Page 208 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 10: Responsibility Accounting and Transfer Pricing

Notes

Task Analyse different centers of a food chain of your choice and categorise them into
various types of responsibility centers.

Self Assessment

Fill in the blanks:
1. The concept of responsibility accounting has emerged to accommodate the need for
management information at a more specific level of detail than can be provided by
........................ procedures.
2. A ........................ is a unit within an organization that is responsible for generating
revenues.
3. A ........................ is part of an organization that does not produce direct profit and adds to
the cost of running a company.
4. ........................ is a unit within an organisation whose manager not only has profit
responsibility but also some influence on capital expenditures.

5. The basic idea under responsibility accounting is that large ........................ organizations are
difficult, if not impossible to manage as a single segment.
6. Responsibility accounting is appropriate where top management has ........................
authority to make decisions.

10.2 Controllability Concept

An underlying concept of responsibility accounting is referred to as controllability. Conceptually,
a manager should only be held responsible for those aspects of performance that he or she can
control. In my view, this concept is rarely, if ever, applied successfully in practice because of the
system variation present in all systems. Attempts to apply the controllability concept produce
responsibility reports where each layer of management is held responsible for all subordinate
management layers. The managers thus, should take care of certain essential elements to ensure
adequate responsibility accounting.

Relevance

The convention of relevance emphasizes the fact that only such information should be made
available by accounting as is relevant and useful for achieving its objectives.

Example: Business is interested in knowing as to what has been total labor cost? It is not
interested in knowing how much employees spend and what they save.

Objectivity

The convention of objectivity emphasizes that accounting information should be measured and
expressed by the standards which are commonly acceptable.

Example: Stock of goods lying unsold at the end of the year should be valued as its cost
price not at a higher price even if it is likely to be sold at higher price in future. Reason is that no
one can be sure about the price which will prevail in future.

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