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What is Responsibility Accounting? Features, Limitations and Benefits

In this article, we will know what is Responsibility Accounting and its features, limitations and benefits. Responsibility accounting is a system of accounts and reports in which a certain person or group of persons is held accountable for expenses and all functions of the organization if the performance of the work is not as per the prescribed norms.

What is Responsibility Accounting? Features, Limitations and Benefits

What is Responsibility Accounting

Responsibility accounting is a type of management accounting that is accountable for all management, budgeting and internal accounting of a company. The primary purpose of this accounting is to support all planning, costing and responsibility centers of a company.

Responsibility accounting refers to a system that identifies responsibility centers, subsequently setting their objectives. It also helps in the development of processes related to performance measurement as well as preparation and analysis of performance reports of the identified responsibility centres.

Accounting typically involves preparing monthly and annual budgets for an individual responsibility center. It also keeps track of a company’s costs and revenues, where reports are submitted monthly or annually and reported to the relevant manager for feedback. Responsibility accounting primarily focuses on accountability centers.

Limitations of Responsibility Accounting

1. Difficulty in assigning responsibility – It is not possible to assign clear responsibility to all centers, as sometimes the goals may be expressed in a qualitative manner. cannot be expressed in numerical form.

2. Lack of group spirit – The department wants to increase its profits, even if the profits of other departments decrease, but it does not have the sense of time. Departments form unions comparing efficiencies among themselves and if workers are transferred from a more efficient department to a less efficient one, there is conflict among employees.

3. Difficulty in cost classification – It is necessary to classify costs into controllable and non-controllable costs instead of traditional classification of costs like factory overhead, administrative overhead and selling overhead or fixed variable overhead. Many difficulties are encountered in classifying costs in this way.

4. Avoidance of Responsibility – Responsibility accounting is based on human behavior, which varies over time. Usually everyone wants to be surrounded by responsibility, so the employees are protesting.

Benefits of Responsibility Accounting

  1. It urges management to accept the structure of the company and examine who is accountable for what and fixes problems.
  2. It increases the attention and awareness of managers as they have to explain the variations they are responsible for.
  3. It helps in comparing achievements between pre-planned goals and actual results.
  4. Personal and company goals are best established and communicated.
  5. This creates a sense of efficiency within the individual employees as their work and achievements will be reviewed.
  6. It guides the management to plan and structure the future expenditure and revenue of a company.
  7. Being a cost control tool, it creates ‘cost consciousness’ among the workers.
  8. It improves and controls the operating activities of the company for an effective and efficient result.
  9. Simplifies report structure and guides for quick reporting.

Features of Responsibility Accounting

1. Inputs and Outputs – Responsibility accounting system can be implemented only on the basis of proper knowledge of inputs and outputs. The monetary term of input is cost, and output is called revenue accordingly. Therefore, cost and revenue information is important for responsibility accounting.

2. Use of budget – In addition to cost and revenue figures, planned and actual financial data are also required. It is only with effective budgeting that the implementation of the accounting plan can be communicated to the relevant levels of management.

3. Performance Reporting – Since the accountability account is primarily related to control, any deviation or disruption in the plan should be noted and reported at the earliest. On reporting of such issue, corrective measures should be taken. Such information is the basis on which the ‘responsibility’ or performance report is prepared.

4. Relationship with Organization Structure – Clear authority and an effective organization structure are absolutely essential for the success of a responsible accounting system. The accounting system is suitably designed in line with the existing organizational structure.

5. Identification of Responsibility Centers – Responsibility accounting system can be implemented only after the identification of Responsibility Centers. Centers represent decision points within the organization.

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