Question

Explain and discuss responsibility accounting, and the components of standard cost variance analysis.

Answer 1

Responsibility Accounting

Responsibility accounting is a reporting system that compiles revenue, cost, and profit information at the level of those individual managers most directlyresponsible for them. The intent is to provide this information to those people most able to act upon it, as well as to judge their performance.

According to Charles T. Horngren, “Responsibility accounting is a system of accounting that recognises various decision centres throughout an organisation and traces costs to the individual managers who are primarily responsible for making decisions about the costs in question”.

Responsibility accounting is based on the assumption that every cost incurred must be the responsibility of one person somewhere in the company. For example, the cost of rent can be assigned to the person who negotiates and signs the lease, while the cost of an employee’s salary is the responsibility of that person’s direct manager. This concept also applies to the cost of products, for each component part has a standard cost (as listed in the item master and bill of materials), which it is the responsibility of the purchasing manager to obtain at the correct price. Similarly, scrap costs incurred at a machine are the responsibility of the shift manager.

By using this approach, cost reports can be tailored for each recipient. For example, the manager of a work cell will receive a financial statement that only itemizes the costs incurred by that specific cell, whereas the production manager will receive a different one that itemizes the costs of the entire production department, and the president will receive one that summarizes the results of the entire organization.

Components of standard cost variance analysis

An analysis of the difference between a standard cost and and actual cost is called variance analysis. The process decomposes the difference in two components.

For direct material: materials price and materials quantity variance.

For direct labor: labor rate (price) and labor efficiency (quantity) variance.