This document discusses responsibility accounting. It defines responsibility accounting as a system that collects planned and actual accounting information for responsibility centers. Responsibility centers are organizational units for which a manager is responsible for costs, revenues, or investment funds. There are four main types of responsibility centers: cost centers, revenue centers, profit centers, and investment centers. Responsibility accounting improves decision making, speed, and motivation by assigning accountability to managers of responsibility centers.

1. SUBMITTED TO: SUBMITTED BY:
MS. KRITI HEENA (13BCM1055)
JAPTINDER(13BCM1059)
HARRY (13BCM1054)
HARKARAN(13BCM1051)
HIMANSHU(13BCM1056)
HARMAN(13BCM1052)

2.  Responsibility accounting is a system of control where
responsibility is assigned for the control of costs. The
persons are made responsible for the control of costs.
Proper authority is given to the persons so that they
are able to keep up their performance.
 In case the performance is not according to the
predetermined standards then the person who are
assigned this duty will be personally responsible for
it . In responsibility accounting the emphasis is on
men rather than on systems.

3.  “ Responsibility accounting is that type of
management accounting that collects and reports
both planned actual accounting information in terms
of responsibility centres.”
Acc. To Anthony & Reece
 “ Responsibility accounting is a system of accounting
that recognises various decision centres throughout
an organisation and traces costs to the individual
managers who are primarily responsible for making
decisions about the costs in question”
Acc. To Charles T. Horngren

4. Inputs and Outputs
Planned and Actual information
Identification of Responsibility Centres
Relationship between organisation structure and
responsibility accounting system.
Performance reporting
Participative management
Transfer pricing policy
Management by exception

6. The Responsibility is the unit in the organisation
that has control over costs, revenues or
investment funds
It is an organisation unit for which a manager is
made responsible
The centre’s manager and supervisor establish
specific and measurable goals for the
responsibility centres
The goals should promote the long term interest
of the organisation

7. There are four basic types of responsibility centres.
These centers indicate the degree of responsibility
the manager has for the performance of the center
 Cost or Expenses centre
 Profit centre
 Revenue centre
 Investment centre

8. Prime concern of the REVENUE CENTER – “TOPLINE”
1. Revenue Center -
Inputs
(Money directly
spent on achieving
sales i.e. Mktg. Exp.)
Output
(Sales Generated
in money terms)
RC’s
TASK
• RC has no authority to decide price.
• RC is charged with cost of Marketing and not with cost of
goods produced
• No formal relationship possible between I & O
• Performance Measure for the RC can be Revenue Budgets.
Generate Sales
e.g. Marketing center

9. A Revenue Center is responsible for selling an agreed
amount of products or services.
It's manager is usually responsible to maximize
revenue given the selling price (or quantity) and given
the budget for personnel and expenses.

10. Decision Rights –
 Promotion Mix –
 Performance Measures –
 Maximize total sales for a given promotion budget
 Actual sales in comparison with budgeted sales
Typically used when –
 RC manager has thorough knowledge about market
 Promotion plays significant role in generating sales
 RC manager can establish optimal promotion mix
 He can set optimal quantity and appropriate rewards

11. Responsibility centers whose employees control costs, but
Do not control their revenues or investment level.
Examples: Production department in a manufacturing
unit, a dry cleaning business
Two types of costs:
 Engineered: those costs that can be reasonably associated with a
cost center – direct labor, direct materials, telephone/electricity
consumed, office supplies.
 Discretionary: where a direct relationship between a cost unit and
expenses cannot be reasonably made; Management allocates them
on a discretionary basis (e.g. depreciation expenses for machines
utilized).

12. e.g. Manufacturing a
product
Can be established
scientifically
Cost varies with even small
fluctuations in volume
Control is easier. Control
starts with planning & ends
with finished task.
Financial Performance
measure suffice the
purpose of evaluation.
e.g. R&D Project
Can not be established
scientifically
Costs varies with bigger volume
changes
Review of task is the only
control measure for cost
control. Control is exercised
during planning stage itself, by
way of establishment of budget
Financial as well as non
financial Performance measure
need to be considered

13. Decision Rights –
 Input Mix – Labor, Material, Supplies
 Performance Measures –
 Minimize total cost for a fixed output
 Maximize output for a given “cost budget”
Typically used when –
 RC manager can measure output & quality of output
 knows cost functions, optimal input mix
 can set optimal quantity and appropriate rewards
Inputs
(Money spent on
production)
Output
(Physical units
Produced)
RC’s
TASK

14. 2. Expenses Center –
Engineered expenses are those expenses which are
arrived at with reasonable reliability.e.g. Material cost ,
labor cost.
• Performance Measure for the RC is std.cost: -
Std Cost of doing actual activity = Std. cost of unit activity * Quantum of
Actual activity
• One can establish relationship between I & O , hence
performance measurement is relatively easy
2.1)Engineered Exp. Center e.g. Production
Department
Inputs
(Money spent on
production)
Output
(Physical units
Produced)
RC’s
TASK

15. 2. Expenses Center –
Discretionary expenses are those expenses which
can not be established with perfect accuracy
2.2) Discretionary Expenses Center -e.g. R&D, Advt.
Dept, a Movie Project
Inputs
(Money spent on
R & D)
Output
(Product
Development)
RC’s
TASK
• Difficult to estimate Input (hence called MANAGED costs)
• Output can not be measured in monetary terms.
• Performance Measure for the RC is Budgeted Input and Actual Input.
• Difficult to establish optimal relationship between I and O

16. Profit is most comprehensive measure of performance
Function/Activity having highest influence on Bottom
Line suits best for Profit Center.
Can be a Business Division or any of the functional unit
Demands highest freedom/autonomy than any other RCs’
Inputs
(Money spent for
earning profits)
Output
(Money-profit
Earned out of sales)
RC’s
TASK
Relationship can be established

17. Decision Rights –
 Input Mix – Labor, Material, Supplies
 Product Mix
 Selling Price
 Performance Measures –
 Actual Profits
 Actual Profit in comparison with budgeted profits
Typically used when –
 RC manager has knowledge about correct
price/quantity
 RC manager has knowledge to select optimal
product mix

18. • Improves quality of decision – RC Mgr are closest to the point of decision
• Improves speed of decision – less intervention by HQ
• HQ is relieved of day-to-day decisions making process – can
concentrate on more strategic decisions
• Provides training ground for general mgt. as RC’s acts as mini Cos’.
• Enhances profit consciousness with every expense made.
(mktg. mgr. will tend to authorize promotional
expenditure which increases the sales).
• Provides best performance indicators of Co’s individual component.
• Since output is clear cut evident, it evokes competition.
• Ensures better and safer delegation of authority.
• Ensures better motivation and evokes commitment.

19. • Caliber of RC mgr. may hamper the decision.
• Incase of more integrated company there may be problems of
cost sharing, transfer pricing, sharing credit for revenue.
• Divisionalisation may impose additional cost of admn/support units.
• Functional set up may not have competent of GM to manage RC.
• Functional units once cooperated may now be in competition with
one another- (as profit of one is loss to another).
• May encourage short term motive at the expense of Co’s overall goal.
• Optimization of RC’s profit not necessarily mean optimization of
company’s profits.
• Decentralization makes top mgt. to rely more on MC reports

20. 4. Investment Centers –
Inputs
(Money spent for
Starting & running
the business)
Output
(Money/net profit
Earned on account
of investment)
RC’s
TASK
• Objective – Make sound investment decision
• It compares Business units profits with assets employed to
earn that profit i.e. efficiency of assets employed.
• It satisfies both the goals of business organizations i.e.
to earn the profit and
to achieve optimal relationship in profits earned and
assets employed

21. Decision Rights –
 Input Mix – Labor, Material, Supplies
Product Mix
Selling Price
Capital Investment
 Performance Measures –
 Actual ROI
 Actual Residual Income i.e. EVA
Actual ROI & RI in comparison with budgeted ROI & RI
Typically used when –
 RC manager has knowledge about correct price/quantity
 RC manager has knowledge to select optimal product mix
 RC manager has knowledge about investment opportunities

22. Return on Investment-
 Relating the profits of a firm with the
investment made.
1. Return on Assets - ROA
2. Return on Capital Employed - ROCE
3. Return on Shareholder’s Equity - ROE
 ROI can be computed in many different ways
depending upon the need and relevance.

23. Net Profit
1) Return on Assets = --------------- * 100
Assets
ROI terminology would change depending on what
Assets base one takes for computation; it can be -
 Total Assets,
 Fixed Assets,
 Gross Assets,
 Net Assets,
 Tangible Assets or
 Employed Assets

24. Net Profit
2) Return on Capital Employed = ------------------------- * 100
Capital Employed
 Capital implies the long term funds
supplied by creditors & owners
 Alternatively it can be
Net Working Capital + Fixed Assets

25. Net Profit
3) Return on Shareholders’ Equity = ---------------- * 100
Equity Capital
Equity includes the preferential capital, however the ordinary
shareholder bears the entire risk.
Net Worth represents the equity capital plus the reserves and
surpluses the portion solely represented by equity holders’.
Net Profit- Pref. Divi.
Return on Shareholders’ Equity = ------------------- * 100
Net Worth

26. As lender require certain interest on their money,
owners too expect certain rate of return on their
funds. (taken together both termed as cost of capital).
Hence no "real" money is made or value is created
until the operating profits exceed the rupee return
required by the owner and the lenders.
Increase in EVA,  Increase in Market Value of the
firm

27. Economic Value Added
• EVA is another of the way to relate profits to assets
employed.
• Economic Value Added = Net Profit – Capital Charge
Capital Charge = Capital Employed * Cost of Capital
• EVA=Net profit – (Cost of Capital * Capital Employed)
• This is nothing but Residual Income which adds to the value
of the firm

28. 1. EVA is Profitability
measure in money term.
Can not be used for
comparison with other
Business Unit or
Industries.
1. ROI is a ratio. Simple
& easy to understand,
Meaningful in absolute
sense. Being a common
denominator of
industries it can used for
comparison.

29. 2. EVA provides an
effective measure than
ROI. EVA Stresses upon
recovery of cost of
capital. And welcomes
every rupee earned over
and above COC.
2. Different ROI %
provides different
incentives across BUs’
(e.g. BU having current ROI
of 30 will be discouraged to
go for additional investment
giving 25% ROI, even though
the ROI is greater than Cost
of Capital OR
BU mgr can improve its ROI
by just disposing the assets
which give lesser ROI than
current one)

30. 3. EVA enables to use
different rates of interest
for different types of
assets involving different
risks. e.g. low rate for
inventory investment
whereas higher rate for
fixed investment.
3. ROI does not allow
different treatment for
different kind of assets
i.e. it treats all
assets/investments at
par.

31. 4. EVA has got strong &
positive correlation with
market value of the firm.
4. It is difficult to define
an explicit relationship
between ROI and
Market value of the firm.
(ROI not necessarily
indicate the market
value of the firm.)
(shareholders worth maximization may not be suitable measure for RC’s performance evaluation
Because it is consolidated effect of entire company)