Faisal
Acc 301 (Chapter 21)
FAISAL.FAISAL@NEU.EDU.TR
RESPONSIBILITY ACCOUNTING
 It is created when manager in different responsibility
centers is doing accounting transactions in his
department
 Responsibility center:
 If entire organization is divided into units/sections
and units are divided into subunits, then this units
and subunits are called responsibility centers.
Manager is responsible for each center.
Def. of RESPONSIBILITY ACCOUNTING
 Most business is organized into a number of
different sub units that perform different functions.
 E.g. manufacturing to divided into different subunits
i.e., purchasing department, production department,
sales department, shipping department, accounting
department finance department and personal
department
 Finance rep center, accounting responsibility centers
etc.
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 If you organize a business in the above manner,
managers and employees are enabling to specialize
in specific activities.
 Some organization use different names for sub unit
such as division/section/department/branches etc.
Responsibility centers describe a sub unit with an
organization
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 Manager of each sub unit is responsible to directing
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the activities of each sub unit
The following needs for the responsibility center
arises
Planning and allocating resources
Controlling operations
Evaluating the performance
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 Responsibility centers consist on following types
 Cost center:
 Only cost or expense related activities are occurred.
 Manager has the duty to control the cost.
 Top level management then evaluate/ check the
performance of manager whether he controlled the
cost or not.
Cost center Definition
 Cost center is a business section that incurred cost or
expenses but doesn’t directly generate revenue.
 E.g. Maintenance department, data processing
production, financing, accounting, legal services
administrative department and laundry etc.
 The decision making responsibility assigned to cost
center manager, include decision about the input
resource.
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 cost sector are evaluated primary on their ability to
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control cost
The quantity is quality of the services. Income
statement cannot be made in it.
Profit center
: this center generate both revenue and cost
e.g., sale department (marketing), product line
department (production): in profit center, manager
has decision making responsibility over both input
and output related resources.
Responsibility
 They are responsible for using center. resource in
the least costly method, possible to generate the
highest revenue for the business.
 Profitability profit centers are evaluated primary on
their profitability.
Investment Centre Definition
 Profit and earned by profit center are reinvested in
investment center.
 An investment center is a profit center for which,
management has been decision making responsibility for
making significant capital investment related to the
central business activities. To evaluate the performance
of an investment center, it is necessary to measure
objectively the cost of assets used in the center’s
operation.
Responsibility accounting
 An accounting system design to measure the
performance of each center written a business are refer
to as a responsibility accounting system.
 Measuring performance along with the line management
responsibility is an important function of this system In
addition such system provides top management with
information useful in identifying strength and
weaknesses among units throughout the organization.
Responsibility income statement
 This statement shows not only the operating result of
a particular business but also the revenue and
expense of each profit center.
 Such Incremental source enables manager to review
quickly the performance of the various profit centers.
Terminologies used in I.S.
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 Contribution Margin:
 Revenue→ variable cost also amount of revenue available
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to contribute towards fixed cost and operating income
Performance Margin:
Performance margin is a sub total in a responsibility
income statement, design to assist in evaluating the
performance of a manager.
Responsibility Margin:
Revenue→ variable cost and traceable fixed cost
Traceable fixed cost
 Fixed cost those are directly traceable to a specific
center.
 Common fixed cost (indirect fixed cost)
 Jointly benefit several parts of the business. The
level of these fixed cost not change, even if one of the
center is closed. When there is cost one department
then it is also beneficial to the other department.
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 Cutting department cost helps assembly department
and assembly department helps finished
department. Cost is already cutting department
through which the benefits are to the assembly
department.
Important Formulas
 ROA= Responsibility Margin / Aug Total
Assets
 Residual income= Responsibility Margin minimum acceptable return
 Cost- margin per unit= unit selling price –
V.C/Unit
 Count margin ratio= cont. M per unit/unit
sales price*100
Committed fixed cost:
 Fixed cost that are traceable to responsibility center but that
in the short run can’t readily change by the central manager.
E.g. depreciation taxes, It is not under the control of
manager.it is calculated as a whole not by manager in a single
department. It can uncontrolled fixed cost when co. don’t
want to calculate the depreciation cost.
 2. Common fixed cost:
 Fixed costs that are of joint benefits to several responsibility.
Centers E.g. Salary of the store e the raw material which is
beneficial to all departments.
3. controllable fixed cost:
 Fixed cost that are under the direct control of their
central manager e.g. loss of advertising specific
product lines a salaries.
 4. traceable fixed cost:
 Fixed cost those are directly traceable to specific
center. Salaries of employees, depreciation etc. and b
are the types of T.F.C.
Thank you!