Responsibility accounting is a management control system based on the principles of delegating and locating responsibility. The authority is delegated on responsibility centre and accounting for the responsibility centre. Responsibility accounting is a system under which managers are given decisions making authority and responsibility for each activity occurring within a specific area of the company. Under this system, managers are made responsible for the activities of segments. These segments may be called departments, branches or divisions etc., one of the uses of management accounting is managerial control.
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.
For example, if Mr. A, the manager of a department, prepares the cost budget of his department, then he will be made responsible for keeping the budgets under control. A will be supplied with full information of costs incurred by his department. In case the costs are more than the budgeted costs, then A will try to find out reasons and take necessary corrective measures. A will be personally responsible for the performance of his department.
Responsibility accounting usually involves the preparation of annual and monthly budgets for each responsibility center. Then the company’s actual transactions are classified by responsibility center and a monthly report is prepared. The reports will present the actual amounts for each budget line item and the variance between the budget and actual amounts.
Responsibility accounting allows the company and each manager of a responsibility center to receive monthly feedback on the manager’s performance.
Principles of Responsibility Accounting:
The following principles of Responsibility Accounting are taken into consideration in order to:
- Fix up the target on budgets or standards or estimates according to responsibility;
- Evaluate the performances, i.e., to compare the actual results with the budgets for ascertaining the variances;
- Analyse the variances for fixing responsibility on the responsibility centres and make reports to the top management.
- Take corrective actions and communicate these to the persons concerned.
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