responsibility accounting with special reference to standard costing and budgetary control
DESCRIPTION
RESPONSIBILITY ACCOUNTING WITH SPECIAL REFERENCE TO STANDARD COSTING AND BUDGETARY CONTROLTRANSCRIPT
SUBMITTED TO:Dr. Amrit Lal Ghosh
Associate Professor
SUBMITTED BY:Biswajit Bhattacharjee (19)
RESPONSIBILITY ACCOUNTING WITH SPECIAL REFERENCE TO
STANDARD COSTING AND BUDGETARY CONTROL
Relating to theresponsibilities of
individual managers.
To evaluatemanagers on
controllable items.
An accounting system thatprovides information . . .
Responsibility Accounting
The areas of responsibility are well defined at different levels of the organisation.
There are clearly set goals and targets for each responsibility centre.
Accounting system generates correct and dependable information for each responsibility centre.
Managers must try to attain the goals and objectives.
Pre-requisities for Responsibility Accounting
What is a Responsibility Center?
It is any part, segment, or subunitof a business that needs control.
– production
– service
Responsibility Centers A responsibility center is the point in an
organization where the control over revenue or expense is located, e.g. division,department or a single machine.
A responsibility center may be divided into three categories ◦ cost◦ profit◦ investment
Investment centerInvestment center
Cost centerCost center
Profit centerProfit center
Types of Responsibility Centers
Cost
Types of Responsibility Centers
Cost Center
Responsibility accounting is a cost
centre where the manager is
accountable for the costs that are
under his control but not for its
revenue.
Profit Center
Revenues
SalesInterestOther
ExpensesManufacturingCommissionsSalariesOther
Types of Responsibility Centers
Responsibility accounting is a
profit centre where the manager is
accountable for sales revenue as
well as cost.
Investment Center
Responsibility accounting is a
investment centre where the manager is accountable for sales revenue and
costs and in addition is responsible for
some capital investment. Corporate Headquarters
Types of Responsibility Centers
The morale of the managers is high because of their active participation in decision making.
Responsibility accounting provides increased job satisfaction and greater motivation to put in their best efforts.
It helps in quick reporting of performance oriented results of management of various levels.
Responsibility accounting facilitates stricter control on costs and revenues.
Advantages of Responsibility Accounting
Standard Costing Standard costing is an important subtopic of cost
accounting. Standard costs are usually associated with a manufacturing company's costs of direct material, direct labor, and manufacturing overhead.
Differences between the actual costs and the standard costs is known as variances.
If actual costs are greater than standard costs the variance is unfavorable.
If actual costs are less than standard costs the variance is favorable.
The sooner that the accounting system reports a variance, the sooner that management can direct its attention to the difference from the planned amounts.
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Procedures of standard costing system Set the predetermined standards for sales margin
and production costs Collect the information about the actual
performance Compare the actual performance with the
standards to arrive at the variance Analyze the variances and ascertaining the
causes of variance Take corrective action to avoid adverse variance Adjust the budget in order to make the standards
more realistic
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Functions of standard costing system Valuation
◦ Assigning the standard cost to the actual output Planning
◦ Use the current standards to estimate future sales volume and future costs
Controlling ◦ Evaluating performance by determining how
efficiently the current operations are being carried out
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Functions of standard costing system Motivation
◦ Notify the staff of the management’s expectations Setting of selling price
BUDGETARY CONTROL A major function of management is to control
operations One element is the use of budget reports which
compare actual results with planned objectives Provides management with feedback on operations
Fixed Budget
A fixed budget is one that is not changed if the activity level differs from the planned level
Disadvantage is that if the actual activity level is higher than planned, an adverse cost variance may be due simply to the increase in variable costs at this level, so the budget becomes irrelevant
Flexible Budget
A flexible budget is designed to change with the level of activity to reflect the different behaviour of fixed and variable costs
Advantage is that any cost variance can only be due to an increase or decrease in fixed costs
Business Accounting 18
Advantages of budgetary control Co-ordination of all functions and activities Responsibility accounting - information is provided to
managers responsible for revenue and expenditure Utilisation of resources - capital and effort are used
to achieve the financial objectives Motivation of managers through the use of clearly
defined objectives and monitoring of achievement Planning ahead gives time to take corrective action Establishes a system of control if plans are reviewed
regularly against actual Transfer of authority to individual managers for
decisions
Business Accounting 19
Disadvantages of budgetary control Set in stone - managers may be constrained by the
original budget (eg make no attempt to spend less than maximum or exceed target income)
Time consuming process may deflect managers from their prime responsibilities of running the business
Unrealistic if fixed budgets are set and actual activity level is not as planned
Disillusioning for managers if fixed budgets are set and not achieved merely due to changes in activity
Demotivating for managers if budgets are imposed by top management with no consultation
Business Accounting 20
Conclusions An effective system of budgetary control helps
managers plan and control the use of resources in a systematic and logical manner◦ Planning helps co-ordinate the activities of the
business◦ Control is achieved through the frequent monitoring of
progress against the plan by managers of budget centres, and taking corrective action where necessary
It is a communication system◦ Financial objectives and constraints are communicated
to managers of budget centres and regular monitoring keeps management informed of progress towards objectives