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TOPIC 6 - Responsibility Accounting

Responsibility accounting measures the performance of decentralized units using accounting results. It recognizes decision centers throughout an organization and traces costs, revenues, assets, and liabilities to individual managers. There are three main types of responsibility centers: 1) a cost center, where a manager controls controllable costs but not apportioned costs, and performance is measured through variance or efficiency analysis, 2) a profit center, where a manager controls costs and revenues and performance is measured through profit margins or contribution ratios, and 3) an investment center, where a manager controls costs, revenues, and some investment decisions, and performance is measured through returns on investment or residual income.

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523 views1 page

TOPIC 6 - Responsibility Accounting

Responsibility accounting measures the performance of decentralized units using accounting results. It recognizes decision centers throughout an organization and traces costs, revenues, assets, and liabilities to individual managers. There are three main types of responsibility centers: 1) a cost center, where a manager controls controllable costs but not apportioned costs, and performance is measured through variance or efficiency analysis, 2) a profit center, where a manager controls costs and revenues and performance is measured through profit margins or contribution ratios, and 3) an investment center, where a manager controls costs, revenues, and some investment decisions, and performance is measured through returns on investment or residual income.

Uploaded by

Anthony Otiato
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© © All Rights Reserved
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TOPIC 6: Responsibility Accounting

This is a term used to define the measuring of performance of decentralized units, using account results.
Responsibility accounting recognizes various decision centers throughout an organization and trace costs
(revenues, assets and liabilities) to the individual managers who are primarily responsible for making the
decisions about the costs in question. A responsibility centre is a unit in an organization headed by a manager
having direct responsibility for its performance. Examples of responsibility centers include cost centre, profit
centre and investment centre. These centers are defined below:

6.1 Cost Centre


Cost centre is a production service location activity or item of equipment whose costs maybe attributed to
cost units. It is therefore any unit of the organization to which cost can be attributed.
Managers in the cost centre have control over various controllable costs (That is costs incurred in the centre)
but may have no control for any alterations apportioned from other cost centres.

Performance measurement in a cost centre can be accomplished through variance analysis or through
efficiency measures such as output/input ratio.

6.2 Profit Centre


A profit centre is a sub unit of an organization such as a division of a company to which both revenue and
costs are assigned so that the profitability of that subunit can be measured. It is also referred to as a strategic
business unit.

Managers in a profit centre have control over costs, and revenue decisions. Performance measurement in a
profit centre can be accomplished through the use of profit margin or contribution/sales ratio.

6.3 Investment Centre


An investment centre is a subunit of the organization where managers have control over cost, revenue and
some investment decisions. Managers can buy some assets so as to increase profitability.

Performance in an investment centre is measured by ratios such as return on investment, which relates the
profit earned to the amount of capital invested. Performance can also be measured from absolute measures
such as residual income.

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