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What is Responsibility Accounting?
Responsibility accounting is an internal system used to better control costs and performance. Its main focus is making individual managers responsible for those elements of a company's performance which they can control. In most cases, responsibility accounting does not affect a company's public accounts.
The idea of responsibility accounting is to deal with the problem that it can be hard to judge individual company departments purely on their profitability. For example, if a business has a team of traveling sales reps, it may have a separate travel department which arranges their journeys and accommodations. In most cases, such a department will only ever spend money and will not directly generate revenue. While the travel arrangements may be a vital part of the sales process, the resulting revenue from the sales is likely to be recorded in the accounts for a separate department.
In responsibility accounting, each department will have stated goals. The relevant manager will then be judged on how well he or she meets these goals. This is similar to most target systems, but will usually work by measuring on a financial basis. The important distinction is that this financial assessment will not necessarily be a pure profitability measure.
In most responsibility accounting systems, each department is classified into one of four categories. A cost center will be judged purely on how low it keeps spending; the travel department in the example above would fall into this category. A revenue department such as the sales team will be judged purely on the revenue it generates. A profit center will be judged on a standard profit or loss basis. This could apply to individual stores in a chain.
The final category is an investment center. This may literally involve financial investments, but could also cover departments involved in long-term projects. Departments in such a category are usually judged using a longer-term view that takes account of issues such as capital spending where the resulting revenue will not all be gathered in the first year.
Generally, responsibility accounting is a purely internal measure. It is possible that details from its operation and results could be included in a company report, for example as information to detail changes a company has made. These details would only be used as a way of sharing information with investors and potential investors. The details do not usually form a part of the mandatory financial information that a company must include in its public accounts.
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Discussion Comments
@goldenbears - There is no definite time frame as to which departments submit responsibility accounting to their company heads. Each company has different protocol, and conducts themselves in a way that best suites their needs.
However, most companies tend to require their departments to do responsibility accounting periodically throughout the year, as this is the best way to get updated data on segment performances.
@drhs07 - There are some disadvantages associated with responsibility accounting too though.
Since departments are divided based on the four categories listed in the article, emphasis is placed on the performance of individual departments. Interdependency between departments can at times go unreported. As a result, company segments compete with one another in optimizing their own segment, rather than working together to optimize the entire system.
Also, information from responsibility accounting reports tends to flow vertically from departments to the company head. Information is rarely shared between departments, thus making interdependency harder to account for.
When interdependency goes unnoticed, the company can tend to waste money on excess resources, such as workers, inventory, and capacity.
@farah1- I think that the advantages of responsibility accounting far outweigh any disadvantages.
It allows managers to have more accountability over the departments and sub-departments that they directly work under. By directly measuring the performance of their departments, managers can easily see if they are meeting their goals -- at least that's how it works in my firm.
Additionally, it allows upper level managers to devote their time to long term business planning and strategy, instead of having to worry as much about the operation of the department.
Responsibility accounting distributes work in such a way that it makes managing a company more feasible.
How often do companies gather reports from responsibility accounting. Is it once every fiscal year, or as often as once a quarter?
Although responsibility accounting seems to be a way to measure the success of individual departments within a company, it also seems to place an extra burden on department managers.
It creates more paperwork and hassle for managers, who could better devote their time to properly managing the business.
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