Responsibility Accounting

         Large organizations have operating activities which are voluminous. Controlling such activities in details & in every sphere is not possible for the top management. The top management has the total authority & responsibility. For the purpose of controlling efficiently, the total authority & responsibility is decentralized by forming small segments which are called responsibility centers & to these centers, specific costs & revenues are allocated. The evaluation of performance of each responsibility center is done at the periodical intervals on the basis of pre-determined targets.

         Responsibility accounting may be known as decentralization of responsibility center so that desired control can be ensured & thereby the goal of the organization can be attained.
Responsibility accounting involves the following:

1. Entire organization is divided into small responsibility centers;
   
   
2. In terms of revenues & costs, the responsibility of each responsibility center is fixed;
   
   
3. In terms of its predetermined target, the performance of each responsibility center is measured.

Pre-requisites of effective responsibility accounting:

         The pre-requisites of the effective responsibility accounting are the following:

1. Under the supervision of a manager should be each responsibility center & for the purpose of operating, it must be separable & identifiable.
   
   
2. The independent measurement of performance of each center must be capable of being done.
   
   
3. Each responsibility center should have clearly set targets.
   
   
4. Each responsibility center’s budget should set targets which should be neither too high nor too low i.e., the budget should be one which can be realised.
   
   
5. The top management should fully support the system.
   
   
6. All managers of responsibility centers should participate in the formulation of plans & policies relating to responsibility centers for the purpose of providing motivation.
   
   
7. For sincere performance of each responsibility center the organizational environments must be conducive.

Objectives of Responsibility Accounting:

The objectives of responsibility accounting are the following:

1. Overall organizational goals are broken down into small goals, each of the small goals is meant for better achievement of a responsibility center.
   
   
2. With the attached responsibility each responsibility center is tied up & there is adequate authority so that responsibility can be discharged.
   
   
3. At the end of a period, evaluation is done of the performance of each responsibility center & comparison of the performance is done with the predetermined targets.
   
   
4. Thorough study is made of the achievements which are above or below the targets & remedial measures are adopted.
   
   
5. Assessment is made of the contribution made by each responsibility center & examination is done of how far it’s possible for the contribution to fulfilling its share in the ultimate organizational growth.
   
   
6. Emphasize is given on the control of cost through planning.
   
   
7. Use is made of the principle of ‘management by exception’ for the purpose of recording only those data where the actual performance of responsibility center falls short of the set target & where the variance is beyond the reasonable limit.

Advantages of Responsibility Accounting:

          For the purpose of exercising control, responsibility accounting is an important tool in the hands of management. For the purpose of effecting efficient control on operations & achieving the organizational goal, responsibility accounting system should be introduced by the organizations which have large dimensions & complex & operations which are decentralized.

         Since for the purpose of achieving the overall goal in a piecemeal way; to various responsibility centers, overall responsibility & authority are decentralized, continuous communication should be there between the overall responsibility center & various sub-responsibility centers. Thus a communication system is automatically established by responsibility accounting.

         The following advantages can be expected from responsibility accounting system:

1. Allocation is made of all the activities of the organization, all the items of income & expenditure including capital expenditure to the well defined responsibility centers. Profit of each responsibility center is also identified. It should be understood by the manager of the centre what has to be performed by him with what resources & in what time period. He gets the things done by making his own way without any interference. Thus much importance is given to human resources.
   
   
2. The managers of responsibility centers worked independently which helps in achieving the ultimate goal.
   
   
3. There is a relationship between efforts & achievement, thereby, loopholes, if any, in the operations gets easily detected.
   
   
4. The overall goals of the organization & individual goals of responsibility centers are communicated to all so that by keeping a view on that, guidance can be given the managers in their respective centers to the operations.
   
   
5. Among the managers & their subordinates, cost-consciousness gets generated which results in automatically reducing cost.
   
   
6. It becomes easy to detect the weak areas in the organization. So for the purpose making the weak areas strong, corrective measures are taken.
   
   
7. By recording the negative variances between the actual performance & target, introduction of management by exception can be done.
   
   
8. For the purpose of exercising best managerial control over the affairs of the organization & achieving the desired goal, responsibility accounting system & budgetary control system can work together.
   
   
9. As realistic goals are fixed for a responsibility centre, its achievement by the employees becomes easy. Their contribution can be assessed by themselves for the purpose of achieving the goal of the organization as a whole. A sense of belonging to the organization is created among the employees by the systematic responsibility accounting as the reward of the employees for accomplishment is not unsatisfactory.
   
   
10. As managers of responsibility centers are allowed to sit with the top management for exchanging of views & opinions, appropriate decision making is almost assumed.

         As against expected advantages there are also some apprehended disadvantages.

Disadvantages of Responsibility Accounting:

         The following are the apprehended disadvantages of responsibility accounting:

1. Solely upon the sincere efforts put in by the managers of the responsibility centers, the success of the responsibility accounting depends. Whether the system will succeed or not shall be decided by the personal factors of the managers.
   
   
2. The place of good management cannot be ever taken by the responsibility accounting because the latter is only a tool in the hands of the former.
   
   
3. Although theoretically, the manager of each organization is given free hand, in actual practice, neglect of employees’ reaction, interference etc. is often noticed. Thus, in the way of proper discharging of responsibility, this stands.
   
   
4. In modern organizations, among the departments, inter-relations & inter-departments are mostly observed. So it becomes almost impossible to demarcate responsibility centers by clear-cut outlines.
   
   
5. Manager of the responsibility center prepares & communicates performance reports. The desired result will not be achieved by the responsibility accounting system, if there is any shortcoming in the report.
   
   
6. Remuneration, future prospects, rewards, good working condition, welfare work & many others account for the individual interest of employees. Co-operation from the employees may be required where there is a clash between individual interest & the organizational interest.

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Other topics under Budget and Planning:

• Budget- Introduction & Budgetary Control
• Distinction between Cash Budget & Cash flow Statement
• Flexible Budget
• Financial Budget & Cash Budget
• Master Budget- Functional Budget
• Steps in preparing a Budget
• Zero-Base Budgeting