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International Journal of Multidisciplinary Research and Development
202
International Journal of Multidisciplinary Research and Development
Online ISSN: 2349-4182, Print ISSN: 2349-5979, Impact Factor: RJIF 5.72
www.allsubjectjournal.com
Volume 4; Issue 8; August 2017; Page No. 202-206
Responsibility accounting: A review of related literature
Tanmay Biswas
Lecturer, Department of Business Administration, Mawlana Bhashani Science and Technology University, Sontosh,
Tangail, Bangladesh
Abstract
Today’s business is too much competitive than ever before and constantly upgrading with new technologies along with changing
business environment and market flexibility. Business failure is a common factor if proper functioning and co-ordination not
possible among the organizational subunits or responsibility centers where the individual managers are directly hold responsible
for their actions. Attaining organizational goals largely depend upon proper functioning across the organization which can be
easily controlled by delegating authorities and responsibilities based on the size and structure of organizations. Responsibility
accounting helps not only in evaluating performance but also in taking managerial decisions like cost control and profit planning.
Ethical dilemmas can be removed from business operations at all level if responsibility accounting is properly practiced. This
study focuses on the reviews of the previous literatures relating to responsibility accounting. A descriptive approach is used to
review different literatures to understand the impact of responsibility accounting in business organizations.
Keywords: responsibility accounting (RA), controllability, decentralization and motivation
Introduction
Responsibility accounting is a management control system
based on the principles of delegating authority and assigning
responsibility. The authority and responsibility are delegated
to the manager of responsibility centers. It works under
responsibility centers (i.e. investment center, revenue center,
cost center and profit center).The investment center manager
has control over cost, revenue and investment in operating
assets. Revenue center manager has control over the operating
revenue of a business. Cost center manager has control over
cost but not over revenue and investment in operating assets.
Profit center manager has control over both revenue and cost
but not over investment in operating assets [26]. Responsibility
accounting aims to evaluate managerial performance of
individual responsibility center and provide responsibility
report and information report for the evaluation of top
management. It is an administrative accounting method that
measures the result of each responsibility center this enables
every manager to be aware of responsibility within his area
relating to cost revenue profit and budgetary control [25].It is
an effective tool of cost control, management control and
profit planning. Hence, as a system of accounting it
distinguished between controllable and uncontrollable cost.
This system deals only with the controllable cost. It is a
system of control where responsibility is assigned for the
control of costs. It is also a method of dividing the
organizational structure into various responsibility centers to
measure the performance. In other words, responsibility
accounting is a device to measure divisional performance
measurement. In this way, responsibility accounting enforces
controllability for ensuring responsibility and accountability in
the horizontal line. The main principle of responsibility
accounting is to establish decentralization (delegation of
decision making authority and segregation of organization into
the subunits), to evaluate performance and to provide
motivation [19]. To reduce the difficulty of managing the large
organization, responsibility accounting is one of the best tools
of cost management which is used in case of decentralization
or divisionalization25. Decentralization is an effective
leadership style that leads to motivate the managers for giving
autonomy of action to the departmental managers by the top
management [1].It has a significant impact on planning and
control that increases flexibility, reduces communication gap,
encourages sub optimal decision making and motivate the
managers [20]. RA system helps to provide responsibility report
and information report, accumulate cost by individual levels of
responsibility and measure performance using the indicators of
EVA, MVA, ROI, ROS and EPS [15].
The term ‘responsibility accounting’ refers to as a system of
intersecting an organization into similar units, each of which is
to be assigned particular responsibilities. These units may be
in the form of divisions, segments, departments, branches,
product lines and so on. Each department is comprised of
personnel’s who are responsible for particular tasks or
managerial functions. Elaborately speaking, responsibility
accounting stands for a system through which managers are
made explainable for a specific set of functions or objectives
and through which their authentic performance can be
weighed and evaluated. It is also known as activity or
profitability accounting. Materially responsibility accounting
can be drawn as pyramid structure where the upward point
determines the controllability principles through responsibility
centers or decision centers there cost center manager use cost
control tools (standard costing, budgetary control, ABC and
value analysis) to control the controllable costs in order to
ensure profitability through adopting responsibility and
accountability in the horizontal line of action. The
controllability principles accentuate that managers should be
made responsible only for those activities or offshoots which
they can restraint or hegemony.
International Journal of Multidisciplinary Research and Development
203
“Responsibility accounting also called activity accounting or
profitability accounting is the collection, summarization and
reporting of financial information about various decision
centers (responsibility centers) throughout an organization”-
(Fakir. A.N.M. Asaduzzaman, 2014) [22]
According to Garrison et al. [26] “The basic idea underlying
responsibility accounting is that a manager should be held
responsible for those items- and only those items- that the
manager can actually control to a significant extent”.
According to Horngren et al. [27] “Responsibility accounting is
a system that measures the plans, budgets, actions and actual
result of each responsibility center”.
Why is the literature reviewed?
Review of this literature is essential for conducting farther
research. It will enhance the knowledge of farther researcher
about his/her related research topic. This literature review
enables the researcher to formulate research problems in terms
of specific area of his/her research interest that has not been
researched. It also helps the researcher to correlate between
results of his own study and those of the others. One of the
main necessities of review of previous documents to similar or
related phenomena is avoiding duplication of the work that has
been done in previous time. Proper review of concerned
literature helps the researcher to select variables and
methodology of study, formulate hypothesis, understand
concept and theories which are relevant to his/her area of
investigation, select appropriate statistical tools and interpret
the results of study
Objective of the study
The objective of the study is to explore and link up the
concept of responsibility accounting research with different
aspects of related literature.
Research Methodology
This study is descriptive cum exploratory in nature. Only
secondary sources of data are used for the purpose of the
study. To develop this study in depth literature review has
been used from published articles, books and websites.
Literature Review
(Benston, 1963) [1] emphasized on the study based on
behavioral science and organizational theory and examining
the accounting systems and reports that lead to motivation.
This study revealed that the process of decentralization has a
significant impact on employee motivation for forming an
effective organizational structure that creates responsibility as
well as accountability. Accounting systems flourish
decentralization which is important for motivation where
responsibility accounting enforces an effective control over
the process of decentralization through using proper budgets
and standards and implies positive aspects of the direct use of
accounting reports.
(Baiman and Noel, 1985) [2] Focused on the relevant analysis
of problem relating to the agent’s performance evaluation and
compensation on historical non-controllable capacity costs.
The result indicated that an agent’s performance evaluation
and compensation on cost incurred in the past where there the
agent had no direct control of allocating fixed costs for the
compensation purpose based on considering some
assumptions, conditions with using cash flows and deriving
depreciation.
(Antle & Demski, 1988) [3] examined the controllability of a
manager using the managerial evaluation through principle-
agent model which shows the cause-effect relationship of
controllability implies that there is a strong relationship
between information content and notion of control. So, the
subject-matter of information may be viewed as appropriate
concern of controllability.
(Bloomfield & Coombs, 1992) [4] analyzed a problem relating
to the development of management information systems called
Resource Management Systems in NHS hospitals in UK help
to disclose the cost of medical activity through accepting the
notion of “responsibility accounting” and “constructive role of
accounting systems” and found less successful in disclosing
such system. This analysis divulge that there is a considerable
consistency to implement the nature and purpose of resource
management systems where data collected from three health
authorities over the three year period by using actor network
approach.
(Lapsley, I. 1994) [5] found in the study that the several
initiatives to implement responsibility accounting systems of
National Health Service in U.K. reveled most of these
attempts did not function effectively as desired. For making
responsibility accounting actionable, market reforms in the
U.K. healthcare organizations had never proved possible with
the co-ordination of controlling environment and central
government.
After studying the reciprocation among different kinds of
control problems, (Arya, et al. 1998) [6] gave a transparent
information about responsibility accounting also analyzed via
two settings: both team and individual production, where it
states that though the agents conditionally control production,
they are not held responsible for the team performance
measure under some conditions; and owner intervention where
the agents are held responsible for a variable.
(Indjejikian & Nanda, 1999) [7] researched on dynamic
incentive and responsibility accounting where dynamic
principal-agent relationship has been affected by a problem
recognized as the ratchet effect. In this study, two period
agency models help to reveal to diminish the ratchet effect
through using of aggregate performance measures and greater
aggregation of responsibility. To make the study meaningful
the researchers present agency diagrams relating to
aggregation and disaggregation of dynamic setting, choice of
responsibility assignment in dynamic settings and
decentralization in dynamic settings.
(Lin & lin, 2002) [8] researched that a case of management
accounting application Cost control system was installed at
Han Dan Iron and Steel Company in the People’s Republic of
China observed various management accounting techniques
for cost control system like target costing, responsibility
accounting, standard costing, flexible budgeting, internal
transfer pricing, behavior motivation, performance evaluation,
variance analysis and so on. The main point of this study was
to reduce production costs and raise profitability. The
successful experiment demonstrated that the responsibility
cost control system is an effective tool for cost control. The
Han Dan experience demonstrated that management
accounting can play a positive role in improving business and
profitability in China or other developing countries
International Journal of Multidisciplinary Research and Development
204
(Rowe, et al. 2007) [9] conducted a nine years field study to
explore the impact of responsibility accounting (RA) in
managing horizontal relationships among several
responsibility center (RC) managers where they found goal
oriented design of accounting as well as participation practices
where RA depends on the magnitude, scope, and speed of
changing organizational process and also showed several
accounting and participation practices to influence competitive
behavior among responsibility center managers. This study
also shows management of RC boundary includes
responsibility center boundaries of framing or reframing are
supported by several participation practices and accounting for
influencing behavior of RC managers competitively or co-
operatively
(Bevan & Messner, 2008) [10] emphesised that the
responsibilities could be predefined to make visible and valid
assumptions through finding the expression of “responsibility
accounting” in a system along with the consequences by
taking two assumptions of equated contractual notion and
implicitly that tied controllability. In this study the researchers
recognized the relationship between responsibility and
controllability. Managers should be made responsible for the
work which can partially controllable and thus they would be
motivated for their work. They put equal emphasis on
responsibility and controllability and regarded. Responsibility
directly makes controllability where managers’ responsibility
is structured in the form of control.
(Cools and Slagmulder, 2009) [11] conducted a study and
observed that responsibility accounting is influenced by
transfer pricing tax compliance when single multinational
enterprise use a single set of transfer prices and introduced a
mixed treatment of responsibility centers in two ways
denoting profit centers for tax purposes and cost/revenue
center for management control systems(MCS) purposes. They
prove the effect of tax-compliant on responsibility accounting
through developing a case study at one certain MNE. They
conducted a field study during 1999 and 2002 in the ‘Semi-
conductors’ Product Division of a large, multi-divisional
MNE. They took interview of 23 people of the organization in
1999 and 2002 total of 47 hours. They also collect 111 internal
company documents linked with transfer pricing. The main
objective of the research is to prove how responsibility
accounting is influenced by transfer pricing. The paper also
contributes in exploring how management control systems is
being formulated and used in the constraints of external
environmental pressure.
(Flow, et al. 2009) [12] found that, effective strategy
implementation can be done by the different uses of budgeting
integration with proper management controls which is
necessary for in terms of both conditions of certainty and
uncertainty also added that continuous budgeting also leads
the managers to be accountable for achieving organization’s
financial targets through the utilization of limited resources.
(Fowzia 2011) [13] conducted a research using logit model for
examining the influence of variables relating to five types of
among eighty-eight service organizations and found no service
organization followed unique type of responsibility accounting
system rather than activity-based, functional-based and
strategic-based. The researcher also found that satisfaction
level exists in different service organizations and the
satisfaction of overall responsibility accounting system
depends upon satisfaction of assignment of responsibility,
performance measurement techniques and reward systems.
(Ocansey & Enahoro, 2012) [14] claimed that the need of
attaching responsibility to activities came from the impact of
stewardship and scarcity of resources which shows that, to
identify the responsibilities of managers is critical as there
exists a causal relationships between the activities and the
performance of their activities. They also observed two
extreme levels (High and low level) of controllability
accounting application systems of the responsibility centers.
(Safa, 2012) [15] reported in the study that decentralization
varies on the size of the business and claimed that deviations
are found out comparing budgeted amounts and actual
amounts of the business operations, in this consideration
responsibility accounting system can be used to detect the
causes of variation and taking the corrective actions. They also
added that manager's responsibility should be determined to
achieve organizational goals.
(Nyakuwanika et al. 2012) [16] Conducted a study relating to
an analysis of effective responsibility accounting system
strategies in the Ministry of Health and Child Welfare
(MOHCW) in Mashonaland West province of Zimbabwe
where sample of 70 employees from fourteen stations using
systematic and purposive sampling methods. This study
observed planning and control were not integrated among the
departments where the performance reports were not
distributed among the sectional managers on a regular basis.
(Akenbor and Nkem, 2013) [17] done a research where
responsibility accounting is a system with which performance
of different segments are evaluated. For attaining their goal,
they develop research questions, formulate hypothesizes and
review related literature. As research instrument they made
questionnaire which population consists a sample of 32
accountants in Rivers State of the manufacturing industry.
Collected data were analyzed using percentages and were
tested using Chi-Square(x2) test. The study evaluated that the
responsibility accounting is not at all suitable for segment
performance on specific manufacturing firms. The researcher
suggested that to take the challenge facing responsibility
accounting, adequate effort would be needed by organizational
executives. They suggest that effectiveness can be achieved by
developing market capitalization of those companies,
providing enough and skilled manpower and ensuring current
data collection about cost, profit, investment of the Nigerian
company.
(Patel, AT. 2013) [18] revealed that responsibility accounting is
used to as a good control system and performance evaluation
tool in large companies. Process of Responsibility accounting
has two parts including Standard costing and budgeting. The
size of organization is the basis of implementing responsibility
accounting. Large scale companies are benefited by using
responsibility accounting system as compared to small scale
companies where each departmental manager is held
responsible for his divisional performance.
(Pajrok, A. 2014) [19] made a study on “Responsible
Accounting in the Hospitality Industry” where the
performance can be evaluated of large diversified
organizations and decentralized into separate parts called
responsibility centers. Responsibility Accounting provides
valuable information to management about relevant cost and
performance in each operational unit, which is needed
especially for surviving the service industry. In this study a
model of hotel structure was developed to show investment
International Journal of Multidisciplinary Research and Development
205
center, cost center, profit center revenue center and cost pool
as well as another framework was shown where the
information content (middle portion) relating to planning,
actions, achievements and performance evaluation to
conceptualize the authority controllability, accountability and
participation and motivation.
(Allahverdi, M. 2014) [20] discussed that with the development
of business throughout the world where organizations need to
adopt new technologies along with different strategies for the
attainment of the organizational objectives. He described
today’s business must change its structure with new
methodology like centrifugal about the centrifugal
administration in business where decision making authority is
delegated from higher administration units to lower ones
which leads to increase the importance of responsibility
accounting in business.
(Kingsley et al.2014) [21] focused on responsibility accounting
issues and effect of transfer pricing policy on the Nigerian
economy. A detailed analysis was made on transfer pricing
issues found that several activities (handling, planning and
controlling) were engaged in multinational firms by reducing
the burden of corporate tax where responsibility accounting
tool used for decentralization.
(Fakir, et al. 2014) [22] examined the practice and use of
responsibility accounting system in listed textile companies of
Bangladesh focusing on overall satisfaction of responsibility
accounting system and the significance of each element
regarding assigning responsibility, establishing performance
measures, evaluating performance, assigning rewards of
responsibility accounting system. This study was conducted
over all listed textile companies and found that all elements
were significant and the satisfaction of using responsibility
accounting system was in satisfactory level.
(Fakir, et al. 2014) [23] defined responsibility accounting as the
process, where financial information about various decision
centers throughout an organization is collected, summarized
and reported, which is also known as activity accounting or
profitability accounting. They conducted a survey on the listed
garments of Bangladesh with a view to finding out the overall
satisfaction of responsibility accounting system and the
significance of each element of responsibility accounting
system and found that all elements are significant and
satisfactory level of using responsibility accounting system
existed of all listed garments companies in Bangladesh.
(Rani, R. & Rani, M., 2015) [24] stated that the size of
organization determines whether the structure of it should be
centralized or decentralized along with defining responsibility
accounting system, which is necessary in terms of delegation
of responsibilities and authorities where the managers are
made to be responsible for planning and controlling the
business activities. They also added that, comparing each
responsibility center’s standard data with actual data,
organization’s performance result can be either favorable or
unfavorable where the greater actual data than that of
standard, the favorable the result would be, and vice-versa.
(Owino, et al. 2016) [25] claimed that responsibility accounting
is an administrative accounting method which deals with costs
and revenues performance, and also used in measuring the
results of all responsibility centers where performance of the
managers is evaluated based on the things which are under
their control. They conducted cross-sectional survey in order
to find out if responsibility accounting matters in Ugandan
public universities and found that responsibility accounting
follows hierarchical patterns.
Findings of the study
Responsibility accounting is a system of finding out a causal
relationship between activities and performance of the
activities so that divisional performance can be evaluated
easily that leads to the motivation to different segments of
organizations through using the concept of decentralization.
Decentralization varies from size of organization, normally
large organizations use the responsibility accounting systems
(activity based, functional based and strategic based).So, it is
an effective method of cost control through coordinating
different segments of operation where information content and
notion of control are useful in enforcing controllability with
adopting responsibility as well as accountability.
Conclusion and guideline for future research
This study has been perceived a large volume of theoretical
and empirical research on responsibility accounting is done in
accumulating the concepts of controllability, responsibility
and accountability principles where cost control and profit
planning are evaluated as guiding criteria so that the large
organizations can adopt and implement it in order to attain
organizational objectives effectively and efficiently. In control
mechanism there are two types of control: absolute and
relative control. Though RA deals with the relative control
(controllable) but absolute control (uncontrollable) is rare. So,
only relative costs can be controlled by using the cost center of
RA system. For evaluating segmental performance through
ROI, RI, EVA and BSC, it is called a “Lamp of Aladdin”. It is
not a new concept in our country. It has already been practiced
in manufacturing industries like textile and garments
industries and service organizations in Bangladesh. This study
reveals some useful information which is not free from certain
limitations. This study is based only on the secondary sources
of data (published articles, books and websites) where primary
sources of data are not generalized. Further research can be
targeted towards a more longitudinal study on overall
manufacturing or service organizations in Bangladesh. This
system should be practiced in all organizations like of
Bangladesh to ensure effective controllability, responsibility,
accountability and to evaluate performance. So, responsibility
accounting helps not only in control but also in planning as
well as decision making too.
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