Responsibility accounting involves accumulating and reporting costs on the basis of individual manager who has authority to make day-to-day decisions. Under responsibility accounting the evaluation of manager’s performance is based only on matters directly under the manager’s control. It is also termed as profitability accounting.
In this system, the accountability is established according to the responsibility delegated to various levels of management and they are made responsible to give adequate feedback in terms of delegated responsibility. The basic idea behind responsibility accounting is that each manager’s performance should be judged by how he or she manages those items and only those items under his/her control.
The best way to encourage managers to achieve the desired level of performance is to measure their performance in comparison to budgeted results. Periodic comparisons of the actual costs, revenues and investments with the budgeted costs, revenues and investments relating to individual managers can help management in ascertaining their performance.
Essential Features of Responsibility Accounting:
- Information for both output and input of resources, i.e., based on cost and revenue data for financial information.
- Information for planned and actual performance.
- Identification of responsibility centre.
- Transfer pricing policy.
- Performance reporting
- To report reasons for deviation from original plan and to what extent.
Advantages of responsibility accounting:
(i) It establishes a sound system of control because it enables top management to delegate authority to responsibility centres while retaining overall control with itself.
(ii) It forces the management to consider the organisational structure to result in effective delegation of authority and placement of responsibility. It will be difficult for individual manager to pass back unfavorable results. Thus, it facilitates decentralisation of decision making.
(iii) It encourages budgeting for comparison of actual achievements with the budgeted figures. It compels management to set realistic budget.
(iv) It increases interest and awareness among the supervisory staff as they are called upon to explain about the deviations for which they are responsible.
(v) It simplifies the structure of reports and facilitates the prompt reporting because of exclusion of those items which are beyond the scope of individual responsibility.
(vi) It is helpful in following management by exception because emphasis is laid on reporting exceptional matters to top management and consequently top management is not burdened with all kinds of routine matters.