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CFO Fundamentals: Your Quick Guide to Internal Controls, Financial Reporting, IFRS, Web 2.0, Cloud Computing, and More by ALLISON I. SHIM, JOEL G. SIEGEL, JAE K. SHIM

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CHAPTER FIFTEEN

The What and Why of Responsibility Accounting

RESPONSIBILITY ACCOUNTING BASICS

What is responsibility accounting?

Responsibility accounting is the system for collecting and reporting revenue and cost information by areas of responsibility. It operates on the premise that managers should be held responsible for their performance, the performance of their subordinates, and all activities within their responsibility center.

What are the benefits of responsibility accounting?

Responsibility accounting, also called profitability accounting and activity accounting, has four advantages:

1. It facilitates delegation of decision making.

2. It helps management promote the concept of management by objective. In management by objective, managers agree on a set of goals. A manager’s performance is then evaluated based on his or her attainment of these goals.

3. It provides a guide to the evaluation of performance and helps to establish standards of performance, which are then used for comparison purposes.

4. It permits effective use of the concept of management by exception, which means that the manager’s attention is concentrated on the important deviations from standards and budgets.

What are the conditions for an effective responsibility accounting system?

Three basic conditions are necessary for an effective responsibility accounting system:

1. The organization structure must be well defined. Management responsibility and authority must go hand in hand at all levels ...

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