Top 14 Principles of Responsibility Accounting | Cost Accounting

The following points highlight the top fourteen principles of responsibility accounting.

1. Determination of responsibility centres by dividing the organisation into various responsibility centres.

2. A target is fixed for each responsibility centre in consultation with the person responsible for the responsibility centre.

3. Actual performance is compared with the target.

4. The variances from the budgeted plan are analysed so as to fix the responsibility of centres.

5. Timely corrective action is taken by the higher management and is communicated to the responsibility centre i.e., the individual responsible so that the performance is improved in future.

6. Offer incentive as inducement for more and more improvement.

7. All apportioned costs and policy costs are excluded in determining the responsibility for costs because an individual manager has no control over these costs. Only those costs and revenues over which an individual has a definite control can be attributed to him for evaluating his performance.

For getting a correct appraisal of the performance of a particular responsibility centre, distinction should be made between controllable costs and uncontrollable costs. Controllable costs are those costs which can be influenced or controlled by a specified person whereas uncontrollable costs are those which cannot be controlled or influenced by the action of a specified individual.

Uncontrollable costs should not be taken into consideration while evaluating the performance of a particular responsibility centre over which the centre has no control.

8. Report to responsible individual for action.

9. To get the desirable result of responsibility accounting, a suitable transfer pricing policy should be followed. Transfer pricing is the price that one sub-unit of an organisation charges for a product or service supplied to another sub-unit of the same organisation. It is desirable that a suitable method of intercompany transfer should be used as it affects the profits of both transferor and transferor units.

10. The aim of responsibility accounting should not be to place blame on managers rather it should be to evaluate their performance and provide feedback so that future performance may be improved. A responsibility accounting system should be positive in approach and should motivate people. It should not be taken as a device to punish people.

It must look into the human aspect of subordinates and should be based on mutual interest. To ensure the success of a responsibility accounting system and for getting the willing cooperation of all persons involved in a responsibility centre, human aspect of responsibility accounting should be given due weightage.

11. The success of responsibility accounting is based on performance reports also known as responsibility reports showing the performance achieved by various responsibility centres. Responsibility accounting is a control device. It is, therefore, desirable that deviations from the budgeted performance should be reported at the earliest so that corrective action may be taken for the future.

For the purpose of control, it is essential that there should be adequate means of reporting the performance of various responsibility centres to the various levels of management so that they may be guided in the line of action to be pursued. Management needs information for arriving at decisions and the evaluating performance to run the concern efficiently.

The required information can be made available to the management by means of reports. Reports can be defined as means of communication, usually in +he written form, of facts which should be brought to the attention of the various levels of management who can use them to take suitable action for the purpose of control.

Thus, presentation of regular reports to help management is the most important task of a responsibility centre as good reporting is now believed to be the nerve of a successful organisation.

Characteristics of Performance Reports:

Success of responsibility accounting depends to a good deal on quality of performance reports that are generated in the organisation.

To be effective, performance reports should have the following characteristics:

(i) Requirements of recipient. First point in the direction is to focus the attention on the requirements of the recipient of report.

(ii) Reporting in conformity with organised chart. This is essential to promote accountability and discipline. There should be individual report for each organisation level.

(iii) Number of reports would be kept to a minimum because a number of reports breed confusion, duplicity of efforts and uncalled for wastage.

(iv) Reports should be made timely, i.e., daily, weekly or monthly depending on the need of the management.

(v) Reports should be designed to motivate manager to initiate connective action.

(vi) Reports should pinpoint responsibility.

(vii) Reports should be standardized as far as possible. Style of presentation should be consistent. Conventional form, size and paper should be used as far as possible.

(viii) Facts should be stated concisely and in logical manner.

(ix) Comparison ratio and trend should be shown.

(x) Reporting should be based on management by exception principle.

(xi) Duplication of contents should be avoided and variances should be shown as favourable or adverse.

(xii) Reports should be revised when conditions warrant special report should be made if there is need for the same.

(xiii) Visual presentation is more effective and communicative and these aids should be extensively used.

(xiv) The distribution of reports should be properly controlled.

12. Accounting System is to be designed in such a way which may provide and accumulate accounting information by areas of responsibility.

Now-a-days, a new term ‘MIS’ (i.e., Management Information System) is very popular. The purpose of MIS is reporting and is to provide the necessary information to the managers and supervisors at various levels to help them to discharge their functions of organising, planning, control and decision making.

MIS is a scientific way of collecting; processing, storing and communicating information relating to the various activities of an organisation to the various levels of management so that management may be facilitated in discharging its functions efficiently and run the organisation in an efficient way for the betterment of all.

MIS enhances the quality of management and growth of the organisation by providing timely, accurate and meaningful information for planning, organisation and control. No management can ever succeed without continuous appraisal of its performance and MIS by providing timely and meaningful information can be helpful in this regard.

MIS should be developed keeping in view information needs of all managers and it should be based on cost-benefit analysis. It should be designed in such a way that it covers all aspects of the organisation and it should be flexible to meet changing management needs and changing inputs.

13. Management has limited time and it need not burden itself with respect to those activities of the responsibility centres which proceed according to the budgeted performance. It is only in case of below or above budgeted performance that they have to concentrate their attention.

Thus, an effective responsibility accounting system must provide for management by exception i.e., it should drawn the attention of the management on significant deviations from budgeted/standard performance and not burden the management with all kinds of routine matters.

14. The management of an organisation expects from each responsibility centre that it should not only achieve its own objective necessary for evaluation of its performance but should achieve the goal congruence.

Usually a conflict between a responsibility centre and the company as a whole is faced when products or services are transferred from one responsibility centre to the other responsibility centre. Such a conflict becomes more apparent when profitability is used as a criterion for evaluating the performance of each responsibility centre.

Under such a set up a manager of a responsibility centre is free to fix a transfer price for goods and services which may provide incentive. It is possible that such a price may fail to achieve the objective of goal congruence i.e., there may be a conflict between a responsibility centre’s goal and goal of the company.

In such a case, the management of the company should dictate the price keeping in view the best interest of the company as a whole.