Meaning of Responsibility Accounting
Responsibility accounting refers to the system of accounting under which specific individuals are made responsible for maintaining accounts related to particular areas of organization. It is also termed as activity accounting or profitability accounting. This is a branch of management accounting where individuals in management line are given routine report depicting the overall performance of company either by department or section wise. A report includes operational result of area as well as the items for which an individual holds a responsibility of accounting.
This system of accounting identifies various responsibility centre throughout the organization and subsequently determine their plan and actions. Responsibility accounting create schemes for measuring the performance and prepare and analyze the performance reports of responsibility centres. It is primarily concerned with planning, costing and responsibility centres of organization. Various components of revenue and expense are gathered and reported in accordance with the areas of responsibility.
Principles of Responsibility Accounting
Various principles of responsibility accounting are as given below: –
- Firstly, the responsibility centres within an organization are determined by dividing an organization into responsibility centres.
- Every responsibility centre is provided with targets in consultation with the responsible individuals for such centres.
- Now the actual performance is measured in accordance with targets.
- Deviations from budgeted plan are identified in order to fix the responsibility centres.
- Higher management team take corrective actions and communicate them to the responsible persons of responsibility centre for enhancing their performance.
- Incentives are offered in order to induce individuals for improving the overall performance.
- While determining the responsibility cost, all apportioned costs and policy costs are excluded as individual manager can’t control them. Only expenses and revenues which are under the control of manager are taken into consideration while evaluating his/her performance.
- Responsible individuals are reported for action.
- A proper transfer price policy should be followed for in order to get desirable result out of responsibility accounting.
- Responsibility accounting do not aim to put blame on managers instead it evaluates their performance and provide feedback for improving their performance level in future.
- Performance reports are the key determinants for success of responsibility accounting. These reports are also termed as responsibility reports which basically shows the performance level of various centre of responsibility.
Advantages of Responsibility Accounting
Different advantages of responsibility accounting can be well-understood from points given below: –
- Responsibility accounting enables in assigning responsibility to each and every individual within the organization due to which they are held accountable for their respective work.
- It leads to enhances the overall performance level of organization as when people know that they will be evaluated, they are motivated to work efficiently towards their roles.
- Responsibility accounting is a key tool which assist organization in better cost planning by collecting full information regarding its cost and revenues. This information is useful in future planning of cost and revenues, fixing of standards and budgets preparation.
- It also plays an efficient role in efficient decision making of company. This is not only work as a control device but also provide valuable information to management team for taking future actions.
- This set of accounting simplifies the whole reporting structure thereby enabling prompt reporting by excluding all such items which are beyond the control of individual.
- Responsibility accounting improve awareness and interests of supervisory staff by making them responsible and asking for explanations about the deviations in performance of company.
- It facilitates in implementation of management by exception as focus is made on reporting the exceptional matters to top management team.
Disadvantages of Responsibility Accounting
- The whole system of responsibility accounting becomes inaccurate in case if its prerequisites are not met. The prerequisites of this system of accounting are quite difficult to be met for every organization.
- It does not do anything with uncontrollable cost and works only with such costs which are controllable.
- This accounting may yield inaccurate results if a company fails to communicate properly its goals and responsibilities to peoples within the organization.
- The further classification of expenses than provided by traditional classified becomes a quite difficult task.
- All the personal reactions of individuals involved in implementation process is totally ignore by system of responsibility accounting.
- There may be chances of loss of basic objectives of organization due to the presence of lot of passive resistance.
- Sometimes, there may be conflict in between the company interest and individual interest which leads to hurdles in successful implementation of policies.