Responsibility Accounting
Dr. Alain Jomarie G. Santos, CPA
Business
Organization
Decentralization
Decision making is not concentrated
under one person
Managers are identified at different
levels to assume responsibility and
control
Responsibility Accounting
There is specialization in their course
System of work and decision
Responsibility Accounting
• It is a system of accounting that recognized various responsibility centers
throughout the organization and actions of these centers by assigning particular
revenues and cost to the one having the pertinent responsibility
• Also called as profitability accounting and activity accounting
• It is that type of management accounting that connects and reports both planned
and actual accounting information in terms of responsibility centers
• It makes the manager accountable and responsible for their performance, and
manage and control the activities of all the subordinates and the responsibility
center
Responsibility Accounting Model
• Defined by four essential elements:
❑Assigning responsibility
❑Establishing performance measure of benchmarks
❑Evaluating performance
❑Assigning rewards
ADVANTAGES OF RESPONSIBILITY ACCOUNTING
• Management Uses Responsibility Accounting as a Control Device and is important
in every type of business. Hence, the ff. advantages are as follows:
✓ Assigning of Responsibility and Goals - MBO
✓ Improves Performance - MBE
✓ Aids in Planning Cost
✓ Delegation and Control
✓ Decision Making
Responsibility Centers
• It is a specific unit of an organization assigned to a manager whois
held accountable for its operations and resources
• Headed by the Dept Head or referred to as the Responsibility
Manager
• He has responsibility to explain the deviations between budget and
actual figures.
• Types are:
➢Cost Center
➢Profit Center
➢Investment Center
➢Revenue Center
ORGANISATION RESPONSIBILITY
STRUCTURE Centers
The general manager Investment centre
Divisional Divisional Divisional Profit center
Manager (1) Manager (2) Manager(3)
Marketing Production Costs center
Manager Manager
Costs
Main Assembly Maintenance center
line
Purchase Sales Relationship between organisation structure and
responsibility accounting
Manager Manager
Cost Center
▪ Cost centers are segments in which the managers are responsible for cost
minimization.
▪ They have no control over revenues and have no revenue responsibilities.
▪ Also known as Expense Center
TYPES OF COST CENTRE
(a) Engineered expenses centers
Costs which can be estimated with reasonable reliability
(b) Discretionary expenses centers
Cost incurred depend on the manager’s decision
Profit Center
▪ The difference between the revenue earned and cost incurred will be a profit. When a
responsibility center gets revenue from output, it will be called a profit center
▪ The manager is responsible for the costs incurred and the revenue generation of the
department
▪ The income statement of a profit center is used as control device.
Suitability of profit center :-
• There exists a decentralized form of organization.
• The divisional manager has access of all relevant information needed for decision
making.
• The divisional manager is sufficiently independent and prepares the budget.
• A definite measure of performance is available
Investment Center
▪ It is an entity segment in which a manager can control not only
revenues and costs but also investment.”
▪ The manager of responsibility center is made responsible for properly
utilizing the assets used in his center.
▪ The performance of an investment center can be measured by
relating profit to the investment base.
Methods used in performance evaluation:
➢Return on Investment / Capital Employed (ROI)
➢Economic Value added (EVA) or Residual Income Approach (RI)
ROI vs EVA
• Return on capital employed establishes relationship between profits
and the capital employed. The term capital employed refer to the
total investment made in the business.
• Economic value added is a measure of performance evaluation. It is
very popular method used to measure the surplus value created by
an investment or a portfolio of investment
Revenue Centers
• Managers are mostly responsible for generating sales, not for the cost
of goods sold
• A distinctive feature of this center is that the outputs and not the
inputs are measured in terms of money
• The manager has no control over the investments in assets or the cost
of manufacturing a product but might able to exercise control over
distribution expenses.
• Use Variance in Sales Price and Sales Mix to monitor or control their
operations.
