Chapter 6

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CHAPTER 6
RESPONSIBILITY ACCOUNTING
6.1 Organizational structure and responsibility accounting

Organizational structure is an arrangement of lines of responsibility within the entity. To attain
the goals described in the master budget, an organization must coordinate the efforts of all its
employees – from the top executive through all levels of management to every supervised
worker. Coordinating the organization efforts means assigning responsibility to managers who
are accountable for their actions in planning and controlling human and physical resources.
Management is in essence a human activity. Budgets exist not for their own sake, but to help
managers achieve their own pursuits and thereby contribute to meeting those of the organization.
Each manager, regardless of level, is in charge of a responsibility center. A responsibility center
is a part, segment or subunit of an organization whose manager is accountable for a specified set
of activities. The higher the manager’s level, the broader the responsibility center he or she
manages and, generally, the larger the number of subordinates who report to him or her.
6.2 Responsibility accounting

is a system that measures the plans (by budgets) and actions (by actual results) of each
responsibility center.
Four major types of responsibility center are:
1) Cost center – manager accountable for costs only.
2) Revenue center – manager accountable for revenues only.
3) Profit center – manager accountable for revenues and costs.
4) Investment center – manager accountable for investments, revenues and costs.
6.3 Feedback:
Budgets coupled with responsibility accounting provide systematic help for managers,
particularly if managers interpret the feedback carefully. Managers, accountants and students of
management accounting sometimes use variances (the difference between the actual results and
the budgeted results) appearing in the responsibility accounting system to pinpoint fault for
operating problems. In looking at variances, managers should focus on whom they should ask
and not on whom they should blame. Variances only suggest questions or direct attention to
persons who should have the relevant information. Nevertheless, variances, properly used, can be
helpful in four ways:
 Early warning. Variances alert managers early to events not easily or immediately
evident. Managers can then take corrective actions or exploit available opportunities.
 Performance valuation. Variances inform managers about how well the company has
performed in implementing its strategies.
 Evaluating strategy. Variances sometimes signal to managers that their strategies are
ineffective.
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Complied by: Sitota, (Ph.D. Candidate)
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 Communicating the goals of the organization. The budget-making exercise and budgeting
information are useful in conveying to managers across the organization the goals of
subunits and the wider corporate goals.
6.4 Responsibility and controllability

Controllability is the degree of influence that a specific manager has over costs, revenues or
other items in question. A controllable cost is any cost that is primarily subject to the influence
of a given manager of a given responsibility centre for a given time span. A responsibility
accounting system could either exclude all uncontrollable costs from a manager’s performance
report or segregate such costs from the controllable costs. For example, a machining supervisor’s
performance report might be confined to quantities (not costs) of direct materials, direct
manufacturing labor, power and supplies.
In practice, controllability is difficult to pinpoint:
1 Few costs are clearly under the sole influence of one manager. For example, costs of
direct materials may be influenced by a purchasing manager, but such costs also depend
on market conditions beyond the manager’s control. Quantities used may be influenced
by a production manager, but quantities used also depend on the quality of materials
purchased. Moreover, managers often work in teams. How can individual responsibility
be evaluated in a team decision?
2 With a long enough time span, all costs will come under somebody’s control. However,
most performance reports focus on periods of a year or less. A current manager may have
inherited problems and inefficiencies from his or her predecessor. For example, present
managers may have to work under undesirable contracts with suppliers or trade unions
that were negotiated by their predecessors. How can we separate what the current
manager actually controls from the results of decisions made by others? Exactly what is
the current manager accountable for? Answers to such questions may not be clear cut.
6.5 Budgeting slack: Padding the budget
Budget padding means underestimating revenue or overestimating costs during the time of
budget preparation. The difference between the revenue or cost projection that a person provides
and a realistic estimate of revenue or cost is called budgetary slack. Therefore budgets
formulated with the active participation of all affected employees are generally more effective
than budgets imposed on subordinates – participative budgeting.
THANK YOU!
2
Complied by: Sitota, (Ph.D. Candidate)

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NO PAIN; NO GAIN

6.1 Organizational structure and responsibility accounting

6.2 Responsibility accounting

6.4 Responsibility and controllability

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