What is responsibility accounting distinguish between cost centers and responsibility centers?

Definition of Responsibility Accounting

Responsibility accounting refers to the process of identifying and spotting the centers of responsibility accounting and their objectives; this helps the organization to analyze and draft a performance report of all the responsibility centers, additionally, these centers are also responsible for reporting revenues and expenses as per the responsibility areas.

Explanation

• Basically, responsibility accounting is defined and based on the defined centers like cost centers, profit centers, and investment centers.
• Responsibility accounting is a sort of management accounting that is responsible for internal accounting, budget related issues, and management concerns.
• The main and crucial objective is to support all the centers within the company and help them with costing and planning.
• The accounting we referred to above relates to the preparation of annual or monthly budget which is allocated or designed for any particular center.
• This accounting style also accounts for the revenue and cost of any company, where quarterly and annual reports are being accumulated and then reported to the manager for the review or feedback.
• In responsibility accounts, a specific person is a help responsible for looking into an assigned area of accounting and cost control of the same, so that it is convenient to hold the person responsible for any increase in cost.
• In this accounting, tasks and responsibilities are assigned based on the knowledge and skillset an individual possess, and proper authority might be given to that person so that he can autonomously take decision pertaining to that department.

History of Responsibility Accounting

• The responsibility accounting was introduced in the year 1920s with the intention to handle all the different levels of authority in any organization’s management.
• During the 1950s and 1960s, the economic activities of the companies were significantly diversified significantly increasing the demand of responsibility accounting and decentralization.

Features of Responsibility Accounting

Some of the features are given below:

• The main feature of responsibility accounting is to define the cost centers at the initial stage which we earlier referred to as responsibility centers.
• For each center, there should be a fixed target which the department has to achieve in the defined deadline, so setting targets for the center is very crucial.
• Then, we must track the performance of each responsibility center and also compare the actual performance with the target performance.
• The variance between the actual performance and target performance is analyzed and post that the responsibility of each center should be fixed.
• Then corrective action has to be taken by the management and it should be individually communicated to the concerned person taking care of the responsibility center.

Example of Responsibility Accounting

Example of responsibility accounting is given below:

• Let us take an example from the cost center perspective, Amgen a renowned pharmaceutical company proposes to produce vaccinations for Polio in a batch of 100,000 in 3 phases. The company estimated the cost of $25 million for all three phases spanned out in 6 months.
• However, post the production of the vaccine the company ended up spending $26.5 million, so here the responsibility account manager must justify the increased cost to the management.
• There can be several reasons, increased cost of raw materials, increased per unit of electricity cost or any new government policy leading to an increase in the cost.

Types of Responsibility Accounting

There are various types, let us discuss them in detail below:

• Cost Center: As the name suggests the persons involved in this center are responsible for controlling cost for the company and they are not responsible for any other functions in the company. However, there are two types of costs namely controlled and uncontrolled, a person should be held responsible for the controlled costs, and the performance of each center is evaluated by comparing the actual vs estimated costs.
• Revenue Center: Revenue takes care of the revenue for the company and no other related responsibilities, mostly the sales related teams are accountable for this center.
• Profit Center: The performance of this center is measured in terms of revenue and cost and the team working in this center has to make sure to report accurate numbers. Generally, a factory can be considered as a profit center where the raw materials as input are a part of the cost center and sales of the finished goods are revenue center.
• Investment Center: We can say that this is a very important center to be on, as this team has to make sure that the assets of the company are properly utilized in the best manner so that the company effectively capitalize on the deployed capital and earn handsome revenues from the same.

Prerequisites of Responsibility Accounting

• As much as effective is responsibility accounting it is equally important to have some prerequisites as a company.
• The initial one is to have a well-defined organizational structure, where the levels of employees are clearly defined, and authorization is efficiently established within the firm.
• The measures which will help to analyze the performance and evaluate must be clearly established and explained to the entire team.

Advantages of Responsibility Accounting

Some of the advantages are:

• The most and the crucial advantage of responsibility accounting is that every accounted person knows the roles and responsibilities he has towards the company, this helps to maintain transparency in the firm.
• Since there are different departments accountable for different activities within the organization, chances of any information mishandling or misreporting are very slim.
• It surely enhances and improves the accuracy of managers working closely with different centers as they are liable for every action within that particular center.

Conclusion

The accounting method which works as a tool to improve the efficiency and transparency of the company is very effective to adapt, while responsibility accounting helps to segregate the operations of the company it also enables to hire of the best talent suitable for each center.

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This is a guide to Responsibility Accounting. Here we also discuss the definition of responsibility accounting along with features, types, Prerequisites, advantages and examples. You may also have a look at the following articles to learn more –