Here You Will Study All These In Details :-
- Meaning and Definition
- Principles of Responsibility Accounting
- Characteristics of Responsibility Accounting
- Difference between Responsibility Accounting and Traditional Accounting
- Requirement of Responsibility Accounting
- Advantages of Responsibility Accounting
- Limitations of Responsibility Accounting
In modern times, the traditional form of accounting has started feeling inadequate. Historical accounting involves recording only monetary business transactions in the books and presenting a report on the historical position at the end of an accounting year. Due to these concepts, traditional accounting has become an insufficient information source for the management. Traditional accounting basically provides information of historical nature to the management, due to which there is no proper control of the efficiency of production, finance, management, marketing etc. Due to these defects of traditional accounting, the accountants felt that by expanding the limits of traditional accounting, the accounts should be kept in such a way that they can be useful enough for the management,And managerial functions can be properly planned and controlled. This led to the development of accountability accounting.
Responsibility Accounting is an innovative technique to achieve the objective of effectively planning and controlling costs in the organization. Responsibility accounting is organized in such a way that the person related to the work can be held accountable for his work.
According to this method, by dividing the organization into various responsibility centers or units, determining their plans, tasks, budgets, costs and benefits, accountability accounting on them, determining the various decision centers in all the organizations and individual managers who are responsible for the cost. Primarily responsible for decision making in , is to determine cost. The ultimate objective of Responsibility Accounting, also known as Profitability Accounting, is to achieve the economic efficiency of the organization. In general, accountability accounting is the collective name of establishing responsibility centers, controlling costs, making elastic budgets and making a person responsible for the work performed by him, etc. Under Responsibility Accounting, information is handled and presented in such a way that it can be used by the management at every level.
Responsibility Accounting Technique can be used in all types of organizations, government-centered, decentralized, for-profit, non-profit, small and big.
Other important definitions of Responsibility Accounting are as follows
Anthony and Rees, wrote in this regard, ‘Responsibility accounting is that type of management accounting in which both planned and actual accounting information is collected and reported as responsibility centers. Is .
According to William L. Ferreira, “the essence of responsibility accounting is the collection of costs and revenues by area so that proven costs can be identified with the person or group responsible for them.”
According to Schultke and Jensen, ‘responsibility accounting is a It is a system in which costs and revenues are to be accumulated and these costs are reported to the managers on the basis of the control of the management. The managerial accounting method that combines budget and performance in a decentralized organization is called responsibility accounting. ,
According John A.Higgins. In the words of , ‘It is a system of accounting which collects from an organization. In this the cost is compiled, recorded and reported on the basis of the levels of responsibility within the organisation. Each supervisory area of the organization is charged only those costs for which it is responsible and has control.
According to C. I. M. A. The terminology, accountability accounting is a method of management accounting by which accountability is determined and management information and reporting system is established according to the responsibility imposed at different levels of management. Under this method, the responsibility of the departments or units of the organization is developed under the specific empowered person and as the centers of responsibility.
According to Anderson, “This concept encompasses an accounting method in which information and data is collected and reported in a manner that is closely related to the organization’s responsibility structure.”
According to R. M. Bhandari, “Responsibility accounting is the method under which costs are collected and reported at each level of responsibility so that accounting cost data can be used by the management for controlling the activities and costs at each level”. ,
The principles of accountability accounting are as follows:
- First, the plan should be made according to the objective, goal, budget, evidence or estimate, then by dividing the plan into different phases or tasks, different responsibility centers should be set.
- The way for each responsibility center should be paved in relation to the plan and full coordination and control should be kept on its work.
- The actual route to the Responsibility Center should be assessed on the basis of evidence.
- After analyzing the variance generated between the evidence and the actual work results, its report should be submitted to the top management for discussion.
- If it is considered necessary by the upper management to take corrective action, then the work should be modified. A report should be submitted in a specific format to the top management explaining the failures.
- Its purpose is to motivate the employees for work. Therefore, managers should also study human behavior.
- In this, various responsibility centers are established. These centers are mainly of four types, which are as follows.
- Cost Center
- Revenue Center
- Profit Center
- Investment Center
Responsibility accounting features are as follows:
- Under this method, the classification of costs is done according to the centers by dividing the entire organization into responsibility centers. Every manager is responsible to his own responsibility center.
- Only controllable costs are collected in respect of all the responsible centers. Its purpose is to hold the officer of each center accountable for the expenses incurred on the activities of his center.
- The starting point of this method is the organization chart in which the scope of work of each officer is clarified.
- For the analysis of costs, costs are classified into controllable and non-controllable.
- Under accountability accounting, the officer of each center compares the actual results of his center with the predetermined goals and evaluates the successes and failures of his center.
Responsibility accounting is a means of giving useful information to the management and not the end, that is, it is true that responsibility accounting is very important for management, but responsibility accounting is not a substitute for traditional accounting. In traditional accounting, transactions are expressed in monetary form and management accepts these historical transactions in the form of reports and statements, but through this accounting method, management gets the necessary information for management functions like planning, cost control, decision making, forecasting etc. Therefore, the need for accountability accounting was felt for the need of management. Responsibility accounting is an additional part of the management process. Under Responsibility Accounting, the idea of establishing responsibility centers for all the activities of the organization is important. That is, all actions and responsibilities are associated with some person or the other. Responsibilities are fixed for income, operating costs, capital expenses and all other items. Each Responsibility Center is headed by the Head of the Department. The fixed target of this head of the department and the amount to be spent by him is also fixed so that he can achieve the desired objective by keeping more control on the cost. Therefore, it is clear that responsibility accounting is not a substitute for traditional accounting. It only fills the shortcomings of the half-formed structure of traditional accounting so that the needs of the management can be met and the person concerned can be held accountable for every action.
Following are the major differences between Responsibility Accounting and Traditional Accounting:-
- The main primary objective of traditional accounting is to provide historical information about the business to the owners, creditors and business owners, whereas the primary objective of responsibility accounting is to divide the organization into various responsibility units and determine the accountability for all the activities of the organization.
- In Responsibility Accounting, the standards of work are fixed according to the forecast and after analyzing the variances generated between the actual work result and these standards, the responsibility is amended if necessary.
- In traditional accounting, a collective profit-loss account and balance sheet are prepared by considering the entire business as a unit, whereas in responsibility accounting, each responsibility center is analyzed separately.
- In traditional accounting, past events are recorded, whereas this new accounting method is mainly concerned with future policies and plans.
- In traditional accounting, only monetary transactions are recorded, whereas in responsibility accounting, the central analysis is also done through non-monetary facts.
- Traditional accounting is based on the concepts of accountancy, whereas the adoption of these concepts is not necessary for accountability accounting.
Responsibility accounting is a method of evaluating the performance of individuals. As it is clear from the title of accounting that under this method two aspects related to responsibility are analyzed. The first aspect tells whether the responsibility was entrusted while the second aspect tells to what extent the responsibility was discharged.
When we talk of responsibility, responsibility can be assigned to persons and not to things. Therefore, under this method, the officers of the organization are entrusted with the responsibility of performing a specific task. This process of delegating responsibility is done through accountability centers. The Responsibility Center can be any of
- (i) Cost Center,
- (ii) Profit Center and
- (iii) Appropriation Center.
Cost Center: There is a center where the organization spends on a particular product or service. While doing responsibility accounting through cost center, it is seen whether the responsible officer has incurred cost more or less than the prescribed cost. It is necessary to make it clear here that for doing accountability accounting through cost centers, the relation of cost is not linked with production. This is also done so that the organization can produce different types of products simultaneously and in such a situation it can be a difficult task to find the cost for each product separately. To check accountability through cost center, it is seen that if the expenses incurred by the manager of the organization are less, then the efficiency of the manager is considered good, otherwise efforts are made to improve.
Profit Center: When a manager is responsible both in respect of cost (production) and its related earnings (market value of production), then such responsibility center is called profit center. The difference between earning and cost is called profit. Profits for profit center are taken before tax. Such expenses are not deducted from the benefits which are not related to that center, there may be many such expenses which are not related to any particular center. Ordinary expenses are separately included in profit and loss account to arrive at net profit.
Profit centers have the following advantages over cost centers
- Profit Center is a collective form of cost (production) and earnings (sale price of production), so it shows efficiency and efficiency.
- Profit center motivates to earn more profit.
- Decentralization is possible through profit centers.
- Profit centers cannot be established in such centers where services are provided because the centers providing services cannot earn profit.
- In such institutions where all production is the same, the importance of cost centers is more.
- There is competition from one profit center to another profit center through profit centers. Due to which the environment of the organization gets polluted.
- Profit Center is a short term idea. Cost center is more suitable in the long run.
- In profit centers, many such expenses which are normal, are omitted for profit, so the position of profit is not known accurately.
- If there are different processes for setting up a profit center, then the problem arises that at what price the goods are transferred from one process to another.
Conclusion- Therefore it can be said that profit center itself is not suitable for accountability accounting.
Investment Center. When a manager is responsible for cost, revenue and appropriation to assets, such center is called appropriation centre. Responsibility at the appropriation center is not seen only through profits, whether the manager has done the appropriation efficiently or not. The rate of return on investment (ROI) is determined at the appropriation center to determine the accountability. ROI can be determined as follows:
- ROI is a commonly accepted measure of efficiency.
- ROI is a comparative measure.
- ROI emphasizes on the proper use of assets.
Limitations – The value of investment used for ROI may vary from person to person. As Gross, or Net.
i. From the above analysis it is clear that investment centers can be considered suitable. The classification of responsibility centers can be understood by the following chart.
|Responsibility Crete :—|—||Profit Center|
- Cost Control – In Responsibility Accounting, effective cost control is done for each officer’s actions and costs directly in the concerned tax institution. Cost accounting has two basic objectives – cost control and cost fixation. Responsibility accounting serves both of these purposes. Since there is a clear division of the responsibilities and rights of each working person and only the controllable costs are compiled at each center, so in this the officer can be held responsible for the activities of his center and thus cost control. can be made effective and benefits can be increased. Management can also give proper guidance for the prevention of variances. In addition, the cost of the item can also be found by summing the total cost of all the responsibility centers.
- Addition in the Efficiency of Budget System – By categorizing the activities of the organization into different responsible centers, the budget system is accessible in use. No budgeting system can be wholly effective unless every responsible officer thinks that the budget is his budget and not a plan of management imposed upon him. In Responsibility Accounting, this feeling can be developed in each person by relating them to the activities of his center.
- Method of Evaluating Employees – Arrangements can be made to reward skilled employees and punish unskilled employees. This increases the efficiency and productivity of the organization.
- Management by Exception – By preparing the reports sent to the management related to departmental works on the principle of exception, the time of the managers is not wasted in resolving various common problems.
- Benefits of Business Planning – In this, due to the proper planning of all the activities, paper work is reduced and red tape can be removed.
Despite the above advantages of accountability accounting, evaluation of departmental efficiency is a difficult task. Management has to face the following difficulties in using it as an effective tool:
- Determination of Centers Difficult – Determining the number of responsibility centers in an organization is a difficult task.
- Classification of Costs – In order to effectively implement responsibility accounting, it is necessary to classify the costs of the organization into controllable and non-controllable costs. In this way a number of difficulties have to be faced in classifying the costs.
- Opposition by the employees – There is opposition from the employees on the adoption of responsibility accounting because responsibility accounting is based on human behavior and generally any person wants to avoid responsibility.
- Lack of group spirit – Each department wants to increase its profits, even if the benefits of other departments decrease, due to this the group spirit is not maintained.
- Expensive System- Establishment of specific system for accountability accounting, cost is incurred in setting up centers, hence it is costly system.
- Beginning Difficult – Under Responsibility Accounting, actual performance is compared on the basis of past facts, so it is not used in the initial few years in the organization.
- Departmental union and opposition – Departments form unions while comparing work efficiency among themselves and if the workers are transferred from more efficient department to less efficient department then there is opposition among the employees.