Responsibility accounting is based on the assumption that every cost incurred must be the responsibility of one person somewhere in the company.
For example, the cost of rent can be assigned to the person who negotiates and signs the lease, while the cost of an employee’s salary is the responsibility of that person’s direct manager. This concept also applies to the cost of products, for each component part has a standard cost (as listed in the item master and bill of materials), which it is the responsibility of the purchasing manager to obtain at the correct price. Similarly, scrap costs incurred at a machine are the responsibility of the shift manager.
By using this approach, cost reports can be tailored for each recipient. For example, the manager of a work cell will receive a financial statement that only itemizes the costs incurred by that specific cell, whereas the production manager will receive a different one that itemizes the costs of the entire production department, and the president will receive one that summarizes the results of the entire organization.
As you move upward through the organizational structure, it is common to find fewer responsibility reports being used. For example, each person in a department may be placed in charge of a separate cost, and so each one receives a report that itemizes their performance in controlling that cost. However, when the more complex profit center approach is used, these costs are typically clumped together into the group of costs that can be directly associated with revenues from a specific product or product line, which therefore results in fewer profit centers than cost centers. Then, at the highest level of responsibility center, that of the investment center, a manager makes investments that may cut across entire product lines, so that the investment center tends to be reported at a minimal level of an entire production facility. Thus, there is a natural consolidation in the number of responsibility reports generated by the accounting department as more complex forms of responsibility reporting are used.