Responsibility and accounting are related to each other in the same way as doctor and patient are related to each other, just like a patient will die if a doctor does not treat him or her on time in the same way accounting will have little meaning if there is no responsibility attached to it. Responsibility accounting is internal to the company in the sense that the company will assign a budget to various departments and compare that budget with actual expenditure and thus assessing the performance of the department as well as department head in the execution of their duties. In order to understand this concept better one should look at some of the advantages and disadvantages of responsibility accounting –
Advantages of Responsibility Accounting
Keep Departments on Their Toes
The first and foremost advantage of responsibility accounting is that it keeps all the department as well as department heads on their toes because all employees at the back of their mind know that their performance will be evaluated regularly and responsibility of non-performance will be fixed which in turn leads to increase in productivity of the workers and thus helps the company in the achievement of goals and objectives set by the top management.
Helps in Performance Evaluation
Another benefit of responsibility accounting is that in a way it also assists the top management in the performance evaluation or performance appraisal of the department heads and employees of the company. Hence for example suppose the production department is performing well for the past 4 quarters and its actual expenditure is less than the budget expenditure while the marketing department actual expenditure is exceeding the budgeted expenditure from the past 4 quarters than the production department head as well as its team members deserve recognition and performance bonus while marketing department head and team members will need to answer some tough questions and company can even take action against them.
Cost Control
Another benefit of responsibility accounting is that in a way it can help in controlling cost for the company because when a company assigns the budget to the department than departments try to manage their work within that budget which in a way helps in saving a lot of unnecessary expenditure and hence improve the bottom line of the company.
Disadvantages of Responsibility Accounting
Needs Robust System
The biggest disadvantage of responsibility accounting is that it needs a robust system in order to be effective. In simple words suppose you keep your valuables in a safe vault in your house but you do not have a CCTV camera in your home than safe vault is of no use because in case of any theft you will not be able to know who stole your valuables. In the same way in the case of responsibility accounting, a robust system is necessary to oversee whether responsibility accounting is being carried out effectively in the company.
Dissent among Employees
Another problem with responsibility accounting is that it creates dissent among employees because when nobody likes to be seen or under supervision for a long period of time as it leads to distraction and loss of focus especially in case of department heads who have years of experience and they being scrutinized every quarter can be depressing as well as frustrating, and we all know that frustrated and depressed employees cannot work for the betterment of the company.
Chances of Bias within Departments
In the case of responsibility accounting chances of biasness creeping in while allocating budget to various departments will always be there which results in the whole exercise of responsibility accounting being futile. Hence for example, if the production department needs $100000 and management is giving only $80000 while the marketing department needs $80000 and management is giving $100000 then the performance of the marketing department will always be better as compared to the production department due to management being biased towards marketing department while allocating budget to various departments.
As one can see from the above that responsibility accounting has advantages as well as disadvantages and that is the reason why any company thinking of implementing responsibility accounting into their company should know the above points so that they can implement the responsibility accounting properly in the company taking into account the negative points of responsibility accounting.