Definition

Responsibility accounting is a fundamental piece of good budgeting. Budgets must be prepared by the people who will be responsible for achieving them.

Explanation

When budgets are prepared by the individuals who are held responsible for achieving them, this ensures that full use is made of the knowledge of the people who have access to the greatest level of detail.

It also means that managers and their subordinates are committed to the budget and will be realistic yet ambitious when setting targets.

When the budgeting process starts from a “grassroots” level, there is a better chance of getting realistic results. With the greater involvement of staff, cost control will also improve.

Budgeting and responsibility accounting together imply providing management control information. This feedback system compares the performance and effectiveness of operating with the plan.

It also provides an opportunity for the reappraisal and adjustment of plans.

Budgeting helps to determine priorities. Management information produced by the budgeting process makes the complex matter of running a business a lot easier.

Budgeting is concerned with management effectiveness. It is better to do the right job moderately well than to do the wrong job superlatively well. Of course, it is better yet to do the right job superlatively well!

Frequently Asked Questions

What is responsibility accounting?

When budgets are prepared by the individuals who are held responsible for achieving them, this ensures that full use is made of the knowledge of the people who have access to the greatest level of detail. It also means that managers and their subordinates are committed to the budget and will be realistic yet ambitious when setting targets.

What is the purpose of responsibility accounting?

Budgeting and responsibility accounting together imply providing management control information. This feedback system compares the performance and effectiveness of operating with the plan. It also provides an opportunity for the reappraisal and adjustment of plans.

Why choose responsibility accounting over other types of budget processes?

Budgeting helps to determine priorities. Management information produced by the budgeting process makes the complex matter of running a business a lot easier. Budgeting is concerned with management effectiveness. It is better to do the right job moderately well than to do the wrong job superlatively well. Of course, it is better yet to do the right job superlatively well!

Is responsibility accounting a form of zero-based budgeting?

Zero-based Budgeting is a term that was coined by Peter Pyhrr. Responsibility Accounting is a type of zero-based budgeting process where the manager requests each department to go through the budget line by line. The costs are analyzed and costs are cut. This process allows managers to be held accountable for their costs and actions.

Is responsibility accounting synonymous with zero-based budgeting?

No, these two concepts are not the same. Although both terms refer to the idea of reworking each department's costs in detail, responsibility accounting is a more formal method than zero-based budgeting. It is important to note that zero-based budgeting occurs in the planning phase, while responsibility accounting takes place in the monitoring phase of the budget process.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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