Tuesday, July 7, 2009


Responsibility Accounting.

The creation of divisions allows for the operation of a system of responsibility accounting. Responsibility accounting is a system of accounting that segregates revenues and costs into areas of personal Responsibility in order to monitor and asses the performance of each part of an organization.
A Responsibility center is a department or organizational function whose performance is the direct responsibility of a specific manager.
In the weakest form of decentralization a system of cost centers might be used. As decentralization becomes stronger the responsibility accounting framework will be based around profit centers. In its strongest form investment centers are used.

Investment centers.

Where a divisional manger of a company is allowed some discretion about the amount of investment undertaken by the division, assessment of results by profit alone (as for a profit centre) is clearly inadequate. The profit earned must be related to the amount of capital invested. Such divisions are sometimes called investment centers for this reason. Performance is measured by Return on Capital Employed (ROCE), often referred to as Return on Investment (ROI) and other subsidiary ratios, or by Residual Income (RI).
An investment center is a profit centre with additional responsibilities for capital investment and possibly for financing, and whose performance is measured by its return on investment.
Managers of subsidiary companies will often be treated as investment centers Managers, accountable for profits and capital employed. Within each subsidiary, the major divisions might be treated as profit centers with each divisional manger having the authority to decide the process and output volumes for the products or services of the division. Within each division, there will be departmental Managers section Managers and so on, who can all be treated as cost center Managers. All Managers should receive regular, periodic Performance reports for their own areas of responsibility.
The amount of capital employed in an investment center should consist only of directly attributable fixed assets and working capital.

  • Subsidiary companies are often required to remit spare cash to the central treasury department at group head office. And so directly attractable working capital would normally consist of stocks and less creditors, but minimal amounts of cash.
  • If an investment center is apportioned a share of head office fixed assets, the amount of capital employed in these assets should be recorded separately because it is not directly attractable to the investment centre.

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