9 2 Responsibility Accounting in Management Managerial Accounting

9 2 Responsibility Accounting in Management Managerial Accounting

A responsibility center is a functional business entity that has definite objectives and goals, dedicated personnel, procedures, and policies as well as the duty of generating a financial report. Some basic responsibility centers that all organisations generally need are Cost center, Profit center, Revenue Center and Investment Center. Responsibility accounting is a powerful tool for organisations to achieve financial success. By allocating financial responsibilities to various units and monitoring their performance, businesses can optimise resource allocation, control costs, and make informed decisions.

• The various company managers and their lines of authority (and the resulting levels of responsibility) should be fully defined.
• 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).
• Individuals from all the responsibility centres report the performance of their respective divisions.
• It involves the communication of the environmental and social effects of a firm’s economic steps.

The executives of Posh footwear track the manager’s performance records to examine the overall work of all divisions to carry out the delineated functions correctly. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.

Is Responsibility Accounting suitable for all types of organizations?

The control, revenues, profit, and investment centers perform their respective responsibilities to achieve the objective of the company to control operating costs. The responsibility accounting system manages the cost and managers’ performances that are accountable for the department expresses. The common key performance indicators (KPIs) that are widely used to measure the performance of divisions are residual income (RI) and return on investment (ROI). In this performance measure, we take the controllable profits before deducting any head office costs or reallocation costs which are not in the control of divisional manager.

Whether or not formal regulations regarding Scope 3 emissions are passed, such as those being proposed by the SEC, the pressure from large companies to measure their carbon footprint is already a reality. In a bid to cut emissions, and align with environmental goals, major corporations are spearheading voluntary initiatives. They create an environment where suppliers find themselves compelled to adopt carbon accounting practices in order to remain relevant and competitive in the marketplace. In this type of accounting system, responsibility is assigned on the basis of the knowledge and skills of the individuals. The basic motive of responsibility accounting is to decrease the overall cost and increase the overall profit.

While the dollar value of a segment’s profit/loss is important, the advantage of using a percentage is that percentages allow for more direct comparisons of different-sized segments. When budgets are prepared by the individuals who are held responsible for achieving them, this ensures that full use is made of the knowledge of the people who have access to the greatest level of detail. It also means that managers and their subordinates are committed to the budget and will be realistic yet ambitious when setting targets. The understanding of the term responsibility, in the context of accounting, essentially means holding designated persons responsible for controlling costs. Responsibility involves such tasks that are assigned to subordinates by managers. For example, if Mr X, a unit manager, plans his department’s budget, he is accountable for keeping it under control.

Furthermore, we shall discuss the role and responsibilities of a bookkeeper in the execution of Responsibility accounting. Managers must choose investments that improve the value of the business by improving the customer experience, increasing customer loyalty, and, ultimately, increasing the value of the organization. The final responsibility center—investment centers—takes into account and evaluates the investments made by the responsibility center managers. The goal of the investment center structure is to ensure that segment managers choose investments that add value and help the organization achieve its strategic goals. Just as with the cost center, let’s walk through an analysis of the December children’s clothing department profit center report.

Different Types of Responsibility Centers

The responsibility accounting system of the company, Lush Footwear, allows the departmental heads to allocate the expenses and control such costs based on immediate needs. The executive management of Lush Footwear is tracking managers’ performance, and at the same time, there are considerably fewer top-level executives who would direct the operations. Responsibility accounting is a type of management accounting in which a company’s management, budgeting, and internal accounting are all held accountable. The fundamental goal of this accounting is to assist all of a company’s planning, costing, and responsibility centers. Responsibility accounting often entails the creation of monthly and annual budgets for each responsibility centre. It also keeps track of a company’s costs and revenues, with reports compiled monthly or annually and sent to the appropriate manager for review.

Advantages and Disadvantages of Responsibility Accounting

Watch this short video to further explain the concept of responsibility accounting and to give you a preview of the rest of the chapter. Watch this short video to further
explain the concept of responsibility accounting and to give you a
preview of the rest of the chapter. The cashiers at Kimberly’s Pizza Palace can be considered part of a cost center.

A system known as responsibility accounting is used to designate departments or persons with accountability for specific areas of an organisation’s operations. It tries to gauge and assess performance in accordance with the tasks set. Cost, income, profit, and investment centres are a few examples of responsibility centres. For instance, a profit centre would be a division in charge of creating profits, whereas pulse surveys a cost centre would be a department in charge of managing and reducing costs. The actual profit margin percentage achieved by the children’s clothing department was 18.5%, calculated by taking the department profit of $32,647 divided by the total revenue of $176,400 ($32,647 / $176,400). The actual profit margin percentage was slightly lower than the expected percentage of 19.5% ($28,756 / $147,200).

Pre-requisites of Responsibility Accounting

The manager should not be evaluated based on matters that are out of his or her control. One of the criticisms of the ROI approach is that each segment evaluates potential investments only in relation to the individual segment’s ROI. This may cause the individual segment manager to select only projects or activities that improve the individual segment’s ROI and decline projects that improve the financial position of the overall company. Most often, segment managers are primarily evaluated based on the performance of the segment they manage with only a small portion, if any, of their evaluation based on overall corporate performance. This means that the bonuses of a segment manager are largely dependent on how the segment performs, or in other words, based on the decisions made by that segment manager. A manager may choose to forgo a project or activity because it will lower the segment’s ROI even though the project would benefit the entire company.

Controllable costs are the costs that can be controlled by the organization. Uncontrollable costs are the cost that the organization can not control. The concerned center is made responsible and accountable for only controllable expenses. So, it is important to distinguish between controllable costs and non-controllable costs.

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Responsibility Accounting is management accounting where all the company’s management, budgeting, and internal accounting are held responsible. The primary objective of responsibility accounting is to hold responsible all the concerned departments of any particular function. The responsibility of the cost centre manager is to control costs, excluding revenues. The cost centre in manufacturing units can be the service and production departments. These units can be departments, divisions, teams, or even individuals, depending on the organization’s structure. Each center is responsible for a set of activities or tasks, and its performance is evaluated based on predetermined goals and targets.

This accounting system ensures that every department works in line with the organization’s overall goals. While the president may delegate much decision-making power, some revenue and expense items remain exclusively under the president’s control. For example, in some companies, large capital (plant and equipment) expenditures may be approved only by the president. Therefore, depreciation, property taxes, and other related expenses should not be designated as a store manager’s responsibility since these costs are not primarily under that manager’s control. This chapter discusses the concepts of responsibility accounting, decentralization, and transfer pricing.