Responsibility Accounting

Posted in Finance, Accounting and Economics Terms, Total Reads: 983
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Definition: Responsibility Accounting

For organizations with voluminous operating activities, it is not possible to maintain the same amount of controllability in all the departments. Thus, the responsibilities are decentralized into separate parts which can be effectively managed such that the firm attains its goals. The separate parts are known as responsibility centers that can be revenue centers, cost centers, investment centers and profit centers.


Responsibility Accounting Process:

-          Divide organization into small manageable parts

-          Assign responsibility to each center in terms of revenues and costs

-          Measure performance of each center in terms of pre-specified targets


Advantages:

-          Each center can work independently and efficiently

-          Targets and efforts are correlated, hence any loopholes are easily identified

-          Central Management does not have to continuously monitor all the operating activities

-          Appropriate Decision making is guaranteed


Disadvantages:

-          The success entirely depends on the managers of responsibility centers

-          Effective use of the tool should be known to the management

-          Employees would look for incentives and rewards once their efforts are conspicuously measured

 

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