The Crimson Press Curriculum Center

First Page and the Assignment Questions:
    Among other activities, an organization’s accounting staff prepares financial statements for use by outsiders and cost analyses for use by line managers and senior management. The accounting staff also undertakes ad hoc analyses of cost and revenue data—usually of a differential nature—for internal use in making alternative-choice decisions.

   Preparation of both routine reports and ad hoc analyses are accounting activities that help managers in their day-to-day decision-making. A third activity—responsibility accounting—goes beyond daily decision-making, per se, to assist in the ongoing management of the organization. Responsibility accounting focuses on the distinction between those revenues and costs that are controllable by a manager and those that are not.

   In its broadest sense, a responsibility accounting system is concerned with planning and controlling, rather than measuring, the resources used in an organization. Clearly measurement is essential to planning and control, so the two cannot be completely divorced. Nevertheless, the focus in this note is on the themes of planning and control.

ORGANIZATION OF THE NOTE

   The note begins with a discussion of the relationship between cost accounting and responsibility accounting. This allows us to distinguish between measurement and control. We then look at several factors that must be considered in designing a responsibility accounting system.

   We next examine the responsibility accounting structure, which consists of the organization’s network of responsibility centers. The note discusses the different types of responsibility centers, and assesses the rationale for choosing one type over another. It then turns to the management control process, dividing it into four phases: programming, budgeting, measuring, and reporting. It discusses the characteristics of each phase and its relationship to the others.

   The note then addresses some of the issues that senior managers must consider if they are to make either profit or investment centers work as effectively as possible, including some tricky design matters such as setting transfer prices and operating in matrix-like organizations. It then takes up the general topic of motivation, and presents some recent thinking on various ways to reward managers and others for good performance. One of the principal objectives in designing a responsibility accounting system is to attain congruence between the organization’s overall goals and the personal goals of operating managers. A variety of matters must be considered to attain this “goal congruence,” one of which is the design of a motivation system.

   The note concludes with a brief discussion of some of the informal aspects that can influence the success of a given responsibility center design. In particular, the note looks at ways individuals in organizations gain power and influence outside the formal responsibility center network.

COST ACCOUNTING AND RESPONSIBILITY ACCOUNTING

   The relationship between cost accounting and responsibility accounting rests in large part on the concept of resources. Full cost accounting focuses on the resources expended for a particular endeavor (called the “cost object”). Differential cost accounting, also focuses on measurement, but expands the discussion to include the question of how costs vary with changes in volume.

   Responsibility accounting, by contrast, focuses on the managers who are responsible for controlling the use of those resources. This concept of responsibility requires senior management to establish a network of responsibility centers. A responsibility center is an organizational unit headed by a manager, who has been charged with achieving some agreed-upon results, usually financial but increasingly non-financial as well.