Responsibility accounting is a concept that views the organization in parts or sub-systems rather than in total or a single system. Of course, the ultimate goal is to achieve organization's objective but that does not come at once. Total achievement is the aggregation of the achievements individual sector.
Responsibility accounting encompasses the following steps:
1. Identifying The Responsibility Centers
The basis of responsibility accounting system is the designation of each sub-unit in the organization as a particular type of responsibility center. A responsibility center is a sub-unit in an organization whose manger is held accountable for specific financial results of sub-unit's activities. The important criteria for creating a responsibility center is that the unit of the organization should be separable and identifiable for operating purposes and its performance measurement should be possible. An organization can be broadly subdivided into four main responsibility centers as cost center, revenue center, profit center and investment center.
2. Delegation Of Authority And Responsibility Or Decentralization
To increase managerial and operational efficiency, the manger of each subunit should be assigned specific authority and responsibility for the activity of that division. No one can be held accountable without having any prior responsibility and responsibility always accompanies corresponding authority. Responsibility centers are the decision centers also, and the decision requires the power or authority.
3. Controllable Of The Object
The manger of a cost center can be held accountable only for the costs, which are controllable by him. Therefore, it is an essential part of responsibility accounting to identify the controllable and non-controllable costs. The same thing applies in the case of revenues, profits and investment.
4.Establishing Performance Evaluation Criteria
Main purpose o responsibility accounting is to measure the divisional or subunit performance. Performance evaluation is a yardstick measurement of whether the results are obtained as ought to be or not. Most often the following criteria are applied for divisional performance evaluation.
*Standard Costing
* Budgetary control
*Profitability ratios
* Valuation measures
5. Electing Cost Allocation Bases
Divisional profitability heavily depends on the bases of allocation of joint overheads and corporate overheads. Switching from one method to another of cost allocation over the products or divisions, product wise profitability change to a great deal. Remember that for decision-making purpose, such allocated overheads should be carefully treated and well understood.
