Responsibility Accounting- expense and revenue centre
RESPONSIBILITY
ACCOUNTING
Meaning
Responsibility accounting is a system of
dividing an organization into similar units, each of which is to be assigned
particular responsibilities. Responsibility accounting is a
management control system based on the principles of delegating and locating responsibility. Responsibility accounting is a system under
which managers are given decisions making authority and responsibility for each
activity occurring within a specific area of the company. Under this system,
managers are made responsible for the activities of segments. These segments
may be called departments, branches or divisions etc. Among the control
techniques “responsibility accounting” has assumed considerable significance.
While the other control devices are applicable to the organization as a whole,
responsibility accounting represents a method of measuring the performance of
various divisions of an organization.
Definition
According
to Charles T. Horongrent,
“Responsibility
Accounting or profitability accounting or activity accounting which means the
same thing, is a system that recognizes various decision or responsibility
centers throughout the organization and traces costs (and revenue, assets and
liabilities) to the individual managers who are primarily responsibility for
making decisions about the costs in question.”
Some
Basic Requirements
·
To
implement a responsibility accounting system, the business must be organized so
that responsibility is
assignable to individual managers.
·
The
various managers and their lines of responsibility should be fully defined.
·
The
organization chart is usually used as a basis for responsibility reporting.
RESPONSIBILITY CENTRES
For effective control, a large firm is usually divided into
meaningful segments, departments or divisions. These sub units or divisions of
an organization are called responsibility centres.
Responsibility centre is a segment or an
autonomous unit or division of a company defined according to function or
product line. For e.g.-
a. Function- marketing, production, finance, etc.
a. Function- marketing, production, finance, etc.
b. Product line- shoe
department, electrical products, food division, etc.
A responsibility
centre is a segment of an organization for which a particular executive is
responsible.
In the words of Deakin and Maher,
“A responsibility centre is a specific unit of an
organization assigned to a manager who is responsible for its operations and
resources.”
For control purposes, responsibility centres are generally categorized into-
1.
Cost /
expense centre
2.
Revenue centre
3.
Profit
centre
4.
Investment
centre
COST / EXPENSE CENTRE
An expense centre is a responsibility centre in which inputs,
but not outputs, are measured in monetary terms. Responsibility accounting is
based on financial information relating to inputs (costs) and outputs
(revenues). In an expense centre of responsibility, the accounting system
records only the cost incurred by the centre but the revenues earned (outputs)
are excluded. An expense centre measures financial performance in terms of cost
incurred by it. In other words, the performance measured in an expense centre
is efficiency of operation in that centre in terms of the quantity of inputs
used in producing some given output.
The modus operandi is to compare actual inputs to some
predetermined level that represents efficient utilization. The variance between
the actual and budget standard would be indicative of the efficiency of the
division. Cost centres are usually the most basic unit of responsibility accounting.
Types of cost / expenses centres-
There are generally two types of expense centres:
1.
Engineered
expense centre
2.
Discretionary
expense centre
ENGINEERED EXPENSE CENTRE
Engineered expense centre have the following characteristics:
·
Their
inputs can be measured in monetary terms.
·
Their
output can be measured in physical terms.
·
The
optimal rupee amount of input required to produce one unit of output can be
established.
Engineered expense centre usually are found in manufacturing
operations. Warehousing, distribution, trucking and similar units in the
marketing organization also may be engineered expense centre and so many
certain responsibility centre within administrative and support department.
Examples are accounts receivable, account payable and payroll section in the
controller department, personnel record and cafeteria in the human resource
department, shareholder record in the corporate secretary department etc. such
units perform repetitive task for which standard cost can be developed. In an
engineered expense centre the output multiplied by the standard cost of each
unit produced represents what the finished product should have cost. When this
cost is compared to actual costs, the difference between the two represents the
efficiency of the organization unit being measured.
Expense centre supervisor are responsible for the quality of
good and for volume of production in addition to their responsibility for cost
efficiency. Therefore the type and amount of production is prescribed and
specific quality standards are set so that manufacturing costs are not
minimized at the expense of quality.
For example:
The
report of an expense centre is given below:
This
shows that the expense centre has spent more than budgeted. This means that the
expense centre is not performing efficiently and is held responsible for the
unfavorable performance of the department.
DISCRETIONARY EXPENSE CENTRE
The output of discretionary expense centre cannot be measured
in monetary terms. They include administration and support units, research and
development organization and most marketing activities.
Management has decided on certain policies that should govern
the operation of the company i.e. whether to match, exceed or spend less than
the marketing effort of its competitors, the appropriate amount of spending on
research and development, etc.
The difference between the budgeted and actual expense is not
a measure of efficiency in a discretionary expense centre, it is simply the
difference between the budgeted and actual input. It, in no way, measures the
value of output. If actual expenses do not exceed the budget amount the manager
has “lived within the budget”. We cannot say that living within the budget is
efficient performance.
COST DEFINED IN TERMS OF CAUSE AND EFFECT
|
||
Type Of Cost
|
Cause And Effect Or
Cost Benefit Relationship
|
Examples
|
Discretionary
|
Relationships are difficult or impossible to
define.
|
Cost of administration and support services
such as employee training, legal advice, research and development, etc.
|
Engineered
|
Relationships are relatively easy to define.
|
Direct resources used in productive
activities such as direct materials, etc.
|
Revenue centre
In a revenue centre, output (i.e. revenue) is measured in
monetary terms, but no formal attempt is made to relate input (i.e. expense or
cost) to output (if expense was matched with revenue, the unit would be a
profit centre). Typically revenue centre
is marketing or sale unit wh8ich do not have authority to set selling price and
are not charged for the cost of goods they market.
| Revenue Center Performance Reports | |||
A revenue center performance report looks very
similar to a cost center performance report.
Notice that the only
difference is the name at the top of the report and that the word “expense” has
been replaced with “product”. Make sure to look at each report carefully to
determine if you are looking at a cost center report or a revenue center
report.
The only difference with a
revenue center performance report is the determination of favorable or
unfavorable variances. Use the same methodology used in the cost center report.
Look to see if the actual amount is greater or less than the budgeted amount.
For the Standard Model, actual is more than budget. Here we are discussing
revenue. Is higher revenue good or bad? Higher revenue is good, so the $90,000
variance is favorable. The Deluxe Model has sales $20,000 lower than budgeted,
which is bad and therefore unfavorable.
A company should not just investigate
unfavorable variances. The Executive Model’s sales were 10% higher than
budgeted. The national sales director might want to know how the Midwest Region
was able to increase sales in order to help boost sales in other regions of the
country. Favorable variances are just as important as unfavorable variances.
Conclusion
Responsibility
accounting is a management control system based on the principles of delegating
and locating responsibility. The authority is delegated on responsibility
centre and the responsibility centre is accountable to achieve pre- defined
targets.
There
are various types of responsibility centres which are responsible for expense,
profit, revenue and investment etc. under this system the managers are
responsible for activities of segments. These segments can be departments,
branches or divisions, etc.
BIBLIOGRAPHY
Ø
Arora,
Manoj & Kumar, Vishal. ‘Business
Performance Measurement’. Kalyani Publishers.
Comments
Post a Comment