Responsibility accounting
Responsibility
accounting involves a company’s internal accounting and budgeting. The
objective is to assist in the planning and control of a company’s
responsibility centers—such as decentralized departments and divisions.
Responsibility
accounting usually involves the preparation of annual and monthly budgets for
each responsibility center. Then the company’s actual transactions are
classified by responsibility center and a monthly report is prepared. The
reports will present the actual amounts for each budget line item and the
variance between the budget and actual amounts.
Responsibility
accounting allows the company and each manager of a responsibility center to
receive monthly feedback on the manager’s performance.
Responsibility Centre
A
responsibility center is a part or subunit of a company for which a manager has
authority and responsibility. The company’s detailed organization chart is a
logical source for determining responsibility centers. The most common responsibility
centers are the departments within a company.
When
the manager of a responsibility center can control only costs, the
responsibility center is referred to as a cost center. If a manager can
control both costs and revenues, the responsibility center is known as a profit
center. If a manager has authority and responsibility for costs, revenues, and
investments the responsibility center is referred to as an investment
center.
1: Cost Center
A
cost center is often a department within a company. The manager and employees
of a cost center are responsible for its costs but are not responsible for
revenues or investment decisions.
A
manufacturer’s cost centers include each of its production departments as well
as the manufacturing service departments such as the maintenance department or
quality control department. Other examples of cost centers include the human
resource department, the IT department, the accounting department, and so on.
Cost
centers are not limited to departments. There might be several cost centers
within a department. For example, each assembly line could be a cost center.
Even a special machine could be a cost center.
Cost
centers are usually associated with the topic of decentralization,
responsibility accounting, and planning and control.
2. Revenue Center
A manager of a revenue center is held accountable for the revenue attributed to the sub-unit. Revenue centers are responsibility centers where managers are accountable only for financial outputs in the form of generating sales revenue. A revenue center's manger may also be held accountable for selling expenses such as sales persons' salaries, commissions, and order receiving costs.
3. Profit Center
Profits are the excess of revenue over the total expenses. Therefore, the manager of a profit center is held accountable for the revenues, costs, and profits of the center. A profit center is aresponsibility center in which inputs are measured in terms of expenses and outputs are measured in terms of revenues.
4. Investment Center
The manger of investment center is held accountable for the division's profit and the invested capital used by the center to generate its profits. Investment centers consider not only costs and revenues but also the assets used in the division. Performance of an investment center are measured in terms of assets turnover and return on the capital employed.
A manager of a revenue center is held accountable for the revenue attributed to the sub-unit. Revenue centers are responsibility centers where managers are accountable only for financial outputs in the form of generating sales revenue. A revenue center's manger may also be held accountable for selling expenses such as sales persons' salaries, commissions, and order receiving costs.
3. Profit Center
Profits are the excess of revenue over the total expenses. Therefore, the manager of a profit center is held accountable for the revenues, costs, and profits of the center. A profit center is aresponsibility center in which inputs are measured in terms of expenses and outputs are measured in terms of revenues.
4. Investment Center
The manger of investment center is held accountable for the division's profit and the invested capital used by the center to generate its profits. Investment centers consider not only costs and revenues but also the assets used in the division. Performance of an investment center are measured in terms of assets turnover and return on the capital employed.
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