Responsibility accounting
/What is Responsibility Accounting?
Responsibility accounting involves the separate reporting of revenues and expenses for each responsibility center in a business. Doing so improves the management of operations. 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.
When to Use Responsibility Accounting
Here are five examples of when to use responsibility accounting:
Cost centers. In a manufacturing company, responsibility accounting is used to track costs within specific departments, such as production or maintenance. For instance, a production manager is held accountable for controlling direct labor, materials, and manufacturing overhead costs without being responsible for revenue generation. This approach helps in identifying inefficiencies and managing expenses effectively.
Revenue centers. In sales departments, responsibility accounting focuses on revenue generation without considering costs. For example, a regional sales manager may be evaluated based on achieving sales targets and managing discounts or returns. By isolating revenues, management can assess the effectiveness of sales strategies and personnel performance.
Profit centers. For divisions or business units that are responsible for both revenues and expenses, such as a product line or a store branch, responsibility accounting enables the evaluation of profitability. For example, a retail store manager may be accountable for sales revenue, cost of goods sold, and controllable operating expenses, helping higher management assess which units contribute most to overall profits.
Investment centers. When evaluating divisions responsible for generating profits and efficiently managing assets, responsibility accounting helps assess performance through metrics like return on investment (ROI). For example, a business unit leader managing a portfolio of products would be accountable for revenues, costs, and the efficient use of assets to maximize returns.
Service centers. In support departments such as IT, HR, or maintenance, responsibility accounting tracks costs related to services provided to other parts of the organization. For instance, an IT manager might be accountable for expenses related to software licensing, support, and infrastructure while ensuring service quality. This allows management to monitor cost control and service efficiency.
Example of Responsibility Accounting
By using the responsibility accounting 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.
Usage of Responsibility Accounting
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 specific 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.
Advantages of Responsibility Accounting
There are several crucial advantages associated with responsibility accounting, which are as follows:
Sets expectations. By providing tailored performance reports to each recipient, you are setting expectations with them regarding what you expect from them in terms of matching certain standards - especially when budget figures are included in the report.
Creates smaller performance buckets. By setting up responsibility reports, you are also breaking up the performance reporting of the business into very small buckets. This makes it easier to learn about performance levels throughout the organization.
Reduces management time. By driving responsibility down into the organization, you are freeing up the time of the management team, which can spend more of its time on other activities.