It is impossible for top managers to make all the necessary decisions about everything except in very small organizations. Somehow at some point he has to delegate some decisions to those who are at the lower levels and are more knowledgeable to the everyday detail of the company’s operation.
By empowering lower level managers to make decisions, decision-making authority is spread throughout the organization rather than being confined to a few top executives. Attached with this decentralized approach, are costs and decisions at each sub-level that managers have to be responsible for.
Decentralized organizations need responsibility accounting systems to link the manager’s decision-making authority with accountability for the outcomes of those decisions and to make sure that they are in congruence with the organization’s goals.
The term responsibility center is used in any part of the organization whose managers has control and is accountable for cost, profit or investment.
An Organizational View of Responsibility Centers
•The manager of an investment center has control over cost, revenue, and investments in operating assets. Investment centers are usually evaluated using return on investment (ROI) or residual income measures.
•The manager of a profit center has control over both costs and revenue, but not over the use of investment funds. They are often evaluated by comparing actual profit to targeted or budgeted profit.
•The manager of a cost center has control over costs, but not over revenue or the use of investment funds. Managers of cost centers are expected to minimize costs while providing the level of products and services demanded by other parts and stakeholders of the organization.
For this decentralized structure to be effective, organizations need to employ responsibility accounting. Responsibility accounting refers to the various concepts and tools used by managerial accountants to measure the performance of people and departments to foster goal congruence.
Below are some of the concepts and tools that managerial accountants used for responsibility accounting:
1.Segment Reporting – Income statements are generated from each part or activity of an organization (e.g. sales territories, individual stores, service centers, manufacturing plants, marketing departments, individual customers, and product lines). In utilizing this concept of reporting, managers have to identify traceable and common fixed costs and make use of activity-base costing if necessary. These segmented income statements are useful in analyzing the profitability of segments and in measuring the performance of segment managers.
2.Performance report of each responsibility centers – this shows the budgeted and actual amounts, and the variances between these amounts, of key financial results appropriate for the type of responsibility center involved. The data in a performance report help managers use management by exception either to control cost operations effectively, find ways to generate more profit or consider opportunities for investments.
3.Activity-based responsibility accounting – Under this approach, management is directed not only to the cost incurred in an activity but also to the activity itself. Questions like the following will be asked, “Is the activity necessary?” Does it add value to the organization’s product or service?” Can the activity be improved? By seeking answers to these questions, managers can eliminate non-value added activities and increase the cost effectiveness of the activities that do add value.
4.Customer Profitability Analysis – uses the concept of activity-based costing to determine how serving particular customers causes activities to be performed and costs to be incurred. This focus on major market segments, geographical regions, distribution channels or customers. This also helps managers gain insight into the factors that are driving the company’s performance.
Goal congruence results when the managers of subunits throughout an organization strive to achieve the goals set by top management. Given the above concept and with proper implementation an organization is surely rising above its competitors.
It is therefore recommended that while top management gave the subunit managers decision-making authority and responsibility accounting systems in place, it is still of utmost importance that both side will conduct regular dialogue and consultations for coordination and to keep each other expectations on the same level and to make sure that top management understands the concerns of the lower level managers and vice versa. Top management also must emphasize that the responsibility accounting systems main functions are information and not blame, make sure costs are distinguished properly between controllable and uncontrollable as this increases the effectiveness of cost management systems, and its usage is to motivate desired behavior that would be beneficial for both the company and the employees.
So how does responsibility accounting fosters goal congruence?
As companies adopt this concept, top level management can concentrate on bigger issues such as overall strategy of the company. This allows as well lower-level managers to respond more quickly to customers and to changes in the operating environment since layers of decisions makings and approvals have been eliminated, and lower managers are now given the chance to be trained for higher positions.
Consequently, as lower level managers make decisions they are expected that their motivation for work and job satisfaction is increased because the decision-making authority empowers them.
But the concept of responsibility accounting is not only limited to an organization’s structure. For any type of cost whether from an organization’s perspective or from your personal life, an important key to managing or controlling the cost is to make it someone’s responsibility. And whether we like it or not, decisions has to be made, the only difference is that if we are choosing to make the right decisions or the wrong ones.