Responsibility Accounting

This is a term used to define the measuring of performance of decentralized units, using account results. Responsibility accounting recognizes various decision centers throughout an organization and trace costs (revenues, assets and liabilities) to the individual managers who are primarily responsible for making the decisions about the costs in question. A responsibility centre is a unit in an organization headed by a manager having direct responsibility for its performance. Examples of responsibility centers comprise cost centre, profit centre, and investment centre. These centers are defined below:

Cost Centre:

Cost centre is a production service location activity or item of equipment whose costs may be attributed to cost units. It is therefore any unit of the organization to which cost can be attributed.

Managers in the cost centre have control over various controllable costs (That is costs incurred in the centre) but may have no control for any alterations apportioned from other cost centers.

Performance measurement in a cost centre can be accomplished through variance analysis or through efficiency measures such as output/input ratio.

Profit Centre:

A profit centre is a subunit of an organization such as a division of a company to which both revenue and costs are assigned so that the profitability of that subunit can be measured. It is also termed as strategic business unit.

Managers in a profit centre have control over costs, and revenue decisions. Performance measurement in a profit centre can be accomplished through the use of profit margin or contribution/sales ratio.

Investment Centre:

An investment centre is a subunit of the organization where managers have control over cost, revenue and some investment decisions. Managers can buy some assets so as to increase profitability.

Performance in an investment centre is measured by ratios such as return on investment which relates the profit earned to the amount of capital invested. The performance can also be measured from absolute measures like residual income.