Responsibility accounting is a system that involves identifying responsibility centers and their objectives, and evaluating the performance of those centers.
In a decentralized organization, lower levels of management are given a great degree of autonomy and independence in making decisions on matters under their responsibility.
The cost variance analysis is the most common performance evaluation tool when evaluating a cost center. Managers of cost centers are evaluated based on costs they can control.
Business segments such as divisions and product lines should be evaluated based on revenues and costs that are directly traceable to them.
Investment centers have control over revenues, costs, and certain assets. Evaluating the performance of investment centers can be performed by using different metrics.
When one department sells to another department within the same organization, transfer pricing aims to determine the rate to be charged that would result in a win-win outcome.
Chapter ContentsResponsibility accounting is an accounting information system that involves identifying subunits known as responsibility centers, determining their objectives, and measuring their performance. It is most useful in decentralized organizations in which lower levels of management are given autonomy in decision-making.
This chapter discusses the concepts of responsibility accounting, decentralization, and transfer pricing. It also shows the different evaluation tools used in assessing the performance of responsibility centers.