Process of Responsibility Accounting

Process of Responsibility Accounting

Responsibility Accounting is a system of accounting in which specific individuals are assigned accounting responsibilities in specific areas of cost control. It is a concept that views the organization as a collection of parts or sub-systems rather than as a whole or as a single system. Responsibility is assigned in this accounting system based on knowledge and skills. Of course, the ultimate goal is to achieve the organization’s goal, but this does not happen overnight. If the costs rise, the person in charge is held accountable and responsible. Total achievement is the sum of individual sector achievements.

Responsibility accounting encompasses the following steps:

(1) Identifying the Responsibility Centers

The basis of the responsibility accounting system is the designation of each sub-unit in the organization as a particular type of responsibility center. A responsibility center is a sub-unit in an organization whose manager is held accountable for specific financial results of sub-unit’s activities. The important criteria for creating a responsibility center is that the unit of the organization should be separable and identifiable for operating purposes and its performance measurement should be possible. An organization can be broadly subdivided into four main responsibility centers as cost center, revenue center, profit center and investment center.

(2) Delegation of Authority and Responsibility or Decentralization

To improve managerial and operational efficiency, each subunit’s manager should be given specific authority and responsibility for the division’s activities. No one can be held accountable unless they have previously held responsibility, and responsibility always comes with corresponding authority. Responsibility centers are also decision centers, and making a decision necessitates the use of power or authority.

(3) Controllable of the Object

The manager of a cost center can only be held accountable for costs that he can control. As a result, identifying controllable and non-controllable costs is an essential component of responsibility accounting. The same is true for revenue, profit, and investment.

(4) Establishing Performance Evaluation Criteria

The primary goal of responsibility accounting is to evaluate the performance of divisions or subunits. Performance evaluation is a yardstick for determining whether or not the results are as they should be. For divisional performance evaluation, the following criteria are commonly used.

  • Standard Costing
  • Budgetary control
  • Profitability ratios
  • Valuation measures

(5) Electing Cost Allocation Bases

The allocation of joint overheads and corporate overheads has a significant impact on divisional profitability. When switching from one method of cost allocation over products or divisions to another, product profitability changes significantly. Remember that such allocated overheads should be treated and understood carefully for decision-making purposes.

To summarize, the responsibility accounting system is a mechanism that collects and reports costs and revenue to top management in order for them to make informed decisions. Furthermore, it allows individuals to expand their skills in order to reduce costs and increase revenue for the organization.

Organizations use a responsibility accounting system to divide their departments into different responsibility centers, allowing them to focus on only those whose performance falls short of expectations.