Responsibility Accounting with an In-Depth View on Its Organizational Protocol - Coursework Example

Responsibility Accounting Name Institution of affiliation Introduction Responsibility Accounting is regarded as to as an internal organization procedure in accounting and budgeting. The activities of a company are usually are planned into different departments which are headed by managers who coordinate the task and process under each. The managers are usually ranked according to their department performance or activity. Responsibility accounting is very important in the budgeting process because, a separate budget is made for each of the departments hence; the budgetary allocation becomes easier as well as the productivity to be measured (Christensen, Feltham & Şabac, 2003). It is evident that the main aim of responsibility accounting is in ensuring accountability in the departmental heads in that their performance is looked at directly from the department they head and not the business as a whole. Prior to this, most of the managers ranking was based on the performance of the organization, that is when the company is doing fine, then all managers are considered to be doing fine and if the company is doing badly then all managers are performing poorly. This is an unfair procedure and responsibility accounting has brought a change in this light. This paper will therefore look into responsibility accounting in an in-depth view on its organizational protocol and method of evaluation. On this, responsibility centers will take center stage. Basic requirements In the analysis and use of responsibility accounting, then a number of things must first be looked at in order to implement the system. Primarily, the main idea is that the organization should be large enough for it to be separated into department depending on the nature of the activities of the company (Changcui, & Xiaoting, 2006). Care should be taken to ensure that the departments are not too big while also not too small. When too big, then it beats the purpose since the manager will be overwhelmed by the job since a lot will be under him. On the other hand, if small, then there will be wastage of funds in terms of budgeting for the different departments and in the salaries of the different organizations Moreover, the various managers under the different departments should have their lines of responsibility, powers and limitations clearly defined to prevent overlapping of duties (Arya, Glover & Radhakrishnan, 2007). Concept of control In terms of the managers, they should have control of the department. However, this is not the case especially since some activities rely on other departments or even on outside influences. In line with this, during the rating of the performance of the different managers, there are two kinds of control that are looked at. Absolute control This is the complete control that the manager has in a number of aspects under their department. This kind of control gives rise to the controllable costs and revenues in the reports. Here the manager is judged harshly on his performance since he has control over factors responsible for success. Relative control This is the control that the manager has but is also influenced by other factors. Relative control is the basis of the uncontrollable costs since the manager does not have complete control over these factors. Due to this fact, criticism in terms of these uncontrollable items is not as harsh. However, it is important to note that criticism is still there since the manager still has some form of control. Responsibility centers In terms of responsibility accounting, the company first needs to be divided into different departments for example the marketing department, the production department, sales department, and the human resource department. Each of these departments has a line of work they are responsible for. Based on their work, responsibility accounting groups the different department into responsibility centers based on their function to the organization. Four responsibility centers are the expense center, profit center, revenue center and investment center. In terms of the departments listed above, then the sales department would fall into the revenue center, the human resource department could fall into both the investment center and the expense center while the production department could fall into the investment and expense center (Changcui, & Xiaoting, 2006). This clearly shows that the responsibility centers are based on the work done by each of the departments. Revenue Centers The revenue departments are synonymous and identifiable with the creation of revenue streams for the corporations. Revenue is creation is through the sales of goods and services. The managers of the revenue centers are the ones responsible for the streaming of revenue that the department is involved with, therefore, when the report is made, the criticism of the manager is usually based on his or her performance and the revenue achieved (Higgins, 2012). The marketing department also falls in the revenue center. There are small cost in the revenue center like salaries, office rent and taxes. Managers need to maximize profits and reduce costs associated with the department. A manager of a cost center essentially should be a person qualified in the departments of sales and marketing. He should be able to make informed decisions in order to maintain high sales Revenue centers have a main disadvantage of being judged on the level of sales that they make for the organization, regardless of the costs incurred. However, the main reason for conducting business is to make profits and therefore costs should be looked into with the same regard with the revenues with profits in mind (Bhattacharyya, 2011). Cost centers Cost center is the direct opposite of the revenue centers in that they add to the profitability of a company indirectly. These centers are usually involved with the company costs, making it the most dreaded department. Reduction of these costs leads to the increase of the organization’s profits. Unlike the revenues departments, which still need to consider costs, the cost center is purely based on analyzing costs. However, some of the departments are not only involved in the reduction in costs but generally in using up the companies funds (Miller, 2002). Primarily, this is because the departments such as staffing, research and development and customer service are only involved in using funds of the organization but do not have revenue streams that can be directly attributable to them (Duska, Duska & Ragatz, 2011). Profit centers These departments are not only involved in the costs but also the revenues that the firm is involved in. The department is therefore, a mixture of both the cost and revenue center. The profits centers pay attention to costs and also revenues. Therefore, this department generates its own revenues and has considerable costs. The manager of such a cost center is therefore expected to make massive decisions. Primarily, this is in determining the units to be sold dependent on the marginal costs involved and which goods are more profitable than others are. Investment centers The investment center is those departments that utilize capital directly and thereafter have a direct inclination to the profitability of the business. Therefore, in an investment center, the manager is directly responsible over a number of items. Primarily these are the assets, revenues, expenses, assets and profitability. Due to this fact, the departments even have their own financial statements mainly in the line of the balance sheet and income statement. Therefore, in terms of the reports, the investment center is mainly based on return on investment. This takes to forms of increasing the percentage of sales while still simultaneously reducing expenses and investment in the asset. Advantages of Responsibility Accounting The main advantage of responsibility accounting is that it is a better system of control. Mainly, in there is the delegation of authority to different managers. The emphasis of this is not only in division of labor but also specialization (Horngren et. al., 2002). Another advantage is increased motivation among the workforce. Each department is ranked based on its performance, whether it is a cost, revenue, investment or profit center. Due to such evaluation, each department wants to outperform itself and the others. All employees of the various departments will be motivated to ensure that their department is not the one being targeted in terms of poor performance. It also provides a comparison tool. As noted earlier, responsibility accounting is not only involved in accounting but also budgeting. Budgeting is the first process where an organization allocates costs to the different departments based on their needs as an estimate; on the other hand, accounting is based on actual figures (Horngren et. al., 2002). The comparison of the two is essential to ensure that there is no wastage or under use of given funds to a department. Responsibility accounting therefore provides a platform for the comparison of the two, the budget and the actual accounting figures. Disadvantages of Responsibility Accounting The primary disadvantage of responsibility accounting is increased competition among the various departments based on the responsibility sectors (Tsamenyi & Uddin, 2010). This is primarily the case since many of the departments are ranked. Most of the departments even though not directly said are in constant competition. Another disadvantage lies in the fact that there might be a conflict in terms of departments having overlapping responsibility centers. A perfect example is in the human resource department, which can be both a cost center and still a profit and revenue center. In this regard, the evaluation becomes hard since it needs to be defined from a number of different angles. In the end, this leads to the organization having a complex evaluation technique. Moreover, the issue of responsibility accounting is only feasible for large-scale companies and corporations involved in a number of activities (Tsamenyi & Uddin, 2010). Therefore, small business especially those that cannot be departmentalized cannot make use of this system. Conclusion It is therefore evident that responsibility accounting is a key management, budgeting and accounting tool. Essentially, it involves the departmentalization of the organization based on responsibility centers. There are four kinds of responsibility centers, which is the cost center, revenue center, profit center and investment center. Each of the centers is different on the aspects it is involved in from costs to revenues to the nature of heavy investment. Each of the responsibility centers has its own advantages and disadvantages. However, as a whole the main advantages include increased motivation, better organizational structure, a good comparison tool and simplicity in evaluation. On the other side, the main disadvantage is the fact that it encourages competition and confusion when the departments overlap. However, in totality, responsibility accounting is beneficial to the organization with its pros greatly outweighing its cons. References Arya, A., Glover, J., & Radhakrishnan, S. (2007). The controllability principle in responsibility accounting: Another look. In Essays in accounting theory in honor of Joel S. Demski (pp. 183-198). Springer New York. Bhattacharyya, D. (2011). Management accounting. Delhi: Pearson. Changcui, L., & Xiaoting, K. (2006). Positive Research on Society Responsibility Accounting Information Highlight——the Empirical Data from 2002 to 2004 on the Shanghai Stock Exchange [J]. Accounting Research, 10, 006. Christensen, P. O., Feltham, G. A., & Şabac, F. (2003). Dynamic incentives and responsibility accounting: a comment. Journal of Accounting and Economics, 35(3), 423-436. Duska, R. F., Duska, B. S., & Ragatz, J. (2011). Accounting ethics. Chichester, West Sussex, U.K: Wiley-Blackwell. Higgins, J. A. (2012). Responsibility accounting. Chicago, Ill.: Arthur Andersen. Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2002). Introduction to Management Accounting: Chapters 1-17. Prentice Hall. Miller, E. L. (2002). Responsibility accounting and performance evaluations. New York Mitra, J. K. (2009). Advanced cost accounting. New Delhi: New Age International (P) Ltd., Publishers Otley, D. (2006). 13 Trends in budgetary control and responsibility accounting. Contemporary issues in management accounting, 291. Tsamenyi, M., & Uddin, S. (2010). Research in accounting in emerging economies: Vol. 10. Bingley: Emerald. Read More