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Responsibility accounting emphasizes individual performance by fixing responsibilities, evaluating performance, and establishing accountability based on delegated tasks. This modern approach in management accounting helps in effective managerial control and reporting.
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INTRODUCTION • Responsibility accounting is one of the recent developments in the field of management accounting. It is rightly described as modern approach to managerial control and reporting. It lays emphasis performance of individuals where responsibilities are fixed for persons.
MEANING AND DEFINITION • Responsibility accounting is a system of management accounting under which accountability is established according to the responsibility delegated to various levels of management and information is fed back in terms of delegated responsibilty.Under this system specified authority in a person are developed as responsibility centers and evaluated individually for their performance. "Institute of cost and works accountants of India "
FEATURES OF RESPONSIBILTY ACCOUNTING • 1. COST AND REVENUES:-Implementation and maintenance if responsibility accounting is based upon information relating to input and output. Input Output Quantity of raw material used,Labour hour consumed expressed in monetary terms are known as costs Output in monetary terms are called revenues.
2. USE OF BUDGETING:-effective responsibility accounting requires both planned and actual information. it is the essential for implementation of responsibility accounting system. It is through budgets that responsibility for implementing plans is communicated to each level of management. • 3. IDENTIFICATION OF RESPONSIBILITYCENTERS:-The responsibility centers are decision points in an organization. In a small firm one individual or group of individuals, who are usually the owners may control the entire organization. In a large firm division is made into segments or departments. These units are known as responsibility centers.
ORGANISATION RESPONSIBILITY STRUCTURE CENTRES The general manager Investment centre Divisional Divisional Divisional Profit centres Manager (1) Manager (2) Manager(3) Marketing Production Costs and revenue centres Manager Manager Costs and revenue centres Main line Assembly Maintenance 4. Relationship between organisation structure and responsibility accounting Purchase Manager Sales Manager
5.ASSIGNING COST TO INDIVIDUALS AND LIMITING THEIR EFFORTS TO CONTROLLABLECOST:-After identifying responsibility centers and establishing authority responsibility relationships, responsibility accounting system involves assigning of costs and revenues to individuals. Only those costs and revenues over which an individual has a definite control can be assigned to them for evaluating his performance. Controllable costs are those costs which can be controlled or influenced by a specified person or a level of management of an undertaking. costs which cannot be controlled or influenced by an individual known as uncontrollable costs.
6.TRANSFER PRICING POLICY:-In a large scale enterprise having divisions there is a common practice of transferring goods and services from one segment of organization to another. In such situation, there is a need to determine the price at which the transfer should take place so that costs and revenues could be properly assigned. Thus, there is a need of having a proper transfer policy for successful implementation of responsibility accounting system.
7. Performance reporting:-Responsibility accounting is a control device. A control system to be effective should be such that deviations from the plan must be reported at the earliest so as to take corrective action for the future. The deviations can be reported only when performance is reported. Thus performance reporting is an important part of management accounting. reporting generally flows from bottom to top.
8. Participative management:-The function of responsibility accounting becomes more effective if participation from subordinates is welcomed. Plans , budgets/standards should be fixed with mutual consent of subordinates. Democratic style of management should be followed.
9. Management by exception:- This states that focus should be on significant deviations and not burden authorities with all kinds of routine matters , rather condensed reports requiring their attention must be sent to them particularly at higher levels of management.
10. Human Aspect Of Responsibility Accounting:- The main aim of responsibility accounting is to ‘evaluate the performance and provide feed back so that the future operations can be improved.' Goals and objectives are achieved through people and hence, responsibility accounting system should motivate people. It must look into human aspect also by considering needs of subordinates, developing mutual interest, providing information about control measures and adjusting according to requirements.
STEPS INVOLVED IN RESPONSIBILITY ACCOUNTING • 1.The organisation is divided into various responsibility centres. Each centre is under charge of a responsibility manager and managers are responsible for the performance of their departments. 2.Targets and goals are set in consultation withmanagers and are properly communicated to them, so that he is able to give full information about his department.
3. The actual performance of each responsibility centre is then recorded andcommunicated to the executive concerned and the actual performance is compared with the goals set. This helps in assessing the work of these centres.
4. If the actual performance of a department is less than the standard set, then the variances are conveyed to the top management. The names of persons responsible for that are also conveyed so that the responsibility may be fixed.
5. Timely action is taken to take necessary corrective measures so that the work does not suffer in future. The directions of top levelmanagement are communicated to the concerned responsibility centre so that the corrective measure are initiated at the earliest.
RESPONSIBILTY CENTRES “A responsibility centre is like an engine in that it has input, which are physical quantities of material, hours of various types of labour, and a variety of services; it works with these resources usually . As a result of this work, it produces output, which classified as a goods or as services. In the words of Deakin and Maher………. “ A responsibility centre is a specific unit of an orgnisation assigned to a manager who is held responsible for its operations and resources”.
TYPES OF RESPONSIBILTY CENTRE • Cost or Expenses centre Cost centres are segments in which the managers are responsible Cost or Expenses centre for costs incurred but have no revenue responsibilities. TYPES OF COST CENTRE (a) Engineered expenses centres Costs which can be estimated with reasonable reliability (b) Discretionary expenses centres Cost incurred depend on the manager’s decision.
PROFIT CENTRE The difference between the revenue earned and cost incurred will be a profit. When a responsibility centre gets revenue from output, it will be called a profit centre. The income statement of a profit centre is used as control device. Suitability of profit centre :- • There exists a decentralized form of orgnisation. • The divisional manager has access o all relevant information needed for decision making. • The divisional manager is sufficiently independent. • Internal transfers from one centre to another centre is not significant. • A definite measure of performance is available.
INVESTMENT CENTRE “An investment centre is an entity segment in which a manager can control not only revenues and costs but also investment.” The manager of responsibility centre is made responsible for properly utilizing the assets used in his centre. The performance of an investment centre can be measured by relating profit to the investment base. METHODS USED TO EVALUATE THE PERFORMNCE • Return on Investment / Capital Employed (ROI) • Economic Value added (EVA) or Residual Income Approach (RI)
Return on Investment or Capital Employed Return on capital employed establishes relationship between profits and the capital employed. The term capital employed refer to the total investment made in the business. • Economic Value added/Residual Income Approach Economic value added is a measure of performance evaluation. It is very popular method used to measure the surplus value created by an investment or a portfolio of investment.
TRANSFER PRICES • “ TRANSFER PRICE IS A PRICE USED TO MEASURE THE PRICE OF GOODS OR SERVICES FURNISHED BY A PROFIT CENTRE TO OTHER RESPONSIBILITY CENTRES WITHIN A COMPANY .”
VARIOUS METHODS OF TRANSFER PRICING THERE ARE VARIOUS TRANSFER PRICING METHODS IN USE .THESE METHODS ARE GENERALLY BASED ON EITHER A.) COST OR B.) MARKET PRICE . THESE ARE AS FOLLOWS . 1.) COST PRICE 2. ) COST PLUS NORMAL MARK UP 3.) INCREMENTAL COST 4.) SHARED PROFIT RELATIVE TO THE COST 5.) MARKET PRICE 6.) STANDARD PRICE 7. ) NEGOTIATED PRICE 8.) DUAL OR TWO - WAY PRICE
1.) COST PRICE :- ACCORDING TO THIS METHOD , GOODS AND SERVICES ARE TRANSFERRED FROM ONE SEGMENT OF THE COMPANY TO ANOTHER ON THE BASIS OF UNIT COST OF PRODUCTION OF THE TRANSFERRING DIVISION .THIS METHOD IS VERY SIMPLE AND CONVENIENT TO OPERATE. • 2.)COST PLUS A NORMAL MARK UP :- TO OVERCOME THE SHORTCOMINGS OF THE SIMPLE COST PRICE METHOD ,MANY COMPANIES ADD TO THE COST OF A MARGIN OF PROFIT ,SAY 15% OF THE COST , TO DETERMINE THE TRANSFER PRICE . UNDER THIS METHOD , THE BUYING DIVISION IS CHARGED THE ACTUAL UNIT COST OF PRODUCTION OF THE TRANSFERRING DEPARTMENT ,PLUS A MARK UP FOR THE PROFIT .
3.) INCREMENTAL COST : - INCREMENTAL COST CAN BE COMPUTED IN TWO WAYSDEPENDING UPON THE CIRCUMSTANCES. A.) IN CASE THE ENTIRE PRODUCTION IS TRANSFERRED TO ANOTHER DIVISION WITHIN THE SAME COMPANY, THE COST WILL BE THE TOTAL OF VARIABLE COST OF TRANSFERRING CENTRE PLUS ANY FIXED COSTS WHICH ARE DIRECTLY ATTRIBUTED TO THAT CENTRE. B.)THE SECOND APPROACH MAY BE USED WHEN GOODS AND SERVICES ARE SOLD TO OUTSIDE CUSTOMERS ,THE COST WILL BE TAKEN AS OPPORTUNITY COST .
4.) SHARED PROFIT RELATIVE TO THE COST :- IN THIS METHOD PROFIT IS SHARED ACCORDING TO THE COST OF EACH DIVISION .NO PRICE IS CHARGED FOR THE INTRA COMPANY TRANSFERS . SHARE OF PROFIT OF A PARTICULAR PROFIT CENTRE = PROFIT OF THE COMPANY X COST OF PARTICULAR PROFIT CENTRE TOTAL COST
5.) MARKET PRICE : - IN THIS METHOD , THE PRICES CHARGED FOR INTRA – COMPANY TRANSFERS ARE DETERMINED ON THE BASIS OF MARKET PRICE AND NOT ON COST BASIS .THERE ARE THREE WAYS OF COMPUTING THE MARKET PRICE . • FIRSTLY:- THE PREVAILING MARKET PRICE ,AFTER MAKING ADJUSTMENT FOR DISCOUNTS AND OTHER SELLING COSTS, MAY BE TAKEN AS TRANSFER PRICE . • SECONDLY: - WHERE ACTIVE MARKET DOES NOT EXIST , COST PLUS A NORMAL PROFIT MAY BE TAKEN AS REASONABLE MARKET PRICE. • THIRDLY : - THE COMPANY COULD INVITE BIDS FROM THE MARKET SO AS TO DETERMINE THE MARKET PRICE . • 6.) STANDARD PRICE :- TRANSFER PRICES CAN ALSO BE FIXED ON PREDETERMINED STANDARD PRICE BASIS . THE STANDARD PRICE MAY BE DETERMINED ON THE BASIS OF COST OF PRODUCTION AND PREVAILING MARKET CONDITIONS.
7.) NEGOTIATED PRICE : - THE INTRA –COMPANY TRANSFER PRICE CAN ALSO BE DETERMINED ON THE BASIS OF NEGOTIATIONS BETWEEN BUYING AND THE TRANSFERRING DIVISION .THE PRICE ARRIVED AT AFTER NEGOTIATIONS WILL BE THE MUTUALLY AGREED PRICE . • 8.) DUAL OR TWO-WAY PRICE : - ACCORDING TO THIS METHOD , THE TRANSFERRING DIVISION IS ALLOWED TO GIVE CREDIT AT ONE PRICE ,WHEREAS , THE BUYING DIVISION IS CHARGED AT DIFFERENT PRICE .
ADVANTAGES OF RESPONSIBILITY ACCOUNTING • MANAGEMENT USES RESPONSIBILITY ACCOUNTING AS A CONTROL DEVICE.IT IS IMPORTANT IN EVERY TYPE OF BUSINESS . FOLLOWING ARE SOME OF THE ADVANTAGES OF RESPONSIBILTY ACCOUNTING: • 1. ASSIGNING OF RESPONSIBILTY . • 2. IMPROVES PERFORMANCE . • 3. HELPFUL IN COST PLANNING . • 4.DELEGATION AND CONTROL. • 5.DECISION MAKING .
CONCLUSION • IN THE END ,WE MAY CONCLUDE THAT THE TECHNIQUE OF RESPONSIBILITYACCOUNTING IS USEFUL FOR ALL TYPES OF ENTERPRISES- BIG AND SMALL,PROFIT AND NON PROFIT,GOVERNMENT AND NON GOVERNMENT,ETC.BUT THE SYSTEM OF RESPONSIBILTY ACCOUNTING MAY DIFFER FROM ORGANISATIONTO ORGANISATION.FURTHER,IN SPITE OF SO MANY ADVANTAGES,IT MUST REMEMBERED THAT IT CAN NEVER BE A SUBSTITUTE FOR A GOOD MANAGEMENT AS IT IS MERELY A TOOL TO BE USED EFFECTIVELY BY THE MANAGEMENT.
