Responsibility Accounting – Concept, Types & Responsibility Centres Explained

 What is Responsibility Accounting?

➡ Definition: A system of management control where responsibility is assigned to individuals for controlling costs and performance within their department or division.

➡ It focuses on:

• People (managers), not just systems.

• Comparing planned vs actual costs & revenues.

• Evaluating performance of divisions (responsibility centres), not the organisation as a whole.

📌 Horngreen’s Definition:

“Responsibility accounting recognises responsibility centres and assigns costs/revenues to those responsible. Also called profitability or activity accounting.”

📌 ICWAI Definition:

A system where accountability is established according to delegated responsibility at each management level, using reports for feedback.

🔹 Key Features of Responsibility Accounting

1️⃣ Inputs & Outputs → Costs & Revenues

✔ Inputs = Raw material, labour hours → Costs (monetary)

✔ Outputs = Goods/services → Revenues (monetary)

2️⃣ Planned vs Actual Info (Budgeting)

✔ Requires budgeted and actual data

✔ Uses tools like:
→ Fixed budgets

→ Flexible budgets

→ Profit planning

3️⃣ Identification of Responsibility Centres

✔ A segment or division under a manager

✔ Big firms divide into manageable units

✔ Each unit = evaluated independently

📌 E.g., A manager responsible for just one machine or an entire production division

4️⃣ Organisation Structure Alignment

✔ Authority ↔ Responsibility should be clearly defined

✔ System must mirror organisational hierarchy

✔ Reports must help in performance evaluation

5️⃣ Assigning Controllable Costs

✔ Assign only controllable costs/revenues to managers

✔ Guidelines:
→ Has authority over cost? ✅ Assign it

→ Can influence cost? ✅ Assign it

→ Cannot directly control but relevant? ✅ Assign for awareness

6️⃣ Performance Reporting

✔ Performance Reports = Responsibility Reports

✔ Flow = Bottom to Top

✔ Should include:
→ Budget vs Actual

→ Variances (controllable & non-controllable)

✔ Use charts, tables, graphs for clarity

🔹 Pre-requisites of Responsibility Accounting

✅ Divisional structure

✅ Clearly defined goals & targets

✅ Managerial participation in budgeting

✅ Managers accountable for controllable activities

✅ Timely performance reporting

🔹 Types of Responsibility Centres

1. 🧾 Cost Centre

✔ Manager controls costs only

✔ No control over revenue

✔ Examples:

→ Production dept

→ Maintenance dept

→ Accounting dept

2. 💰 Revenue Centre

✔ Manager controls sales/revenue generation

✔ No control over costs/investments

✔ Example: Sales department

3. 📊 Profit Centre

✔ Manager controls costs & revenues → hence profit

✔ Encouraged to act like a business owner

✔ Responsible for:
→ Product mix

→ Selling price

→ Marketing strategy

4. 🏢 Investment Centre

✔ Manager controls costs, revenues & asset investments

✔ Highest level of responsibility

✔ Examples:
→ New business unit

→ Hotel division with full autonomy

🔹 Steps in Responsibility Accounting

1️⃣ Divide organisation → responsibility centres

2️⃣ Set goals/targets with centre managers

3️⃣ Compare actual performance with targets

4️⃣ Report variances & assign responsibility

5️⃣ Take corrective actions timely

📌 Goal: Improve performance & fix responsibility

✅ Advantages

✔ Fixes individual accountability

✔ Improves cost control & planning

✔ Boosts motivation & initiative

✔ Helps in performance appraisal

✔ Provides relevant, real-time data

⚠️ Problems / Limitations

✘ Difficult to classify controllable vs non-controllable costs

✘ May lead to inter-departmental rivalry

✘ Only a directional tool, not a full control system

✘ Preparing responsibility charts is complex

✘ Risk of information overload in reports

🔹 Divisional Performance: Concept

✔ Organisation is divided into divisions with independence

✔ Each division = responsibility centre

✔ Manager accountable for:
→ Operations

→ Profitability

→ Investments

✔ Encourages decentralisation & self-driven units

📝 Summary Chart: Types of Responsibility Centres