Responsibility accounting involves accumulating and reporting costs based on individual managers who control decision making. It traces costs to managers responsible for incurring those costs. Responsibility accounting establishes control through decentralized decision making while retaining overall control. It encourages budgeting and comparison to actual results. Managers are accountable to explain variances from budgets. Responsibility centers include cost centers, profit centers, revenue centers, contribution centers, and investment centers. Principles of responsibility accounting include determining responsibility centers, setting targets, comparing actuals to targets, analyzing variances, taking corrective action, offering incentives, excluding uncontrollable costs, and generating responsibility reports. Difficulties can arise from unclear organization structures and responsibilities as well as distinguishing controllable and uncont
Responsibility accounting is a system of dividing an organization into similar units, each of which is to be assigned particular responsibilities. These units may be in the form of divisions, segments, departments, branches, product lines and so on. Each department is comprised of individuals who are responsible for particular tasks or managerial functions. The managers of various departments should ensure that the people in their department are doing well to achieve the goal. Responsibility accounting refers to the various concepts and tools used by managerial accountants to measure the performance of people and departments in order to ensure that the achievement of the goals set by the top management.
Responsibility accounting, therefore, represents a method of measuring the performances of various divisions of an organization. The test to identify the division is that the operating performance is separately identifiable and measurable in some way that is of practical significance to the management. Responsibility accounting collects and reports planned and actual accounting information about the inputs and outputs of responsibility centers.
Responsibility accounting is a system of dividing an organization into similar units, each of which is to be assigned particular responsibilities. These units may be in the form of divisions, segments, departments, branches, product lines and so on. Each department is comprised of individuals who are responsible for particular tasks or managerial functions. The managers of various departments should ensure that the people in their department are doing well to achieve the goal. Responsibility accounting refers to the various concepts and tools used by managerial accountants to measure the performance of people and departments in order to ensure that the achievement of the goals set by the top management.
Responsibility accounting, therefore, represents a method of measuring the performances of various divisions of an organization. The test to identify the division is that the operating performance is separately identifiable and measurable in some way that is of practical significance to the management. Responsibility accounting collects and reports planned and actual accounting information about the inputs and outputs of responsibility centers.
1.1 identify the type of accounting
1.2 difference between Cost Accounting , Cost Accountancy and Costing
1.3 understand the Management information needs
1.4 identify the objectives of cost accounting
1.5 difference between Cost Accounting Vs. Financial Accounting
1.6 identify the role of cost accountant
Notes on Responsibility Accounting ,Management Accounting ,Cost Center,Profit Center, Investment Center.Advantages to the Company .Responsibility accounting is one of the important control systems in large companies. This system comprises of responsibilities, accountability and performance evaluation. It measures the performance of various divisions of an organization.Responsibility accounting is a method of collecting and reporting both budgeted and actual costs and revenue by divisional managers who are responsible for it. Budgeting and standard costing are important part of responsibility accounting.
1.1 identify the type of accounting
1.2 difference between Cost Accounting , Cost Accountancy and Costing
1.3 understand the Management information needs
1.4 identify the objectives of cost accounting
1.5 difference between Cost Accounting Vs. Financial Accounting
1.6 identify the role of cost accountant
Notes on Responsibility Accounting ,Management Accounting ,Cost Center,Profit Center, Investment Center.Advantages to the Company .Responsibility accounting is one of the important control systems in large companies. This system comprises of responsibilities, accountability and performance evaluation. It measures the performance of various divisions of an organization.Responsibility accounting is a method of collecting and reporting both budgeted and actual costs and revenue by divisional managers who are responsible for it. Budgeting and standard costing are important part of responsibility accounting.
Management Accounting studies the preparation and use of cost accounting information for managerial decision-making and control purposes. This course provides students with the tools needed to understand and address the important problems facing management accountants today. In order to keep up with the class, students should go over the relevant chapters and problems prior to each class. This must then be followed by a more in-depth review of the material and practice of problems after the class.
Module - BackgroundTRANSFER PRICING AND RESPONSIBILITY CENTERSIlonaThornburg83
Module - Background
TRANSFER PRICING AND RESPONSIBILITY CENTERS
Modular Learning Objectives
Keep the following objectives in mind as you work through the material in this module:
· Define the role of responsibility accounting.
· Differentiate between controllable and uncontrollable costs.
· Analyze structure of a decentralized organization.
· Define profit centers, cost centers, and investment centers.
· Compute transfer prices.
· Identify three main transfer pricing approaches.
Required Reading
This module covers the role of responsibility accounting and responsibility centers. Explore these topics further while keeping the above six objectives in mind. Click on the three arrows to explore each topic in more detail:
The term responsibility accounting refers to an accounting system that collects, summarizes, and reports accounting data relating to the responsibilities of individual managers. A responsibility accounting system provides information to evaluate each manager on the revenue and expense items over which that manager has primary control (authority to influence).
A responsibility accounting report contains those items controllable by the responsible manager. When both controllable and uncontrollable items are included in the report, accountants should clearly separate the categories. The identification of controllable items is a fundamental task in responsibility accounting and reporting.
To implement responsibility accounting in a company, the business entity must be organized so that responsibility is assignable to individual managers. The various company managers and their lines of authority (and the resulting levels of responsibility) should be fully defined. Not all managers have equal authority and responsibility. The degree of a manager’s authority varies from company to company.
The controllability criterion is crucial to the content of performance reports for each manager. For example, at the department supervisor level, perhaps only direct materials and direct labor cost control are appropriate for measuring performance. A plant manager, however, has the authority to make decisions regarding many other costs not controllable at the supervisory level, such as the salaries of department supervisors. These other costs would be included in the performance evaluation of the store manager, not the supervisor.
Watch this short video to further explain the concept of responsibility accounting. https://www.youtube.com/watch?time_continue=1&v=EsS0socI3I4
Decentralization is the dispersion of decision-making authority among individuals at lower levels of the organization. In other words, the extent of decentralization refers to the degree of control that segment managers have over the revenues, expenses, and assets of their segments. When a segment manager has control over these elements, the investment center concept can be applied to the segment. Thus, the more decentralized the decision-making is in an organization the more appli ...
Bangalore University - M.Com III Sememster - Accounting and Taxation specialization - Accounting for Managerial Decisions (AMD) - Module 3 - Responsibility Accounting and Divisional Performance Measurement - Theory with Formats and examples.
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2. Concept of Responsibility Accounting
• Responsibility accounting involves accumulating and reporting costs
on the basis of individual manager who has the authority to make day
to day decisions. The basic idea behind responsibility accounting is
that each manager’s performance should be judged by how he or she
manages the input and output items and only those items under his /
her control.
3. Definition of Responsibility Accounting
• According to Charles T. Horngren, “Responsibility accounting is a
system of accounting that recognizes various decisions centres
throughout an organization and traces costs to the individual
managers who are primarily responsible for making decisions about
the costs in question”.
4. Significance of Responsibility accounting
• It establishes a sound system of control because it enables top
management to delegate authority to responsibility centres while
retaining overall control with itself.
• It forces the management to consider the organizational structure i.e.,
it facilitates decentralization of decision making.
• It encourages budgeting for comparison of actual achievements with
the budgeted figures.
5. • It increases interest and awareness among the supervisory staff as they
called upon to explain about the deviations for which they are
responsible.
• It simplifies the structure of reports and facilitates the prompt
reporting because of exclusion of those items which are beyond the
scope of individual responsibility .
• Relevant and ready information which can be used to estimate future
costs and revenues and to fix up standards for departmental budgets.
6. Types of Responsibility Centres
The following are the main types of responsibility centres for
management control purposes:
• Cost (or Expenses ) Centres: An expense centre is a responsibility
centre in which inputs but not outputs are measured in monetary
terms. In an expense centre of responsibility , the accounting system
records only the cost incurred by the centre but the revenues earned (
outputs) are excluded.
7. • Profit centre: this is a centre mainly which has the responsibility of
generating and maximizing profits is called profit centre. This a centre
whose performance is measured in terms of both expenses it incurs
and revenues it earns. Thus a factory may constitute a separate profit
centre and see its production to other department or the sales
department. Profit analysis can be used as a basis for evaluating the
performance of divisional manager.
• Revenue centre : it is a centre mainly devoted to raising revenue with
no responsibility for production. The main responsibility of managers
fo such managers is to generate sale revenue. Manager is not concern
the cost of manufacturing or area of investment but he is concern with
the control of marketing expenses of the product.
8. • Contribution centre: It is a centre whose performance is mainly
measured by the contribution it earns. Contribution is the difference
between sales and variable costs. Higher the contribution better will
be the performance of the manager of a contribution centre. Manager
has no control over the fixed cost but he can control contribution by
increasing sales and reducing variable costs.
• Investment centre: It is a centre which manager can control not only
costs and revenues but also investments. The manger of such centre is
responsible for proper utilizing the assets in his centre. For calculating
Return On Investment(ROI)
ROI= Net profit of the division x 100
Investment of the division
9. Principles of Responsibility accounting
i. Determination of responsibility centre by dividing the organization
into various responsibility centres by dividing the organization into
various responsibility centres.
ii. A target is fixed for each responsibility centre in consultation with
the person responsible for the responsibility centre.
iii. Actual performance is compared with the target.
iv. The variances from the budgeted plan are analyzed so as to fix the
responsibility of centres.
v. Timely corrective action is taken by the higher management and
communicated to responsibility centres.
10. vi. Offer incentive as inducement for more and more improvement.
vii. All apportioned cost and policy costs are excluded in determining
the responsibility for costs because an individual manager has no -
control over these costs. Only those costs and revenues over which
an individual has definite control can be attributed to him for
evaluating his performance.
viii. Report to responsible individual for action.
ix. To get a suitable result of responsibility accounting, a suitable
transfer pricing policy should be followed. Transfer pricing is the
price that one sub-unit of an organisation charges for product
supplied to another sub-unit of the same organisation.
x. The success of responsibility accounting is based on responsibility
reports showing the performance achieved by the organisation.
11. Major difficulties encountered in Introducing
Responsibility Accounting
• Well defined organisation structure, proper delegation of work and
responsibility, proper allocation, a proper system of reporting are
absent and makes it difficult to have a responsibility accounting.
• It becomes difficult to have a further analysis of expenses than
provided by traditional classification of expenses.
For example- wages of workmen is controllable but fringe benefits
included in it have to be paid under law.
• While introducing the system supervisory staff may require additional
clarification especially the responsibility reports. They must be
explained properly the purpose and benefits of the new system.