Responsibility accounting is an internal system used to better control costs and performance. Its main focus is making individual managers responsible for those elements of a company's performance which they can control. In most cases, responsibility accounting does not affect a company's public accounts.
The idea of responsibility accounting is to deal with the problem that it can be hard to judge individual company departments purely on their profitability. For example, if a business has a team of traveling sales reps, it may have a separate travel department which arranges their journeys and accommodations. In most cases, such a department will only ever spend money and will not directly generate revenue. While the travel arrangements may be a vital part of the sales process, the resulting revenue from the sales is likely to be recorded in the accounts for a separate department.
In responsibility accounting, each department will have stated goals. The relevant manager will then be judged on how well he or she meets these goals. This is similar to most target systems, but will usually work by measuring on a financial basis. The important distinction is that this financial assessment will not necessarily be a pure profitability measure.
In most responsibility accounting systems, each department is classified into one of four categories. A cost center will be judged purely on how low it keeps spending; the travel department in the example above would fall into this category. A revenue department such as the sales team will be judged purely on the revenue it generates. A profit center will be judged on a standard profit or loss basis. This could apply to individual stores in a chain.
The final category is an investment center. This may literally involve financial investments, but could also cover departments involved in long-term projects. Departments in such a category are usually judged using a longer-term view that takes account of issues such as capital spending where the resulting revenue will not all be gathered in the first year.
Generally, responsibility accounting is a purely internal measure. It is possible that details from its operation and results could be included in a company report, for example as information to detail changes a company has made. These details would only be used as a way of sharing information with investors and potential investors. The details do not usually form a part of the mandatory financial information that a company must include in its public accounts.
