The document discusses responsibility accounting, which involves assigning managers responsibility for specific elements of a company's performance and providing them with reports to monitor their areas. It then provides 3 examples: 1) It outlines the key responsibilities of an accounting department, such as payroll, cash management, procurement, and property accounting. 2) It discusses the types of responsibility centers - cost centers, revenue centers, profit centers, and investment centers - and how they are evaluated. 3) It gives an example of how preparing division-level profit and loss statements for a textile company revealed that only the spinning division manager deserved a bonus based on their results.

1. Assignment
ON
“Responsibility Accounting”
(Cost Accounting)
Submitted to:
Department of Management Studies
AMRAPALI INSTITUTE, SHIKSHA NAGAR
LAMACHAUR, HALDWANI
UTTRAKHAND TECHNICAL UNIVERSITY
Submitted to: Submitted by:
MS. ARTI SHARMA SAURBH BHANDARI
Lecturer, MBA 4th Sem
AIMCA Deptt.

2. RESPONSIBILITY ACCOUNTING
DEFINITION: Responsibility accounting is a reporting system that compiles revenue, cost,
and profit information at the level of those individual managers most directly responsible for
them. The intent is to provide this information to those people most able to act upon it, as well as
to judge their performance with it.
Responsibility accounting is an internal system used to better control costs and performance. Its
main focus is making individual managers responsible for those elements of a company's
performance which they can control. In most cases, responsibility accounting does not affect a
company's public accounts.
WHAT IS RESPONSIBILITY ACCOUNTING?
Responsibility accounting refers to a company’s internal accounting and budgeting. The
objective is to assist in the planning and control of a company’s responsibility centers—such as
decentralized departments and divisions.
Responsibility accounting usually involves the preparation of annual and monthly budgets for
each responsibility center. Then the company’s actual transactions are classified by responsibility
center and a monthly report is prepared. The reports will present the actual amounts for each
budget line item and the variance between the budget and actual amounts.
Responsibility accounting allows the company and each manager of a responsibility center to
receive monthly feedback on the manager’s performance.
In responsibility accounting, each department will have stated goals. The relevant manager will
then be judged on how well he or she meets these goals. This is similar to most target systems,
but will usually work by measuring on a financial basis. The important distinction is that this
financial assessment will not necessarily be a pure profitability measure.
In most responsibility accounting systems, each department is classified into one of four
categories. A cost center will be judged purely on how low it keeps spending; the travel
department in the example above would fall into this category. A revenue department such as the
sales team will be judged purely on the revenue it generates. A profit center will be judged on a
standard profit or loss basis. This could apply to individual stores in a chain.
The final category is an investment center. This may literally involve financial investments, but
could also cover departments involved in long-term projects. Departments in such a category are
usually judged using a longer-term view that takes account of issues such as capital spending
where the resulting revenue will not all be gathered in the first year.
Generally, responsibility accounting is a purely internal measure. It is possible that details from
its operation and results could be included in a company report, for example as information to
detail changes a company has made. These details would only be used as a way of sharing

3. information with investors and potential investors. The details do not usually form a part of the
mandatory financial information that a company must include in its public accounts.
Responsibilities of an Accounting Department
Most people don’t realize the importance of the accounting department in keeping a business
operating without hitches and delays. That’s probably because accountants oversee many of the
back-office functions in a business — as opposed to sales, for example, which is front-line
activity, out in the open and in the line of fire.
Folks may not think much about these back-office activities, but they would sure notice if those
activities didn’t get done. On payday, a business had better not tell its employees, “Sorry, but the
accounting department is running a little late this month; you’ll get your checks later.”
Typically, the accounting department is responsible for the following:
Payroll: The total wages and salaries earned by every employee every pay period, which are
called gross wages or gross earnings, have to be calculated. Based on detailed private
information in personnel files and earnings-to-date information, the correct amounts of
income tax, social security tax, and other deductions from gross wages have to be
determined.
Stubs, which report various information to employees each pay period, have to be attached
to payroll checks. The total amounts of withheld income tax and social security taxes, plus
the employment taxes imposed on the employer, have to be paid to federal and state
government agencies on time. Retirement, vacation, sick pay, and other benefits earned by
the employees have to be updated every pay period.
In short, payroll is a complex and critical function that the accounting department performs.
Many businesses outsource payroll functions to companies that specialize in this area.
Cash collections: All cash received from sales and from all other sources has to be carefully
identified and recorded, not only in the cash account but also in the appropriate account for
the source of the cash received. The accounting department makes sure that the cash is
deposited in the appropriate checking accounts of the business and that an adequate amount
of coin and currency is kept on hand for making change for customers.
Accountants balance the checkbook of the business and control who has access to incoming
cash receipts. (In larger organizations, the treasurer may be responsible for some of
these cashflow and cash-handling functions.)
Cash payments (disbursements): In addition to payroll checks, a business writes many
other checks during the course of a year — to pay for a wide variety of purchases, to pay
property taxes, to pay on loans, and to distribute some of its profit to the owners of the
business.

4. The accounting department prepares all these checks for the signatures of the business
officers who are authorized to sign checks. The accounting department keeps all the
supporting business documents and files to know when the checks should be paid, makes
sure that the amount to be paid is correct, and forwards the checks for signature.
Procurement and inventory: Accounting departments usually are responsible for keeping
track of all purchase orders that have been placed for inventory (products to be sold by the
business) and all other assets and services that the business buys — from postage to forklifts.
A typical business makes many purchases during the course of a year, many of them on
credit, which means that the items bought are received today but paid for later. So this area
of responsibility includes keeping files on all liabilities that arise from purchases on credit so
that cash payments can be processed on time.
The accounting department also keeps detailed records on all products held for sale by the
business and, when the products are sold, records the cost of the goods sold.
Property accounting: A typical business owns many substantial long-term assets called
property, plant, and equipment — including office furniture and equipment, retail display
cabinets, computers, machinery and tools, vehicles (autos and trucks), buildings, and land.
Except for small-cost items, such as screwdrivers and pencil sharpeners, a business
maintains detailed records of its property, both for controlling the use of the assets and for
determining personal property and real estate taxes. The accounting department keeps these
records.
The accounting department may be assigned other functions as well, but this list gives you a pretty
clear idea of the back-office functions that the accounting department performs. Quite literally, a
business could not operate if the accounting department did not do these functions efficiently and on
time. To do these back-office functions well, the accounting department must design a good
bookkeeping system and make sure that it is accurate, complete, and timely.
Advantages and Disadvantages
Responsibility accounting has been an accepted part of traditional accounting control systems for
many years because it provides an organization with a number of advantages. Perhaps the most
compelling argument for the responsibility accounting approach is that it provides a way to
manage an organization that would otherwise be unmanageable. In addition, assigning
responsibility to lower level managers allows higher level managers to pursue other activities
such as long term planning and policy making. It also provides a way to motivate lower level
managers and workers. Managers and workers in an individualistic system tend to be motivated
by measurements that emphasize their individual performances. However, this emphasis on the

5. performance of individuals and individual segments creates what some critics refer to as the
"stovepipe organization." Others have used the term "functional silos" to describe the same idea.
Consider 9-6 Exhibit below. Information flows vertically, rather than horizontally. Individuals in
the various segments and functional areas are separated and tend to ignore the interdependencies
within the organization. Segment managers and individual workers within segments tend to
compete to optimize their own performance measurements rather than working together to
optimize the performance of the system.

6. TYPES OF RESPONSIBILITY CENTERS
1.Cost Center / Discretionary Cost Center
2. Revenue Center
3. Profit Center
4. Investment Center
Cost center managers are responsible for the incurring and controlling costs in their
organizational subunit.
Discretionary cost center managers are typically responsible for adhering to a budget.
Revenue center managers are responsible for revenues generated by their organizational
subunit.
Profit center managers are responsible for revenues and expenses generated and incurred by
their organizational subunit.
Investment center managers are profit as well as the capital investments required to generate the
profit.

7. RESPONSIBILITY CENTRE AND THEIR EVALUATION
RESPONSIBILITY CENTRES EVALUATION METHODS
Revenue Centre Sale Price Variance
Sale Quantity Variance
Sale Mix Variance
Cost Centre Raw Material Variances:
Labor Variances
Overhead Variances
Profit Centre Gross Profit
Contribution Margin
Investment Centre ROI
Residual Income
Economic Value Added
ADVANTAGES DISADVANTAGES
Helps manage a large and diversified
May create conflicts between various divisions
organization
Motivate Manager to optimize their
Undue competition may become dysfunctional
performance
Narrows down vision as overall company
Provide manager freedom to make local
prospective are not considered by individual
decisions
managers.
Top management get more time for policy
May prove costly due to duplication
making and strategic planning
Supports management and individual
specialisation based on comparative Problem in coordination across divisions
Advantages
RESPONSIBILITY ACCOUNTING- PROFIT PLANNING & CONTROL
Planning & control are essential for achieving good results in any business. Firstly, a budget is
prepared and, secondly, actual results are compared with budgeted ones. Any difference is made
responsibility of the key individuals who were involved in (i) setting standards, (ii) given
necessary resources and (iii) powers to use them.
In order to streamline the process, the entire organization is broken into various types of centers
mainly cost centre, revenue centre, profit center and investment centre. The organizational
budget is divided on these lines and passed on to the concerned managers. Actual results are

8. collected and displayed in the same form for comparison. Difference, if any, are highlighted and
brought to the notice of the management. This process is called Responsibility Accounting.
CONTROLLABILITY CONCEPT
An underlying concept of responsibility accounting is referred to as controllability.
Conceptually, a manager should only be held responsible for those aspects of performance that
he or she can control. In my view, this concept is rarely, if ever, applied successfully in practice
because of the system variation present in all systems. Attempts to apply the controllability
concept produce responsibility reports where each layer of management is held responsible for
all subordinate management layers as illustrated below.
MANAGERIAL PERFORMANCE AND ECONOMIC PERFORMANCE
All businesses operate in a complex environment. The traditional approach of centralized control
is not possible. There is a shift towards decentralization. At the same time, the management
wants to retain some sort of control over activities of its managers.

9. When authority is decentralized and passed on to managers, there is a problem of goal-
congruence. This means that the management will constantly review all operations and activities
of individual divisions to insure that none of them is working against the overall objectives of the
company. Such a behavior is called dysfunctional and is damaging to the company.
While evaluating, performance of an individual manager, two factors have to be considered:
Should the manager’s job be separated and a manager is rewarded or penalized only for
those activities over which the manager has control.
Should the manager’s decision be seen in a wider prospective and final judgment be
given only after reviewing full impact of such decisions.
It is obvious that a manager's decisions should be evaluated after seeing their impact on the
bottom line i.e. profitablity of the comany. But such policy would not be motivational for the
individual manager and the good results may be nullified by the factors not under the control of
the particular manager. Hence, the company follows first appraoch i.e. managerial performance.

10. CONSOLIDATED P&L ACCOUNTS
An example to explain Responsibility Accounting
An integrated textile unit showed a net profit after tax of Rs.272 million. Its ROI (Return on
Investment), was 17.5% which is much above the supposed cost of capital of 12.5%.
The company was operating three divisions: (i) Spinning Unit, (ii) Weaving Unit and (iii) a
Finishing Unit. As of now, it is not apparent who earned what. So managers of the three
departments would be asking for bonuses or rewards.
Now suppose, the company asks its accountants to prepare Division-wise P&L account and
present the same to the management for performance appraisal of the three managers.
DIVISION WISE ACCOUNTS
After considering division-wise performance, who do you think deserve the bonus?
Only the manager, Spinning Division, deserves the bonus. Manager Weaving has just broken
even by earning profit equal to cost of capital. Manager Finishing was really a drag on the

11. company’s resources and its losses were only hidden in consolidated statements because of
substantial contribution made by Spinning Unit.
However, this is over-simplified example but it brings glaring facts to the notice of the
management and other users of the accounts.