Responsibility Accounting

The core principle is that managers should be held responsible only for what they can control. Reports are organised by area of responsibility, so each manager sees the results they are accountable for.

Units are usually classified as cost centers, where managers control costs; revenue centers, where they control sales; profit centers, where they control both; and investment centers, where they also control the capital invested and are judged on return.

For example, a factory manager may be responsible for production costs and efficiency, but not for selling prices set by the sales team. A responsibility report for the factory would focus on costs and output compared with budget.

Responsibility accounting improves accountability and motivation and makes performance reviews fairer. Its challenges include separating controllable from uncontrollable items, which is not always clear, and avoiding behaviour where managers improve their own unit's numbers at the expense of the whole business.