Responsibility Accounting
Responsibility accounting system is the system that measures, projects and analyze the
performance of responsibility centre. It assigns actual and planned revenue and costs to the
responsibility centre. Costs and revenue are traced directly to responsibility center when it is
feasible and economical. But when they cannot be traced directly, they are allocated in
responsibility center. Responsibility accounting system records budgeted costs and revenue
which are not dealt by company’s cost and financial accounting system.
Depending on the nature of manager’s responsibility for center’s monetary inputs/outputs,
responsibility center fall into one of the given four categories:

Revenue Center: It is the responsibility center which is related with revenue or output. It
involves selling to customers or transferring products or service to other responsibility
center and putting monetary value on the transfers.

Cost centre: It is the responsibility center where manager is responsible for cost/output
but not revenue.

Profit center: In profit center, performance is measured as difference between revenue
and cost i.e. output and input.

Investment center: It is the responsibility center where manager is held responsible for
the use of assets as well as profit.
Budget
It is the future allocated expense or plans of actions covering specific time period. It can be
expressed both in monetary and non monetary terms. Budgets are used for short term planning,
evaluating performance and determining compensation. Budget coordinates and communicates
between different units and organization department. Budget provides an excellent guide for
spending.
Master budget
Master budget is the company’s operating and financial budgets. Operating budget covers those
operations that show revenue, expense and change in Working capital over budgeted period.
Financial budget shows planned financing activities such as repayment of debt, issuance of
common stock and new borrowings over budgeted period.
Basic budget types
A. Fixed Budget: It is also known as static budget. It assumes planned output will be
achieved on the basis of which budget’s cost is estimated.
B. Flexible budget: It does not assume the attainment of particular level of output. It shows
planned level of costs at various levels of output. It estimates the expected cost of
production over a range of possible volumes.
Variance reports
It is the output of accounting system. Variance is the difference between budgeted amount and
actual output. It is the first step to measure financial performance of responsibility center.
Disaggregation
Disaggregation is necessary to provide more detail information about the performance as profit
variance moves down through an organization. Variance can be both negative and positive.
Disaggregation helps to identify less controllable factors affecting profit.
Budget Variance disaggregation
Budget variance identifies responsibility center where deviation has occurred, income statement
elements that are affected and provides amount of deviation and its causes to some extent.
Transfer Pricing
It is the price that an organization unit charges other units for transfer of products and services to
them in the same organization. In transfer of goods and services, two decisions should be made:
A. Sourcing decision: Production of product inside the company
B. Transfer price decision: Price of product to be transferred between profit center
A company must establish transfer price system to adopt a profit center form. This affects the
ability to make optimum decisions, as incorrect transfer price create incorrect measurements and
in turn incorrect decisions. Transfer price system is the mechanism for distributing revenue
which helps to accomplish three factors:
 Provide relevant information to each responsibility center to determine optimum tradeoff
between company costs and revenue.
 Maximize company profit by maximizing unit profits.
 Contribution of profit center to company’s total profits.
Based on the nature of business, transfer price system range from simple to complex form. There
are three types of transfer price:
A. Market based: It is the transfer price at which products and services are transferred
between organization units at external market price. It leads to optimal total company
profit realization.
B. Cost based: It is the transfer price at which products and services are transferred at
transferor’s costs. If reliable market prices are not readily available, cost based price is
preferred.
C. Negotiated based: It is the transfer price that is determined on the basis of negotiations
between organizations units involved in internal transfer transaction. It is used if there is
disagreement as to appropriate market transfer price.