Responsibility Accounting

Concept of Responsibility Accounting 

Responsibility accounting refers to a system that undertakes the identification of responsibility centres, subsequently determine its objectives. It also helps in the development of processes related to performance measurement as well as the preparation and analysis of performance reports of the identified responsibility centres. 


Objectives of Responsibility Accounting 

See below for the major objectives or principles of responsibility accounting –

  • Each responsibility centre is given a target, which is communicated to the relevant management level 

  • At the end of the time period, there is a comparison between the target and the actual performance 

  • The variations that are detected in the budgeted plan are examined for fixing responsibility to the centre 

  • Due measures are taken by the top management which is communicated to the responsible personnel 

  • The responsibility for costs does not include the policy costs and various other apportioned costs 


Features of Responsibility Accounting

Read on to know more about the host of responsibility accounting features, you

  • Inputs and Outputs 

Responsibility accounting system can be implemented only on the basis of due information of input and output. The monetary term of inputs is costs, and outputs are correspondingly called revenues. Hence, cost and revenue information is crucial for responsibility accounting. 

  • Use of Budgeting 

Apart from the data of cost and revenue, planned and actual financial data is also required. It is only with effective budgeting that the accounting plan implementation can be communicated to the concerned levels of management. 

  • Relationship between responsibility accounting system and organisation structure 

Clear lines of authority and effective organisation structure is an absolute necessity for the success of a responsibility accounting system. The accounting system is appropriately designed to be consistent with the existing organisational structure. 

  • Identification of responsibility centres 

Only after responsibility centres are identified, the responsibility accounting system can be implemented. The centres go on to represent the decision points within the organisation. 

  • Performance reporting 

As responsibility account primarily relates to control, any deviation or disruption in the plan has to be noted and reported at the earliest. On the report of such an issue, corrective measures have to be taken. Such information is the basis on which ‘responsibility’ or performance reports are prepared. 


Different Types of Responsibility Centres

A responsibility centre is a functional business entity that is given definite objectives and goals, dedicated personnel, procedures and policies as well as the duty for generating a financial report.


Managers are vested with specific responsibility in terms of expenses incurred or revenue generation or the investment of funds. Let us take a look at the four types of responsibility centres. 

  1. Profit centre 

It contributes to both revenue and expenses, resulting in profit and loss, respectively. For example – Product line is a profit centre, and the responsible person is the product manager.

  1. Cost centre 

The centre only contributes to specific costs that have incurred. For example – Housekeeping department will only incur cost. 

  1. Revenue centre 

The revenue centre only leads to the generation of sales. For example – Sales department of an organisation.

  1. Investment centre 

The centre is responsible for profits and returns on investment. The latter includes the fund which is invested in the organisation's operations. For example – A subsidiary entity of a company is an investment centre. The responsible person in that instance would be the president of the subsidiary.


Responsibility Accounting Example

The following scenario acts as an example of responsible accounting –

The responsibility accounting system of the company, Lush Footwear, allows the departmental heads to allocate the expenses and control such costs based on immediate needs. The executive management of Lush Footwear is tracking managers’ performance, and at the same time, there are considerably less top-level executives who would direct the operations. 


To carry out the demarcated functions properly, the executives of Lush Footwear prints the responsibility accounting performance reports for the analysis of holistic performance of all the departments. If it is seen that the statistics seem to meet the established objectives, further responsibility accounting budgets are allocated by the top management. 


Test your knowledge – 

Now that you have some idea about the topic of responsibility accounting, how about testing your newly gained knowledge! Find out if you are able to answer the following quiz. 


i. Responsibility accounting undertakes the collection as well as reporting of costing information on -

(a) Cost centre basis 

(b)Department basis 

(c) Product basis 

(d) Function basis 

ii. Responsibility accounting covers the following –

(a) All employees

(b) Chief Executive Officer and Chief Financial Officer 

(c) Middle Managers 

(d) Managers 

[You can find the solutions to the quiz at the end of article]


Advantages of Responsibility Accounting

  • Responsibility accounting establishes a robust mechanism for cost control 

  • To achieve the objectives of cost control, the organisational structure is re-assessed by the management to consider attribution of responsibility as well as engaging in power delegation 

  • Budgeting is put in place which helps in the comparison of actual achievement on the ground

  • The awareness among designated personnel is enhanced, which is likely to lead to greater productivity. They will also be held accountable for their actions, and any deviation will necessarily call for an explanation 

  • Reporting structure and timings are facilitated because such items are excluded which is beyond the purview of individual responsibility of the designated personnel


Disadvantages of Responsibility Accounting 

  • There could be instances of individual interest and organisational interest to be at loggerheads. Such conflict is likely to create problems for policy implementation

  • Organisational chart may not be possible to be established in such a manner where the grant of authority and the responsibility lines are clearly demarcated 

  • The policy implementation process is likely to experience the reactions from the designated person as well, which may eventually cause passive resistance. Such actions may negatively impact the organisational objectives

  • The tool can only be effective if an outstanding reporting system is put in place 

  • In the absence of a sound structure of organisation, the responsibility centres cannot be clearly identified 

  • Fresh analysis of the conventional methods of the classification of expenses may be cumbersome


Did you know?

Among all the different kinds of responsibility centres such as cost centre, profit centre, revenue centre and investment centre – profit centres enjoy maximum autonomy. If business unit managers are not given sufficient autonomy, they will not be able to undertake critical operating decisions connected with profit generation. 


There is a multitude of decisions that may have to be taken within a short period of time. Such decisions may range from pricing, product mix, purchase, and inventory, among others.  

Objectives of Social Responsibility Accounting 


It will be useful for you to know that, connected to the inherent principles of responsibility accounting, an important concept of social responsibility accounting has emerged. Before we determine what the objectives of social responsibility accounting are, let us know a little bit about the concept.


Social responsibility accounting, even though used generally in the context of corporate social responsibility, involves the communication of the environmental and social effects of a firm’s economic steps. It is usually done with respect to a specific interest group or towards the society at large. The focus on multinational corporations and the tools mostly include – public hearing, public audit, social audit, use of complaint box and citizen charter and public expenditure tracking survey.


Let us now look at the underlying objectives of social responsibility accounting.

  • The communication will disclose and measure the 'costs' and 'benefits' caused to society due to the firm's production-related activities

  • The organisation may use it as an assessment for the impact of its performance on communities, people and environment 

  • It leads to the creation of a favourable image of the organisation and helps to attract investors. In continuation of this aspect, it will also facilitate the inflow of capital from multiple sources to the organisation

  • It lends an overall conducive effect on society with the firm committing to improving its business processes


If you are keen to learn more about responsibility accounting, do not forget to install Vedantu’s app in your device, and check the online materials available on the platform. 


[Solutions]

i. (a) Cost centre basis 

ii. (a) All employees 

The table that has been indicated below shows the kinds of responsibility centres that are attributed to each level of employees.

FAQ (Frequently Asked Questions)

What is Responsibility?

The understanding of the term responsibility, in the context of accounting, essentially means holding designated persons responsible for controlling costs. Responsibility involves such tasks that are assigned to subordinates by managers. 


The subordinate bears the commitment to ensure that the entrusted tasks are taken to its completion. For discharging the relevant duty, the designated personnel are vested with due authority for facilitating performance.


What is Responsibility Accounting?

The meaning of responsibility accounting is the control system that assigns responsibility for cost control to designated personnel. As opposed to budgetary control and standard costing, which focuses on devices of control, responsibility accounting involves persons who engage in the cost controlling mechanism.