Responsibility Accounting : Types, Features, Objectives, Advantages and Steps

What is Responsibility Accounting ? 

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.

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. If the motives do not get fulfilled, the concerned people are held accountable and answerable. Accountability is clearly defined under responsibility accounting, so concerned people work more carefully as they are made answerable to their seniors, management, and board of directors.

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. The focus of responsibility accounting is mostly on Responsibility Centers.

What are Responsibility Centers?

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. Different types of responsibility centers are being set up under responsibility accounting and every responsibility center has different goals assigned to them that they have to fulfill in order to contribute to the overall growth of the organization. Some basic responsibility centers that all organisations generally need are Cost center, Profit center, Revenue Center and Investment Center.

Types of Responsibility Centers

1. Cost Center

A cost center is responsible for cost control. The main objective of the cost center is to minimize cost. The cost center’s prime work is to check the cost of an organisation and to limit the unwanted expenditure that the company may acquire. Costs, in this respect, are basically classified as controllable costs and non-controllable costs. 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. The performance evaluation is done on the basis of the actual cost that occurred and the targeted cost.

Some types of costs centers are:

• Production Cost Center
• Personal Cost Center
• Service Cost Center
• Impersonal Cost Center
• Process Cost Center
• Operation Cost Center

2. Revenue Center

This center is basically inclined towards the generation of leads and subsequently increasing the overall revenue of the firm. Company’s sales team is mainly held responsible for this. A revenue center is judged solely on its ability to generate sales; it is not judged on the amount of costs incurred. Revenue centers are employed in organisations that are heavily sales focused. Sales team are trained to generate more leads and convert them. Trainings are set up for them and evaluation of the personnel is made on the basis of the conversion rates.

3. Profit Center

A profit center refers to a center whose performance is measured in cost and revenue both. It contributes to both revenue and expenses, resulting in profit and loss. Profit occurs when revenues are more than costs and loss occurs when costs are more than profits. The profit center is accountable for all the actions associated with the sale of goods and production. The principle objective of a profit center is to generate and maximize profit by minimising the cost incurred and increasing sales. The accomplishment of a profit center is estimated in terms of profit growth during a definite period.

4. Investment Center

This center is held responsible for using the company’s assets in the most efficient way and investing them in the best opportunities in order to increase returns. Companies evaluate the performance of an investment center according to the revenues it brings in through investments in capital assets. An investment center is sometimes called an investment division. Investment centers are increasingly important for firms as financialization leads companies to seek profits from investment and lending activities in addition to core production.

Features of Responsibility Accounting

1. Inputs and Outputs: Responsibility accounting majorly covers two most important aspects of business i.e. costs and revenue. Costs can be identified as inputs and revenue can be identified as outputs. Cost and revenue are the essence of the business and need a close watch.

2. Use of Budgeting: Budgeting involves planning and controlling inputs and outputs. Costs can be identified as inputs and revenue can be identified as outputs. Under budgeting process, planned stats of cost and revenue are set up and then compare with the actual cost and revenue and offset the deviations.

3. Performance Reporting: Performance reports of all the responsibility centers are made properly and reported to seniors for evaluation. Corrective measures are taken in case of deviations.

4. Identification of Responsibility Centers: Under responsibility accounting, various types of responsibility centers are identified and operated to ensure the smooth running of various functions of the organisation.

Objectives of Responsibility Accounting

1. Accountability: Responsibility Accounting makes concerned people accountable for the results. Division needs to prepare the reports and send them to the manager. In this way, personnel takes care of all the necessary things, as they know they have to give proper reports to the managing authorities.

2. More Responsible Personnel: Responsibility Accounting makes the company’s personnel more responsible for the organisation’s performance. Responsibility accounting ensures better results, growth, proper documentation, effective and efficient personnel, and more accountable and responsible employees.

3. Minimisation of Costs: Responsibility Accounting ensures the minimisation of costs at various levels in order to avoid wastage of resources. A cost center ensures a cut in costs and makes the overall cost system effective.

4. Maximisation of Profits: Under Responsibility Accounting, the main goal of the profit center is to increase the profits of the organization over different periods of time, which improves the overall financial position of the company.

5. Decentralisation: Responsibility Accounting decentralises power so that personnel will have a sense of responsibility and belongingness to the organisation.

Advantages of Responsibility Accounting

1. System of Control: Responsibility Accounting sets up a system of control in a way that concerned people are held responsible for their work and they are accountable to their seniors and management regarding their performances.

2. Awareness: Responsibility accounting creates awareness in the workplace as the personnel has to explain the deviation of their assigned responsibility center.

3. Better Results: As actual numbers are compared with the target numbers over the years, management will know the reasons for the constant deviation and they can take corrective measures carefully according to the needs of the organization.

4. Efficiency: Responsibility Accounting creates a sense of efficiency within individual employees as their work and achievements will be reviewed.

5. Effective communication: Individual and company goals are established and communicated in the best way.

Steps in Responsibility Accounting Process

Responsibility Accounting involves the following steps:

1. Identification of responsibility sectors correctly.
2. Setting goals and assigning responsibilities to the various responsibility centers.
3. Keeping an eye on their actual performance.
4. Comparison of actual performance to the target.
5. Finding the reasons for deviations, if any.
6. Taking corrective measures.