Describes the Concept of responsibility accounting. Discuss the different types of responsibility centres. Out of these centres tell about the profit centre and the investment centre. Which according to you is a better measure of performance and why ?
Meaning of responsibility accounting:- It is a control device that measures the performance of the various responsibility centres or divisions in an organisation. So responsibility accounting focuses on responsibility centres.
A responsibility centre is a sub unit of organisation under the control of a manager, who is responsible for the activities of that responsibility centre.
According to Definition of Charles T. Horngren:- “Responsibility accounting is a process or organisation that explores the plans of action of each of these centres by allocating particular revenues and costs”.
In other words:- It is an information system that undertakes the control report by accumulating cost, revenue and profit report information under a defined responsibility centre within a company. Each responsibility centre has a manager who is responsible for activities under his centre.
TYPES OF RESPONSIBILITY CENTRES
- Revenue Centers
- Cost/ Expense Centres
- Profit Centers
- Investment Centers
1.Revenue Centers :- It is a centre where managers are accountable only for financial output in the form of generating sales revenue. Thus, managers are responsible for revenue generation and not for the cost incurring. This is the centre in which outputs are measured in monetary terms.
Note:- It generally happens in those organisations where revenue centres acquire finished goods from a manufacturing division.
2. Cost / Expense Centres:- In these centres, managers are normally accountable for the costs only. In such centres, the accounting system records only the costs incurred and revenue earned are excluded. Such centres are responsible to control costs only. An entire department is considered a single cost centre.
Types of Cost Centers
Cost centres are of two types
- Engineering cost centres
- Discretionary Cost Centers
3. Profit Center:- It is that department whose performance is measured in terms of profits. The difference between the revenue earned and Expenses incurred by the centres is called a profit centre. So this centre is concerned with the responsible for Controlling revenue as well as costs. This centre involves accounting information related to cost and revenue.
So revenue is to be recognised only when sales are made to outside customers. Thus, revenue represents a monetary measure of the output of a profit centre.
4. Investment Centre:- It is a responsibility centre in which inputs are measured in terms of cost. In which assets are employed also measured. In such a centre a manager is accountable for costs and revenue as well as for the investment in assets used by his centre. Thus, the manager has control over revenue, expenses and the amounts invested in the centre’s assets. The manager is required to earn a satisfactory return.
He also prepared credit policy, which has direct influence on debt collection, and the inventory policy, which also determined investment in inventory.
Comparison Between Profit centre and investment centre
Profit Center:- In the above theory we have an analysis that profit centres measure performance revenue and costs. From whose difference we can measure the profit of the organisation. So it takes into consideration both costs as well as revenue for the purpose of finding profits of the organisation. This centre has prepared a report on the revenue and costs after it concludes profit.
Investment Center:- It is concerned with the investment over the assets and inventory. Which assets and inventory leads to output which turns into revenue. Such centres also prepare a report over the credit policy which generates the debt collection of business as well as boosts sales volume. Thus, such a centre policy considered revenue, expense and investment. Which is more important for the business. Because if business invests in monetary terms over the assets or inventory then business can expect profit of the business.
Conclusion:- If we see deeply in the above theory of profit centre and investment centre, out of these both centre investment centre has more importance as compared to profit centre. Because its scope is wider than the profits centre. So investment is the initial process of doing business. After investment profit can be earned. Investment is more broad concept as compared to profit. responsibility accounting
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