Responsibility accounting is an underlying
concept of accounting performance measurement systems. The basic idea is that large diversified organizations are difficult, if not impossible to manage as a
single segment, thus they must be decentralized or separated into manageable parts.
These parts, or segments are referred to as responsibility centers that include: 1) revenue centers, 2) cost centers, 3) profit centers and 4)
investment centers. This approach allows responsibility to be assigned to the segment managers that have the greatest amount of influence over the key
elements to be managed. These elements include revenue for a revenue center (a segment that mainly generates revenue with relatively little costs), costs for a
cost center (a segment that generates costs, but no revenue), a measure of profitability for a profit center (a segment that generates both revenue and
costs) and return on investment (ROI) for an investment center (a segment such as a division of a company where the manager controls the acquisition and
utilization of assets, as well as revenue and costs).
An underlying concept of responsibility accounting is referred to as controllability. Conceptually, a manager should
only be held responsible for those aspects of performance that he or she can control. In my view, this concept is rarely, if ever, applied successfully in
practice because of the system variation present in all systems. Attempts to apply the controllability concept produce responsibility reports where each
layer of management is held responsible for all subordinate management layers as illustrated below.
Advantages and Disadvantages
Responsibility accounting has been an accepted part of traditional accounting control systems for many years because it
provides an organization with a number of advantages. Perhaps the most
compelling argument for the responsibility accounting approach is that it
provides a way to manage an organization that would otherwise be unmanageable.
In addition, assigning responsibility to lower level managers allows higher
level managers to pursue other activities such as long term planning and policy
making. It also provides a way to motivate lower level managers and workers.
Managers and workers in an individualistic system tend to be motivated by
measurements that emphasize their individual performances. However, this
emphasis on the performance of individuals and individual segments creates what
some critics refer to as the "stovepipe organization." Others have
used the term "functional silos" to describe the same idea. Consider
Exhibit 9-6 below1. Information flows vertically, rather than horizontally.
Individuals in the various segments and functional areas are
separated and tend to ignore the interdependencies within the organization.
Segment managers and individual workers within segments tend to compete to
optimize their own performance measurements rather than working together to
optimize the performance of the system.
Summary and Controversial Question
An implicit assumption of responsibility accounting is that separating a company into responsibility centers that are
controlled in a top down manner is the way to optimize the system. However, this
separation inevitably fails to consider many of the interdependencies within the
organization. Ignoring the interdependencies prevents teamwork and creates the
need for buffers such as additional inventory, workers, managers and capacity.
Of course, a system that prevents teamwork and creates excess is inconsistent
with the lean enterprise concepts of just-in-time and the theory of constraints.
For this reason, critics of traditional accounting control systems advocate
managing the system as a whole to eliminate the need for buffers and excess. They also argue that companies need to develop process oriented learning support
systems, not financial results, fear oriented control systems. The information
system needs to reveal the company's problems and constraints in a timely manner
and at a disaggregated level so that empowered users can identify how to correct
problems, remove constraints and improve the process. According to these
critics, accounting control information does not qualify in any of these
categories because it is not timely, disaggregated, or user friendly.
This harsh criticism of accounting control information leads us to a very
important controversial question. Can a company successfully implement
just-in-time and other continuous improvement concepts while retaining a
traditional responsibility accounting control system? Although the jury is
still out on this question, a number of field research studies indicate that
accounting based controls are playing a decreasing role in companies that
adopt the lean enterprise concepts. In a study involving
nine companies, each company answered this controversial question in a different
way by using a different mix of process oriented versus results oriented
learning and control information.2 Since each company is different, a generalized
answer to this question for all firms in all situations cannot be provided.