The accounting field has expanded to include at least three main purposes: financial reporting, product or service cost reporting, and performance evaluation reporting. Responsibility accounting structures systems and reports to focus the accountability of specific people. Accounting is then assigned to specific departments or functions in which the responsibility for performance lies.
In comparison with financial accounting, responsibility accounting segments the business into distinct responsibility centers whereas financial accounting simply groups like costs together. To do so, a measurement process must be established. This measurement process compares actual results against objective goals for the segment prior to the end of a budget period. These goals are part of the operating budget and define targets of operation for every aspect of the business.
Responsibility accounting must be custom-fit to the individual needs of the business. The revenue and expense categories must reflect the functions and operations management values so they can be properly monitored and evaluated with the help of responsibility accounting.
In addition, responsibility accounting compiles the individual centers’ performance reports into successively aggregated collective reports. The purpose of doing so is to recognize broader categories of responsibility. Within these broader categories, much detailed information can be found for further analysis.
A responsibility center can be as minor as a single operation or machine or as major as encompassing the entire business. The entire company is essentially the responsibility center of the chief executive. Most commonly however, a business is broken down into several centers that can be lined up in successive layers like a pyramid.