Chapter 14

PGDM IIResponsibility AccountingIntroductionThe role of management is to plan, organize, integrate, and inter-relate the organizational activities in such a way so that it can support to achieve organizational objectives.This role is facilitated through management control systems.A control system is a set of formal and informal systems to assist the management in steering the organization towards its goals.Control systems are employed in all organizations.

Management Control SystemsThe purpose of management control system assists the management in coordinating the activities of the organization and in steering of those activities towards the achievement of the firms overall purposes, goals, and objectives.

Control SystemSet of formal and informal system

Assist the management in steering the organisaitonAccounting Database For ControlFinancial Accounting review firms progress to dateCost Accounting cost data for planning, control and decision makingDecision Accounting helps to arrive at right decisionControl Accounting permits inclusion of goals other than profitResponsibility Accounting conveys costing information to manager of responsibility centreResponsibility AccountingResponsibility accounting emphasises division of an organisation among different sub units in such a way that each sub unit is the responsibility of an individual manager.

In this way each manager is responsible for the revenues of the unit under his charge and is also accountable for his actions.

Major Considerations All inputs and outputs are expressed in monetary terms as far as possible.

Though a managers total performance depends on a variety of measures such as quality control, morale of workers etc. but for responsibility accounting it is restricted to financial performance.Responsibility CentresResponsibility centre can be defined as a unit of function of an organisation headed by a manager having direct responsibility for its performance.

Five types of responsibility centres can be established for management control purposes -- a cost or expense centre; a revenue centre; a profit centre; an investment centre and contribution centre.Cost Centre A cost centre is a smaller segment of activity or area of responsibility for which costs can be accumulated.

Responsibility in a cost centre is restricted to costs only.

In a manufacturing environment, all production centres and service centres are termed as separate cost centres. Revenue Centre The revenue centre is the smallest segment of activity or an area of responsibility for which only revenues are accumulated.

A revenue centre has the primary responsibility of generating revenues.

Most of the sales offices, for example, are considered revenue centres. Profit CentreA profit centre is a segment where both revenues and costs are accumulated.

In general terms, most responsibility centres are viewed as profit centres -- taking the difference between revenues and expenses as profit.

The manager holds responsibility for both revenues and expenses. The main objective of profit centres manager is to maximise the centres profitInvestment Centre Investment centre is a segment of activity for area held responsible for both profits and investment.

For planning purposes, the budget estimate is a measure of rate of return on investment variance.

In short, the objective function of an investment centre is to maximise the centres return on investment. Contribution Centre Contribution Centre is a segment of activity or area of responsibility for which both revenues and variable costs are accumulated.

The main objective of contribution centre manager is to maximise the centres contribution.Inter-Profit Centre RelationsSetting transfer price

Transfer price is the value of transfer of services or goods between different centres

Fairness in setting transfer priceMethods for fixing the transfer priceCost based prices Variable costActual Cost of ProductionFull CostFull Cost plus Mark upStandard CostMarket based pricesNegotiated pricesLimitation of Responsibility Accounting It is difficult to prepare an organisation chart, which clearly delineates lines of responsibility and grants authority. Departments are so intermingled and interdependent that it is usually impossible to draw distinct responsibility lines.It requires proper meshing of organisational chart and chart of accounts.Individual interest may conflict with organisational interest and serious problems of implementation may occur.Thank You