What do you understand by the term ‘responsibility accounting’ and how does it help the budget process

Budgeting works best where a clear organisation structure exists and where clear lines of responsibility are laid out. An organisation structure is an arrangement of lines of responsibility within the company or department. Each manager within the organisation is in charge of, or responsible for, a part or segment of the organisation and thus that part could be called a responsibility centre. Responsibility centres can be cost centres, revenue centres, profit centres or investment centres.

Responsibility accounting measures actual results with budgeted for every responsibility centre and ultimately helps to trace costs and revenues to the person who has the most knowledge of, and who is responsible for, those costs and revenues. Budgets coupled with responsibility accounting, provide a focus for managers when interpreting variances. Variances, whether positive or negative, should prompt questions and subsequent investigation, not blame. Thus responsibility accounting identifies a person who can properly explain a variance. It is of utmost importance with responsibility accounting that all non-controllable costs within a responsibility centre are separately identified and not included as part of any performance review of that centre.