Maintenance of responsibility accounting system

The implementation and maintenance of responsibility accounting system is based upon information relating to inputs and outputs. The physical resources utilized in an organization such as raw material used and labor hours consumed, are termed as input. These input expressed in the monetary terms are known as costs. Similarly outputs expressed in monetary terms are called revenues. Thus responsibility accounting is based on cost and revenue information. Effective responsibility accounting requires both planned and actual financial information. It is only the historical cost and revenue data but also the planned future data which is important for the implementation of responsibility accounting system. It is through budget that responsibility for implementing the plans communicated to each level of management. The use of fixed budgets, flexible budget and profit planning are all incorporated into one overall system of responsibility accounting. The whole concept of responsibility accounting is focused around identification of responsibility center. The responsibility center represents the sphere of authority or decision points in an organization. In small firm, one individual or small groups of individuals who are usually the owners, may possibly manage or control the entire organization. However, for effective control, a large firm is usually, divided into meaningful segments, departments or divisions. These sub units or divisions of organization are called responsibility center. A responsibility center is under control of an individual who is responsible for the control of activities of that sub unit of the organization. This responsibility center may be very small sub unit of the organization, as an individual could be made responsible for one machine used in manufacturing operations.

A sound organization structure with clear cut lines of authority responsibility relationship is a prerequisite for establishing a successful responsibility accounting system. Further, responsibility accounting system must be so designed as to suit the organization structure of the organization. It must be founded upon the existing authority responsibility relationships in the organization. In fact, responsibility accounting system should parallel the organization structure and provide financial information to evaluate actual results of each individual responsible for a function.