Question

Explain what is responsibility accounting and why its important to Decentralized companies?

Answer 1

Decentralize comapnies is a technique of segregation of the company into smaller manageable units. These units have autonomy to make decisions related to financial aspects too. All that the management wants is better performance of these units. The responsibility of this is placed on the head ie the manager of that unit. Hence the manager requires to be very deligent in his decision making. The problem in this case is that these managers often make thier own decisions and the company might potentially loose its control on the overall operations of the company.

Hence , to deal with these kind of issues, the solution is a responsibility accounting system. According to this system, the managers who have the power to make decisions of their units, shall be held responsible for those decisions they make. Thus, under this system, a unit becomes a responsibilty center. Further these responsibility centers will be segregated into 3 types:

1. Cost center
2. Profit center
3. Investment center.

Thus managers will be responsible for the costs minimization, profits maximization and investment optimization.