Question

State the essentials for effective of responsibility accounting

Answer 1

Answer:

1. Inputs and Outputs or Costs and Revenues:

The implementation and maintenance of responsibility accounting system is based upon information relating to inputs and outputs. The physical resources utilized in an organisation; such as quantity of raw material used and labour hours consumed, are termed as inputs. These inputs expressed in the monetary terms are known as costs. Similarly outputs expressed in monetary terms are called revenues. Thus, responsibility accounting is based on cost and revenue information.

2. Planned and Actual Information or Use of Budgeting:

Effective responsibility accounting requires both planned and actual financial information. It is not only the historical cost and revenue data but also the planned future data which is essential for the implementation of responsibility accounting system. It is through budgets that responsibility for implementing the plans is communicated to each level of management. The use of fixed budgets, flexible budgets and profit planning are all incorporated into one overall system of responsibility accounting.

3. Identification of Responsibility Centres:

The whole concept of responsibility accounting is focused around identification of responsibility centres. The responsibility centres represent the sphere of authority or decision points in an organisation. In a small firm, one individual or a small group of individuals, who are usually the owners may possibly manage or control the entire organisation.However, for effective control, a large firm is, usually, divided into meaningful segments, departments or divisions. These sub- units or divisions of organisation are called responsibility centres. A responsibility centre is under the control of an individual who is responsible for the control of activities of that sub-unit of the organisation.

This responsibility centre may be a very small sub-unit of the organisation, as an individual could be made responsible for one machine used in manufacturing operations, or it may be very big division of the organisation, such as a divisional manager could be responsible for achieving a certain level of profit from the division and investment under his control. However, the general guideline is that “the unit of the organisation should be separable and identifiable for operating purposes and its performance measurement possible”.