The control of activities is an important task to be carried out in a business. Unless and until the functions of a business are not scrutinized and checked for regarding the proper functioning, the business cannot be carried out properly. The best and the most appropriate way to check the proper working of the business is to check the budgets. The budgets give a detailed analysis of the situation of the business in a quantitative manner.
The budgetary control refers to the setting up of standards and targets regarding the income and expenditure, that are to be achieved by the business processes in a stipulated time. If these targets are not achieved then it’s the responsibility of the budgetary control only to look after the reasons of non-achievement of goals, take measures to correct it and look after the efficiency of workers. This includes continuous monitoring and adjusting the performance accordingly. Budgetary control gives a detailed analysis of the functions of the business and that too in a quantitative manner which is helpful in making comparisons.
There are mainly two types of Budgets:
- Flexible Budget: This kind of budget is designed in such a way that as the firm’s level of operations will change, it will also change accordingly. It is dynamic in nature and works as per the requirement of the firm.
- Fixed Budget: This kind of budget is designed to remain constant even if the level of operations of the business change. The budget will still remain the same no matter what. This business is not dynamic in nature.
The budgetary control is usually a bulky task. It is not an easy task to handle such a big business all alone. For this purpose, the responsibility of controlling is delegated to several small departments who handle their own departments and help in the maintenance of efficiency in the business. These small centers are known as the Responsibility Centers which look after the working of their own department and report accordingly. This is a better way to manage a business as no single department gets left out of the scrutiny.
Thus, Responsibility Accounting is a managerial tool which helps the managers to look after the proper working of their concerned department. Usually there are 4 kind of Responsibility Centers:
- Cost Center: The cost center is concerned with the cost department only i.e. to take care that the cost must be kept in check and at the same time minimize the cost as much as possible.
- Revenue Center: The revenue center deals with the pricing of the product in such a manner that the costs of the business are covered and the desired profit is achieved. This department is concerned with the sale of the products.
- Investment Center: The investment center is the department where output is compared with the Return on Investments so as to achieve the maximum returns.
- Profit Center: This is the center concerned with the earning of profit. Profit is the Revenue – Expenses. This center aims at maximizing the profits of the business.
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Concept of Controllability of Responsibility Accounting:
The Responsibility Accounting is completely related to the controllability concept. But it also states that the manager must be held responsible only for that part which he can control. Almost all the functions of a business are controllable. Sometimes the functions at the lower level become non-controllable. Thus the Manager must be held responsible only for what he can control.
The Responsibility Accounting takes help of Standard Costing on a large to draw the various variances. Standard costing helps in the ascertainment of differences in the actual working of the business and the planned performance. This helps in making comparisons.
Often Budgetary Control is misinterpreted as Budgetary Control or vice versa, whereas they both are different from each other.
- Budgetary Control does not differentiate between Controllable and Non-controllable costs whereas Responsibility Control differentiates between the both and also takes into consideration only the Controllable Costs.
- Budgetary Control does not emphasize on the performance appraisal reports. The Responsibility Accounting emphasizes on the performance appraisal reports and expects the report from every center’s manager.
Framework for Responsibility Accounting:
- The organization must be divided into proper departments,
- Every Department must be well organized,
- Each department must be having a manager and her must be known about what his job is and
- The performance report must be presented in a defined format and the report must be only related the controllable activities only.
Process of Responsibility Accounting:
The process of responsibility accounting is mainly concerned with the communication. The communication needs to be effective. The steps of responsibility accounting are:
- The managers must be chosen carefully for every responsibility center. They should be chosen such that they are efficient at working.
- The managers must be informed about the job they are assigned.
- The performance report must be filed time to time and with all details.
- The suggestion should be given for the improvement of performance as well as corrective measures should be taken to get proper results.
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Advantages of Responsible Accounting:
The Responsible Accounting is a vital part of the association. The advantages of Responsible Accounting are:
- Responsibility Accounting helps in better understanding of the functions of the business and the budgeting process. It shows how important the budgets are to set the targets of the business. It’s the targets which help in the planning. If there are no plans, the business will fail to operate. It is said that Failing to Plan is Planning to Fail.
- Responsibility Accounting helps in the quantitative presentation of the data. The quantitative presentation gives a basis for the comparison of the data and also helps in ascertaining the short falls.
- Responsible Accounting fixes the responsibility of the center which helps in measuring the financial performance of a responsibility center.
- Responsibility Accounting helps in controlling the price expenses of the individuals. Responsibility accounting helps in the controlling of expenses as well as in the cost reduction.
Limitations of Responsible Accounting:
- The Departments of the business are so intertwined that sometimes it is not possible to fix the responsibilities of the departments. The inter dependence makes it difficult for the business to ascertain the responsibility to be assigned to a specific department.
- The Responsible Accounting requires a well-developed and well figured out system of communication and reporting. There needs to be efficient reporting system which is easily understandable and is reliable in nature.
- The Responsible Accounting mainly focusses on the goals of the business. This may lead to contradiction between the interests of the individual and the organization’s interests. This contradiction may lead to serious consequences.
- The system totally ignores the qualitative aspects and rather give importance to the quantitative aspects and results. This is the sole reason that the accounting system is rendered inefficient.
- The aims may face resistance from employees but at the same time it may ignore the interests of the individuals in the formation of policies. It goes on ignoring the personal reactions of the personnel involved in the implementation of this system.
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