Responsibility Accounting
ROLE OF RESPONSIBILITY ACCOUNTING IN FOSTERING GOAL CONGRUENCE
RATIONALE:
It is impossible for top managers to make all the necessary decisions about everything except in very small organizations. Somehow at some point he has to delegate some decisions to those who are at the lower levels and are more knowledgeable to the everyday detail of the company’s operation.
By empowering lower level managers to make decisions, decision-making authority is spread throughout the organization rather than being confined to a few top executives. Attached with this decentralized approach, are costs and decisions at each sub-level that managers have to be responsible for.
Decentralized organizations need responsibility accounting systems to link the manager’s decision-making authority with accountability for the outcomes of those decisions and to make sure that they are in congruence with the organization’s goals.
PERSONAL ANALYSES AND DISCUSSION:
The term responsibility center is used in any part of the organization whose managers has control and is accountable for cost, profit or investment.
An Organizational View of Responsibility Centers
• The manager of an investment center has control over cost, revenue, and investments in operating assets. Investment centers are usually evaluated using return on investment (ROI) or residual income measures.
• The manager of a profit center has control over both costs and revenue, but not over the use of investment funds. They are often evaluated by comparing actual profit to targeted or budgeted profit.
• The manager of a cost center has control over costs, but not over revenue or the use of investment funds. Managers of cost centers are expected to minimize costs while providing the level of products and services demanded by other parts and stakeholders of the organization.
For this decentralized structure to be effective, organizations need to employ responsibility accounting.
RATIONALE:
It is impossible for top managers to make all the necessary decisions about everything except in very small organizations. Somehow at some point he has to delegate some decisions to those who are at the lower levels and are more knowledgeable to the everyday detail of the company’s operation.
By empowering lower level managers to make decisions, decision-making authority is spread throughout the organization rather than being confined to a few top executives. Attached with this decentralized approach, are costs and decisions at each sub-level that managers have to be responsible for.
Decentralized organizations need responsibility accounting systems to link the manager’s decision-making authority with accountability for the outcomes of those decisions and to make sure that they are in congruence with the organization’s goals.
PERSONAL ANALYSES AND DISCUSSION:
The term responsibility center is used in any part of the organization whose managers has control and is accountable for cost, profit or investment.
An Organizational View of Responsibility Centers
• The manager of an investment center has control over cost, revenue, and investments in operating assets. Investment centers are usually evaluated using return on investment (ROI) or residual income measures.
• The manager of a profit center has control over both costs and revenue, but not over the use of investment funds. They are often evaluated by comparing actual profit to targeted or budgeted profit.
• The manager of a cost center has control over costs, but not over revenue or the use of investment funds. Managers of cost centers are expected to minimize costs while providing the level of products and services demanded by other parts and stakeholders of the organization.
For this decentralized structure to be effective, organizations need to employ responsibility accounting.