SUBMITTED TO:Dr. Amrit Lal Ghosh

Associate Professor

SUBMITTED BY:Biswajit Bhattacharjee (19)

RESPONSIBILITY ACCOUNTING WITH SPECIAL REFERENCE TO

STANDARD COSTING AND BUDGETARY CONTROL

Relating to theresponsibilities of

individual managers.

To evaluatemanagers on

controllable items.

An accounting system thatprovides information . . .

Responsibility Accounting

The areas of responsibility are well defined at different levels of the organisation.

There are clearly set goals and targets for each responsibility centre.

Accounting system generates correct and dependable information for each responsibility centre.

Managers must try to attain the goals and objectives.

Pre-requisities for Responsibility Accounting

What is a Responsibility Center?

It is any part, segment, or subunitof a business that needs control.

– production

– service

Responsibility Centers A responsibility center is the point in an

organization where the control over revenue or expense is located, e.g. division,department or a single machine.

A responsibility center may be divided into three categories ◦ cost◦ profit◦ investment

Investment centerInvestment center

Cost centerCost center

Profit centerProfit center

Types of Responsibility Centers

Cost

Types of Responsibility Centers

Cost Center

Responsibility accounting is a cost

centre where the manager is

accountable for the costs that are

under his control but not for its

revenue.

Profit Center

Revenues

SalesInterestOther

ExpensesManufacturingCommissionsSalariesOther

Types of Responsibility Centers

Responsibility accounting is a

profit centre where the manager is

accountable for sales revenue as

well as cost.

Investment Center

Responsibility accounting is a

investment centre where the manager is accountable for sales revenue and

costs and in addition is responsible for

some capital investment. Corporate Headquarters

Types of Responsibility Centers

The morale of the managers is high because of their active participation in decision making.

Responsibility accounting provides increased job satisfaction and greater motivation to put in their best efforts.

It helps in quick reporting of performance oriented results of management of various levels.

Responsibility accounting facilitates stricter control on costs and revenues.

Advantages of Responsibility Accounting

Standard Costing Standard costing is an important subtopic of cost

accounting. Standard costs are usually associated with a manufacturing company's costs of direct material, direct labor, and manufacturing overhead.

Differences between the actual costs and the standard costs is known as variances.

If actual costs are greater than standard costs the variance is unfavorable.

If actual costs are less than standard costs the variance is favorable.

The sooner that the accounting system reports a variance, the sooner that management can direct its attention to the difference from the planned amounts.

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Procedures of standard costing system Set the predetermined standards for sales margin

and production costs Collect the information about the actual

performance Compare the actual performance with the

standards to arrive at the variance Analyze the variances and ascertaining the

causes of variance Take corrective action to avoid adverse variance Adjust the budget in order to make the standards

more realistic

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Functions of standard costing system Valuation

◦ Assigning the standard cost to the actual output Planning

◦ Use the current standards to estimate future sales volume and future costs

Controlling ◦ Evaluating performance by determining how

efficiently the current operations are being carried out

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Functions of standard costing system Motivation

◦ Notify the staff of the management’s expectations Setting of selling price

BUDGETARY CONTROL A major function of management is to control

operations One element is the use of budget reports which

compare actual results with planned objectives Provides management with feedback on operations

Fixed Budget

A fixed budget is one that is not changed if the activity level differs from the planned level

Disadvantage is that if the actual activity level is higher than planned, an adverse cost variance may be due simply to the increase in variable costs at this level, so the budget becomes irrelevant

Flexible Budget

A flexible budget is designed to change with the level of activity to reflect the different behaviour of fixed and variable costs

Advantage is that any cost variance can only be due to an increase or decrease in fixed costs

Business Accounting 18

Advantages of budgetary control Co-ordination of all functions and activities Responsibility accounting - information is provided to

managers responsible for revenue and expenditure Utilisation of resources - capital and effort are used

to achieve the financial objectives Motivation of managers through the use of clearly

defined objectives and monitoring of achievement Planning ahead gives time to take corrective action Establishes a system of control if plans are reviewed

regularly against actual Transfer of authority to individual managers for

decisions

Business Accounting 19

Disadvantages of budgetary control Set in stone - managers may be constrained by the

original budget (eg make no attempt to spend less than maximum or exceed target income)

Time consuming process may deflect managers from their prime responsibilities of running the business

Unrealistic if fixed budgets are set and actual activity level is not as planned

Disillusioning for managers if fixed budgets are set and not achieved merely due to changes in activity

Demotivating for managers if budgets are imposed by top management with no consultation

Business Accounting 20

Conclusions An effective system of budgetary control helps

managers plan and control the use of resources in a systematic and logical manner◦ Planning helps co-ordinate the activities of the

business◦ Control is achieved through the frequent monitoring of

progress against the plan by managers of budget centres, and taking corrective action where necessary

It is a communication system◦ Financial objectives and constraints are communicated

to managers of budget centres and regular monitoring keeps management informed of progress towards objectives