Responsibility Accounting

In a responsibility accounting system, costs are classified or identified with the persons responsible for their incurrence commonly referred to as responsibility centres. The virtue of this manner of collecting cost data is that they not only indicate what costs have been incurred but also who is responsible for them so that responsibility can be localised in case actual costs exceed budgeted costs. The head of each responsibility centre is expected to prepare a budget of the costs over which he has control and the authority to incur, and he is expected to operate within the limits of the budget. The responsibility accounting concept is important for controlling cost. The individuals in the organisation are held accountable only for those costs over which they have control and the authority to incur. They are not accountable for costs which they cannot control.

Responsibility accounting, as a control device, is relevant to divisional performance measurement. Responsibility accounting focuses on responsibility centres. A responsibility centre is a sub-unit of an organisation under the control of a manager who is responsible for the activities of that responsibility centre. For the purpose of measuring divisional performance, the responsibility centres are divided into:

·         Expense centres;

·         Profit centres; and

·         Investment centres.

An expense centre is a segment whose financial performance is measured in terms of cost.  The profit centre is that division of an organisation in which financial performance is measured on the basis of profit, that is, revenue - expenses. The measure of performance in an investment centre is based on the relationship between the segment profit contribution and segment assets.