INSPIRING MINDS- RESPONSIBILITY ACCOUNTING-

82 NAVREEN SANDHU (B)

193 RAMANDEEP KAUR (C)

RESPONSIBILITY ACCOUNTING
INTRODUCTION

Responsibility Accounting is an accounting system that collects, summarizes, and reports accounting data relating to the responsibilities of individual managers. It traces costs, revenues, or profits to the individual managers who are primarily responsible for making decisions about the costs, revenues, or profits and taking action about them. Under this system division of an organization into various responsibility centres under specified authority in a person is done and each centre is evaluated individually for their performance.

The responsibility centres are generally classified into three categories:

1. COST CENTRE – These are segments in which the managers are responsible for costs incurred but have no revenue responsibilities.

2. PROFIT CENTRES- In this manager are held responsible for both revenues and expenses.

3. INVESTMENT CENTRES- In this manager is responsible for not only revenues, expenses, but also investment.

82 NAVREEN SANDHU (B)

PROS AND CONS OF RESPONSIBILITY ACCOUNTING:-

PROS:-

1. Provides a way to manage a large diversified organization. Better decisions can be made at the local level.

2. Provides incentives to department managers and individuals to optimize their individual performances.

3 Provides top management with more time to make policy decisions and engage in strategic planning.

4.Allows management to avoid understanding the system by using top down remote control based on accounting measurements

5. Supports management and individual specialization based on comparative advantage.

6.Overall, it supports individualistic capitalism.

CONS:-

1. The point at left has some credibility at the division level, but the system must be managed as a system not a group of subsystems. A RAstovepipe organization creates conflicts between segments, e.g. transferring pricing problems, production departments pushing defective products downstream to maximize labor efficiency and production volume measurements.

2. This causes competition between segments and individuals rather than cooperation and teamwork. Prevents goal congruence. Creates slack and excess, e.g. inventory buffers, excess capacity ,people, and vendors. Promotes ranking people which ignores statistical variation. According to Deming, this destroys moral, intrinsic motivation and teamwork.

3. Tends to ignore many, if not interdependencies within the system. Decisions are based on self interest rather than the best interest of the system.

4. According to Deming, a system cannot manage itself.

5. This is how management accounting lost relevance according to Johnson and Kaplan. The top down approach also ignores the concept of continuous improvement and Deming’s concept of leadership, i.e. managers need to understand the system so that they can help facilitate improvement, not judge and blame people for variations in financial accounting results

6. Overall, it conflicts with communitarian capitalism and a company’s attempt to change to the team oriented model.

193 RAMANDEEP KAUR (C)

Conclusion

Responsibility accounting is used as a control device. Its aim is to help management in achieving organizational goals. Responsibility accounting is appropriate where top management has delegated authority to make decisions. Under Responsibility accounting a manager performance is evaluated on matters directly under the manager control. It can be used at every level of management. The idea behind responsibility accounting is that each manager's performance should be judged by how well he or she manages those items under his or her control.

82 NAVREEN SANDHU (B)

References

Anwers.com

Accounting for management and information technology

9Finance.com
Wikipedia.com