputs of responsibility centres. Responsibility Accounting is based on information pertaining to inputs and outputs. The resources utilised in an organisation which are essentially physical in nature and refer to quantities of materials consumed, hours of labour and so on, are termed as inputs. These heterogeneous physical resources are converted into a common denominator called the monetary measure, for the purpose of managerial control. When they are expressed in monetary terms, they are fermed as costs. In a similar way, when outputs are measured in monetary terms, they are termed as revenues. More precisely, responsibility accounting is based on cost and revenue data or financial information. Responsibility Accounting must be so designed as to suit the existing structure of the organisation. Responsibility should be coupled with authority. A person is obliged to perform his duties only when he is conferred with adequate powers to do so. A sound organisation structure, with clear-cut assignment of authorities and responsibilities should exist for the successful functioning of the responsibility accounting system. When the organisation is not in order, it will miserably fail to work. Responsibility Accounting system mainly depends on the assigned responsibilities and authorities such that the performance of each manager is evaluated in terms of such factors.

Responsibility centre The main focus of responsibility accounting is on the responsibility centres. A responsibility centre is a sub-unit of an organisation under the control of a manager who is held responsible for the activities of that centre. The responsibility centres, for control purposes, are generally classified into: (1) Cost Centres, (2) Profit Centres and (3) Investment Centres.

Cost centre When the manager is held accountable only for costs incurred in a responsibility centre, it is called a cost centre. More precisely, it is the inputs and not outputs that are measured in terms of money. In a cost centre of responsibility, the accounting system records only costs incurred by the centre/unit/division, but the revenues earned (output) are excluded from the purview. This only means that a cost centre is a segment whose financial performance is measured in terms of cost. The costs are the planning and control data in cost centres, since managers are not made responsible for profits and investments in assets. 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.The performance of a cost centre is measured by cost alone, without taking into consideration, its attainments in terms of output. 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. A common feature of production departments is that they 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 andl effectiveness of the responsibility centre cannot be measured.

Profit centre When the manager is held responsible for both cost (inputs) and revenues (output) and thus, for profit of a responsibility centre, 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 where the former exceeds the latter and loss when it is vice versa. The term revenuewith reference to responsibility accounting is used in a different sense altogether. According to generally accepted principles of accounting, revenues are recognised only when sales are made to external customers. For evaluating the performance of a profit centre, the revenue represents a monetary measure of output emanating from a profit centre during a given period, irrespective of whether the revenue is realised or not. The underlying principle is that a department has output representing goods and services which are capable of monetary measurement. The relevant profit to facilitate the evaluation of performance measurement of a profit centre is the pre-tax profit of a responsibility centre. The profit of all the departments so calculated will not necessarily be equivalent to the profit of the entire organisation. The variance will arise because costs which are not attributable to any single department, are excluded from the computation of the departments profits and the same are adjusted while determining the profits of the whole organisation. Hence, it is the divisional profit which is required for the purpose of managerial control.

Investment centre When the manager is held responsibility for costs and revenues as well as for the investment in assets of a responsibility centre, it is called an Investment Centre. In an investment centre, the performance is measured not by profit alone, but it is related to investments effected, since the manager of an investment centre is always interested to earn a satisfactory return. The return on investment which is usually referred to as ROI, serves as a criterion for the performance evaluation of the manager of an investment centre. Viewed from this angle, investment centres may be considered as separate entities wherein the managers are entrusted with the overall responsibility of managing inputs, outputs and investment. This only represents an extension of the responsibility idea.

ZERO-BASE BUDGETING
Method for preparing cash flow budgets and operating plans which every year must start from scratch with no pre-authorized funds. Unlike the traditional (incremental) budgeting in which past sales and expenditure trends are assumed to continue, ZBB requires each activity to be justified on the basis of cost-benefit analysis, assumes that no present commitment exists, and that there is no balance to be carried forward. By forcing the activities to be ranked according to priority, ZBB provides a systematic basis for resource allocation. The term "zero-based budgeting" is sometimes used in personal finance to describe "zero-sum budgeting", the practice of budgeting every dollar of income received, and then adjusting some part of the budget downward for every other part that needs to be adjusted upward. Zero based budgeting also refers to the identification of a task or tasks and then funding resources to complete the task independent of current resourcing.

Advantages of ZBB
Forces budget setters to examine every item. Allocation of resources linked to results and needs. Develops a questioning attitude. Wastage and budget slack should be eliminated. Prevents creeping budgets based on previous years figures with an added on percentage. Encourages managers to look for alternatives.

Disadvantages of ZBB
It a complex time consuming process Short term benefits may be emphasised to the detriment of long term planning
Affected by internal politics - can result in annual conflicts over budget allocation

VARIANCE ANALYSIS
Variance analysis is usually associated with explaining the difference (or variance) between actual costs and the standard costs allowed for the good output. For example, the difference in materials costs can be divided into a materials price variance and a materials usage variance. The difference between the actual direct labor costs and the standard direct labor costs can be divided into a rate variance and an efficiency variance. The difference in manufacturing overhead can be divided into spending, efficiency, and volume variances. Mix and yield variances can also be calculated. Variance analysis helps management to understand the present costs and then to control future costs. Variance analysis is also used to explain the difference between the actual sales dollars and the budgeted sales dollars. Examples include sales price variance, sales quantity (or volume) variance, and sales mix variance. A difference in the relative proportion of sales can account for some of the difference in a companys profits. First of all, budgets of different departments are made with estimated figures. After this, it is compared with actual accounting figures. In this technique, we find variances. These variances may be favourable and unfavourable. For example, we have recorded actual quantity and cost of our raw material, after this, it is compared with budgeted value of raw material quantity and cost. Result of this will be material cost variance. Like this, we will find the variance of labour cost and overhead cost. This technique of budgetary control is helpful for reducing the cost of business.

Direct Materials Standards and Variance Analysis:

Direct Materials Price and Quantity Standards: Standard price per unit of direct materials is the price that should be paid for a single unit of materials, including allowances for quality, quantity purchased, shipping, receiving, and other such costs, net of any discounts allowed. Direct Materials Price Variance: Direct materials price variance is the difference between the actual purchase price and standard purchase price of materials. Direct materials price variance is calculated either at the time of purchase of direct materials or at the time when the direct materials are used. Direct Materials Quantity Variance: Direct materials quantity variance or Direct materials usage variance measures the difference between the quantity of materials used in production and the quantity that should have been used

according to the standard that has been set. Although the variance is concerned with the physical usage of materials, it is generally stated in dollar terms to help gauge its importance.

Direct Labor Standards and Variance Analysis:

Direct Labor Rate and Efficiency Standards: Direct labor price and quantity standards are usually expressed in terms of a labor rate and labor hours. The standard rate per hour for direct labor includes not only wages earned but also fringe benefit and other labor costs. Direct Labor Rate/Price Variance: Direct Labor price variance is also termed as direct labor rate variance. This variance measures any deviation from standard in the average hourly rate paid to direct labor workers. Direct Labor Efficiency | Usage | Quantity Variance: The quantity variance for direct labor is generally called direct labor efficiency variance or direct labor usage variance.

Manufacturing Overhead Standards and Variance Analysis:

Manufacturing Overhead Standards: Procedures for the establishing and using standard factory overhead rates are similar to the methods of dealing with the estimated direct and indirect factory overhead and its application to jobs and products. Factory Overhead Variances: Jobs or processes are charged with cost on the basis of standard hours allowed multiplied by the standard factory over head rate. The standard overhead rate or predetermined overhead rate is discussed in detail at our job order costing system page. The standard hours allowed figure is determined by multiplying the labor hours required to produce one unit (the standard labor hours per unit) times the actual number of units produced during the period. The units produced are theequivalent units of production for the departmental factory overhead cost being analyzed. At the end of the month, overhead actually incurred is compared with the expenses charged into process using the standard factory overhead rate. The difference between these figures is called the overall or net factory overhead variance. overall or net factory overhead variance needs further analysis to reveal detailed causes for the variance and to guide management toward remedial action. This analysis may be made by using (1) the two variance method, (2) the three variance method, or (3) the four variance method.