Large business organizations have huge operating activities. With a total responsibility and authority over the entire organization, it often gets difficult for the top management of the company to look into each and every aspect of such voluminous activities. To control the activities efficiently, the total authority is decentralized and divided into small groups.
It is this decentralization of responsibility that is termed as ‘responsibility accounting’. It is similar to other cost systems but with larger emphasis on setting up the responsibility assigned and it’s execution. The performance of each responsibility center is evaluated based in terms of its pre-planned target.
Defining Responsibility Accounting
According to Robert Anthony, responsibility accounting is a type of management accounting that collects and reports pre-determined and actual information in terms of responsibility centres.
Eric Kohler has defined responsibility accounting as an accounting method where costs are recognized with people who are assigned to control it rather than with products or services.
Necessities of Efficient Responsibility Accounting
- A healthy managerial environment needs to exist in the organization for better performance.
- The company should be divided into various responsibility centres.
- Individual responsibility centres needs to have pre-determined targets.
- A detailed budget with active involvement of concerned managers.
- Top management’s support for carrying out effective responsibility accounting.
- Individual performance reports of all divisions needs to be prepared and necessary measures should be taken and communicated to concerned managers.
Objectives of Responsibility Accounting
- The goals of an organization are divided into small goals. These small aims help in better achievement of individual responsibility centres.
- Cost control is given emphasis on through planning.
- Responsibility center goes through performance evaluation done on the basis of pre-determined targets.
- In-depth study of the achievements which were attained below or above the target.
Principles of Responsibility Accounting
- Identifying responsibility centres within a business organization.
- Targets are fixed for each responsibility centres after consulting with the concerned manager of the centres.
- Comparing the actual performance with the target
- Offering incentives for motivating to perform better
- Specifying controllable and uncontrollable activities at different levels of the responsibility centres.