Importance Of Responsibility Accounting

2.1.1 Responsibility Accounting

(i) Meaning

Responsibility accounting is a method of accounting in which costs and revenues are identified with persons who are responsible for their control rather than with products or functions. The purpose of the system is to exercise cost control by fixing a responsibility for the cost. Under this system, responsibility centres are identified and costs and revenues are classified on the basis of responsibility centres. The iInputs and output of each responsibility centre is expressed in monetary terms. The sum total of various inputs is the cost and, the total of revenues the output. Wherever monetary measurement of output is not possible, it is measured in terms of the total cost of goods or services transferred.

The names of those persons who were in charge of performance are also conveyed, so that the responsibility may be fixed.

(ii) Importance of Responsibility Accounting

Responsibility accounting is important for the following reasons:

• It establishes a sound system of cost control.

• It makes the staff cost conscious.

• It is framed as per the needs of the an organisation

• It is possible to compare the actual performance with the set standards.

• It leads to the effective delegation of authority.

• It helps focus on the responsibility centre which does not perform well.

2.1.2 Types of Responsibility centres

(i)i. Cost Ccentres

It isA cost centre is a centre for in which the output is not measured. In case of certain responsibility centres, it is neither possible nor necessary to measure the output in terms of monetary units. Most of the service departments come in under this category. E.g. For example, it is almost impossible to measure the monetary value of the Ffinance or the Aaccounting department’s contribution to the organisation. The accounting system, therefore, records the cost incurred in with respect of to these centres, but not the revenue earned. Such centres are, therefore, termed as expenses

A contribution centre’s performance is measured in terms of the contribution it earns. The responsibility of the manager of a contribution centre is to increase contribution. The manager can increase the contribution by increasing sales or by decreasing variable cost.

Self-assessment Questions

1) A responsibility centre where the manager is accountable for only for the revenues and costs is a ______________.n?

a) Profit centre

b) Cost centre

c) Revenue centre

d) Account centre

2) A cost centre is:

a) The part of the business where all costs are paid to suppliers.

b) An area of the business accountable for both costs and revenues.

c) An area for which costs are accumulated.

d) A Pproduction department where all production costs are aggregated.

3) An investment centre is a responsibility centre where the manager has control of:

a) Costs

b) Costs and profits

c) Costs, profits and assets

d) Costs, profits and product quality

4) Which of the following is not an example of a responsibility centre?

a) Cost centre

b) Investment centre

c) Contribution centre

d) Profit centre

5) The Mmaintenance department of a manufacturing company is a(n) ___________.

a) Segment.

b) Profit centre.

c) Ccost centre

d) Iinvestment