Definition of Accountability in Organizations – Responsibility Accounting

Introduction

In order to achieve the goal, every organization must establish a good control system. The control system should be framed in the mode of responsibility in respect of all activities, for that each divisional or activity managers are entrusted the authorities according to the organizational structure based on their level and create accountability on their activities. This accountability measures the performance of each activity by the management and it creates spontaneous responsibility to the all persons in the organization. In this chapter we can study elaborately about the responsibility accounting.

A key managerial responsibility is for the management of resources

The nature of resources that a manager will be responsible for, it includes that the:-

People - directing the activities and looking after people

Financial - using financial resources in the best possible way for the organisation in line with profit and sales targets.

Materials - making sure that materials are used in the most productive way with the minimum waste

Machinery and equipment - using the most appropriate machinery and equipment, and making sure that it is maintained, replaced and updated where necessary

Time - ensuring efficient use of time

Buildings - making sure that premises are safe and are being used in the best possible way

Information - making sure that the organisation uses the most effective information processing technologies.

Definition of Accountability

Accountability is the acknowledgment and assumption of responsibility for actions, products decisions, and policies including the administration, governance and implementation within the scope of the role or employment position and encompassing the obligation to report explain and be answerable for resulting consequences.

Product costing Vs Accountability

Product cost is the summation of direct materials, direct labor, and factory overhead. Accountability represents only the cost which is incurred and directly responsible by the divisions or departments. Both are relevant in incurring cost of the product, the accountability creates the responsibility to the each divisions in respect of cost incurred by them. The product cost is divided into various segments based on the division’s responsibility when establishing accountability. You can understand the difference in the following example:-

Product Cost & Responsibility Cost

Costs for accountability are ` 30 for Dept A and B ` 36 for Dept. B and ` 44 for the central unit. The product costing of the product here is `110.

Thus the product costing is not deviated from the accountability whereas it is intertwined with it. Therefore, the good Costing system generates the information for the needs of product costing and Responsibility costing.

The Accountability and Responsibility is one and the same concept. This lesson elaborately explains how to build the responsibility in an organization in the accounting perspective.

Definition of Responsibility Accounting

C.I.M.A., London, defines responsibility accounting as “a system of management accounting under which accountability is established according to the responsibility delegated to various levels of management and management information and reporting system instituted to give adequate feed-back in terms of the delegated responsibility.”

Concept of Responsibility Accounting

Responsibility Accounting is a collection, summarization, and reporting of financial information about various decision centers (responsibility centers) throughout an organization; also called activity accounting or profitability accounting.

It traces costs, revenues, or profits to the individual managers who are primarily responsible for making decisions about the costs, revenues, or profits in question and taking action about them.

Responsibility accounting is appropriate where top management has delegated authority to make decisions. The idea behind responsibility accounting is that each manager’s performance should be judged by how well he or she manages those items under his or her control.

Factors of Responsibility Accounting for Management Control

Planning

The entire activities of the organization must be well planned based on responsibility. The effective planning has to prepare with the consultation of the respective person of those who held responsibility.

Fixing standards

For the execution of plan, the management must fix the standards, set up budgets and estimate the actual. The targets must be very clear and precise and it should be very realistic.

Allocation of resources

After fixing the standards, the management has to allocate the resources while executing the plan for action and also it has to give necessary direction for such execution to the staff. The training must provide to the staffs whenever they required for execution.

Evaluation of Performance

The actual performance of each responsibility centre must evaluate, compare the actual with standards and find the variances. The positive motivation should be provided to the persons showing performance of favourable variance.

Analyse the variances

The corrective measures should be taken when there are any negative deviations. A leader’s job is to ensure every member of the team wins, and winning is defined as meeting the organization’s top objectives. One of the best ways I’ve found to help people win is to establish an accountability-based culture focused on producing results, not activities. Here is the seven-step formula you can use to create accountability and achieve extraordinary results in any organization:

The Effective communication is a tool of control system which drives results. The team leader has to ask their members about the status of the work and he must explain the purpose i.e., how and why it is important to achieve the goal of organization. Moreover, the team leader must know the requirements in order to complete the task. This approach removes excuses, reduces rework and is a great way to build relationships. It’s also a great way to develop future leaders by increasing responsibility and encouraging decision making and creativity. By holding others accountable, the team leader is teaching them to accept responsibility. The commitment is best way to build trust and improve the results.

Responsibility centers

Management Control Structure

The organizations are decentralized or segmented into various parts for controlling the entire organization which is headed by a manager having direct responsibility for its performance. These parts or segments are referred to as responsibility centers that include: 1) Expense centers, 2) Revenue centers, 3) profit centers and 4) investment centers.

Responsibility Accounting for Divisional Performance

This approach allows responsibility to be assigned to the segment managers that have the greatest amount of influence over the key elements to be managed. These elements include costs for a cost center (a segment that generates costs, but no revenue), revenue for a revenue center (a segment that mainly generates revenue with relatively little costs), a measure of profitability for a profit center (a segment that generates both revenue and costs) and return on investment (ROI) for an investment center (a segment such as a division of a company where the manager controls the acquisition and utilization of assets, as well as revenue and costs).

Expense Centers

The responsibility of the cost or expense centre is only the cost incurred by the unit or divisions. The division manager is responsible for the entire process of cost control in their respective units. The process includes estimation of cost, evaluation of performance, and comparison of actual with budgeted. Thus the manager of a cost centre is responsible for controlling the cost and he must take measures for the uncontrollable cost.

There is various classification of expense or cost centre, such as:-

Engineered Expenses centre

Discretionary Expenses Centre

Administrative and Support Centers

R & D centers

Marketing Centers

Engineered Expenses centre

This type of centre is applicable in manufacturing, warehousing, distribution and trucking. Here the inputs are measured in terms of money value but the output is measured in units. Moreover, the centre is responsible in respect of quality of output and employees training and development.

Discretionary Expenses centre

The administration and developmental activities of the product developments are covered in this type of centre. e.g.

Research & Developmental Expenditure,

Marketing activities of capturing the market of the product,

The customer service and

Financial planning.

Administrative and Support centers

It provides services to other responsibility centers, so it is difficult to evaluate and quantify the contribution of the services of the staffs. The manager of this unit can prepare budget to control the expenditure.

R & D centers

In the modern world, the technology is changing every day. So, every organization must develop their product based on the changing technology, for that they have to spend lot of money and time on Research and development. The cost controlling system is very difficult in this unit. This is because of heavy expenditure incurred for the experiment while developing a new technology, innovate a new product and improving the old product, it is very difficult to quantify the results.

Marketing Centers

The activities are related to obtaining orders which includes advertising, sales promotion, and training sales force. The evaluation in terms of sales is very difficult for this centre. This is because these activities are long term perception.

Revenue Centre

A revenue centre is responsible for selling products and services and the responsibility is decentralized into various divisions on the basis of geographical area.

Profit Centre

Profit centre is applicable to all divisions in the organization. This is because of the overall organization goal is striving to attain the maximum profit. It is evaluated in terms quantum of profit for which revenues are harmonized with expenses related to the organization as whole and the responsibility may decentralize into various divisions on the basis of product or divisions or territory etc.,

For example: Transfer pricing

Transfer pricing is the notional price which is used while transferring goods from one division to another. This method is applicable in the process industry because output of one process becomes the input of another process. The measurement of internal profit helps to evaluate the division’s performance and internal management control. It is a tool of Management control process.

The effective profit centre system must have the following requirements:-:

A Sound system of Transfer prices,

Autonomy to the Divisional Manager,

Survival of Market facilities,

Negotiation power to the Divisional Managers,

Uniform system of Accounting

Arbitration to settle Disputes

Adequate knowledge of management required to the Divisional Managers.

Investment Centre:

The responsibility of this centre is based on the assets employed i.e. Return on investment and optimum utilization of the asset. In this respect all assets are considered as investment, which is directly and indirectly involved in the investment activities.

Controllability Concept

A fundamental concept of responsibility accounting is referred to as controllability. Hypothetically, a manager should only be held responsible for those aspects of performance that he or she can control. In my view, this concept is rarely, if ever, applied successfully in practice because of the system variation present in all systems. Attempts to apply the controllability concept produce responsibility reports where each layer of management is held responsible for all subordinate management layers.

Advantages of Responsibility centers:

It is an effective tool for cost control/reduction

It helps to Budgetary control/standard costing

It is an aid to planning/controlling by top management

It fixes responsibility/motivates

It evaluates performance of managers/divisions

Advantages of Responsibility Accounting

Responsibility accounting is a traditional accounting control system; it provides an organization with a number of advantages.

It provides a way to manage an organization unless otherwise it is unmanageable.

It helps fixing divisional responsibilities through assigning responsibility to lower level managers that allows higher level managers to pursue other activities such as long term planning and policy making.

It also provides a way to motivate lower level managers and workers.

Managers and workers in an individualistic system tend to be motivated by measurements that emphasize their individual performances.

It is a tool for cost control and cost reduction exercises resorted to, by the management from time to time. Budgetary and standard costing techniques are applied.

Criticisms of Responsibility Accounting

The Responsibility accounting is separating a company into various parts or units of responsibility centers for controlling the entire organization. But this separation creates the problem of non-cooperation among the various divisions within the organization. The top level management may find difficulties for coordinating the activities of the groups.