Responsibility Accounting

Summary

This video introduces responsibility accounting, focusing on the management of costs and revenues at different levels of responsibility. Key components include linking costs and revenues to specific managers, who control them within a set budget. The video explains three types of responsibility centers: cost centers, profit centers, and investment centers, each with their own evaluation criteria. Responsibility reports help assess managerial performance, with reports for cost centers focusing on controllable costs, for profit centers including controllable margin, and for investment centers adding return on investment (ROI). Overall, responsibility accounting enhances managerial effectiveness.

Takeaways

• 😀 Responsibility accounting links costs and revenues to specific responsibility levels in an organization.
• 😀 Responsibility accounting focuses on costs and revenues that are controllable by the responsible manager.
• 😀 Budget data plays a crucial role in evaluating performance in responsibility accounting.
• 😀 A responsibility center is any unit or manager with control over specific activities.
• 😀 Responsibility reports are flexible budgets used to evaluate managerial performance.
• 😀 There are three types of responsibility centers: cost centers, profit centers, and investment centers.
• 😀 A cost center is responsible only for costs, with no responsibility for revenue generation.
• 😀 A profit center controls both costs and revenues, and its responsibility report includes both for evaluation.
• 😀 A profit center's performance is often evaluated using a metric called controllable margin (contribution margin minus controllable fixed costs).
• 😀 An investment center controls revenues, costs, and asset-related decisions, and is evaluated based on controllable margin and return on investment (ROI).
• 😀 ROI in an investment center is calculated by dividing controllable margin by average operating assets, both of which are controllable by the manager.

Q & A

What is responsibility accounting?

Responsibility accounting is a system that links costs and revenues directly to specific levels of responsibility within an organization, allowing for evaluation based on controllable costs and budget data.

What are the primary components of a responsibility accounting system?

The primary components of a responsibility accounting system include linking costs and revenues to specific responsibility levels, controlling costs at that level, and using budget data for evaluation.

What is the focus of responsibility accounting?

Responsibility accounting focuses on controllable costs at different levels of management, aiming to evaluate the performance of managers based on costs they can influence.

What are responsibility centers in responsibility accounting?

Responsibility centers are divisions or departments within a company where managers are responsible for controlling specified sets of activities, which may include costs, revenues, and assets.

How are managers evaluated in responsibility accounting?

Managers are evaluated using responsibility reports, which act like flexible budgets, focusing on the costs and revenues they can control and influence.

What are the three types of responsibility centers?

The three types of responsibility centers are cost centers, profit centers, and investment centers.

What is a cost center, and how is it evaluated?

A cost center is a department that incurs only costs and does not generate revenue. It is typically evaluated based on controllable costs, which the manager can influence.

What is a profit center, and what does its responsibility report contain?

A profit center is a department or division that incurs costs and generates revenue. Its responsibility report includes both revenues and controllable costs, and it also calculates the controllable margin (contribution margin minus controllable fixed costs).

What is an investment center, and how is its responsibility report different from the others?

An investment center is a division that controls both revenues and costs, as well as asset-related decisions. Its responsibility report includes the controllable margin and an additional calculation of return on investment (ROI), which is calculated by dividing the controllable margin by the average operating assets.

Why is responsibility accounting beneficial for organizations?

Responsibility accounting helps improve managerial performance by clearly defining areas of control, encouraging accountability, and making it easier to evaluate managers based on the costs and revenues they can influence.