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Business LibreTexts

9.2: Responsibility Accounting in Management

  • Page ID
    10655
  • Responsibility accounting

    The term responsibility accounting refers to an accounting system that collects, summarizes, and reports accounting data relating to the responsibilities of individual managers. A responsibility accounting system provides information to evaluate each manager on the revenue and expense items over which that manager has primary control (authority to influence).

    A responsibility accounting report contains those items controllable by the responsible manager. When both controllable and uncontrollable items are included in the report, accountants should clearly separate the categories. The identification of controllable items is a fundamental task in responsibility accounting and reporting.

    To implement responsibility accounting in a company, the business entity must be organized so that responsibility is assignable to individual managers. The various company managers and their lines of authority (and the resulting levels of responsibility) should be fully defined. The organization chart below demonstrates lines of authority and responsibility that could be used as a basis for responsibility reporting.

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    To identify the items over which each manager has control, the lines of authority should follow a specified path. For example, in the picture above we show that a department supervisor may report to a store manager, who reports to the vice president of operations, who reports to the president. The president is ultimately responsible to stockholders or their elected representatives, the board of directors. In a sense, the president is responsible for all revenue and expense items of the company, since at the presidential level all items are controllable over some period. The president often carries the title, Chief Executive Officer (CEO) and usually delegates authority to lower level managers since one person cannot keep fully informed of the day-to-day operating details of all areas of the business.

    The manager’s level in the organization also affects those items over which that manager has control. The president is usually considered a first-level manager. Managers (usually vice presidents) who report directly to the president are second-level managers. Notice on the organization chart that individuals at a specific management level are on a horizontal line across the chart. Not all managers at that level, however, necessarily have equal authority and responsibility. The degree of a manager’s authority varies from company to company.

    While the president may delegate much decision-making power, some revenue and expense items remain exclusively under the president’s control. For example, in some companies, large capital (plant and equipment) expenditures may be approved only by the president. Therefore, depreciation, property taxes, and other related expenses should not be designated as a store manager’s responsibility since these costs are not primarily under that manager’s control.

    The controllability criterion is crucial to the content of performance reports for each manager. For example, at the department supervisor level, perhaps only direct materials and direct labor cost control are appropriate for measuring performance. A plant manager, however, has the authority to make decisions regarding many other costs not controllable at the supervisory level, such as the salaries of department supervisors. These other costs would be included in the performance evaluation of the store manager, not the supervisor.

    Watch this short video to further explain the concept of responsibility accounting and to give you a preview of the rest of the chapter.

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    A YouTube element has been excluded from this version of the text. You can view it online here: http://pb.libretexts.org/temp/?p=410

    Decentralization is the dispersion of decision-making authority among individuals at lower levels of the organization. In other words, the extent of decentralization refers to the degree of control that segment managers have over the revenues, expenses, and assets of their segments. When a segment manager has control over these elements, the investment center concept can be applied to the segment. Thus, the more decentralized the decision making is in an organization, the more applicable is the investment center concept to the segments of the company. The more centralized the decision making is, the more likely responsibility centers are to be established as expense centers.

    Some advantages of decentralized decision making are:

    • Managing segments trains managers for high-level positions in the company. The added authority and responsibility also represent job enlargement and often increase job satisfaction and motivation.
    • Top management can be more removed from day-to-day decision making at lower levels of the company and can manage by exception. When top management is not involved with routine problem solving, it can devote more time to long-range planning and to the company’s most significant problem areas.
    • Decisions can be made at the point where problems arise. It is often difficult for top managers to make appropriate decisions on a timely basis when they are not intimately involved with the problem they are trying to solve.
    • Since decentralization permits the use of the investment center concept, performance evaluation criteria such as ROI and residual income (to be explained later) can be used.