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Responsibility Accounting

Large organizations can be difficult, if not impossible to manage as a single unit. To address this issue, companies decentralized or separate into manageable segments or divisions.

The following are advantages and disadvantages of decentralized companies:

Advantages include:
  1. Frees top management to spend their time on long-term strategic planning and other higher-level decisions.
  2. Each segment has the opportunity to hire its own experts as needed.
  3. Segment managers are able to maintain closer contact with their customers.
  4. Provides training needed for segment managers to move into higher level positions.
  5. Improves motivation and retention.
Disadvantages include:
  1. Duplication of costs.
  2. Problems aligning the goals of business segment managers with the goals of top management.

Accounting Tools (2016) defines responsibility accounting as follows: responsibility accounting is a reporting system that compiles revenue, cost, and profit information at the level of those individual managers most directly responsible for them. The intent is to provide this information to those people most able to act upon it, as well as to judge their performance. Responsibility accounting is most commonly used in an organization that distributes responsibility down through the corporate hierarchy.

We collect and distribute budget data of  responsibility centers in a decentralized organization. A responsibility center is a part of an organizational unit that is supervised by a manager, who has decision making authority over the center, and is responsible for its for the controllable results of the center.

Types of Responsibility Centers include:
  1. Cost centers. The manager in a cost center  is responsible only for those costs that they can exert control over.
  2. Revenue centers. The manager in a revenue center is responsible for revenue only.
  3. Profit centers. The manager in a profit center is responsible for both revenue and costs.
  4. Investment centers. The manager of an investment center is responsible for the overall financial health of the company including generating profit and managing all of the economic resources of the company.

 

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