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Please discuss the concepts of Responsibility Accounting and how it can be used as a managerial tool. Please provide several examples to support your response. Please define and discuss the various quality costs and how the analysis of these costs can improve the profitability and efficiency of an organization.

Answer 1

Responsibility accounting is a system in which responsibilities are assigned to control costs. Under this to control cost persons are made accountable. Specific areas are assigned to specific persons and they are made responsible for its accounting and to control cost. It measures the performance of various divisions of an organizations. Here responsibility centers are established. Data from these centers are collected and reported. Under this organization is divided into various units, and each unit is assigned particular responsibilities. Each unit is allocated to an individual who are made responsible for managerial functions. In case the cost increases that individual will be held responsible. Responsibility is assigned according to knowledge and skills.

Responsibility accounting can be used as an effective managerial tool in following ways:

• Motivational tool: This can be used as an effective motivational tool by the management, as responsibilities are assigned to individuals they are motivated to improve there performances continuously.
• It can be used as a control technique: As managers have control on revenue and expenses under there authority, this system helps to evaluate there performances through the information provided by it. For example big decisions are part of top management responsibility, which makes them accountable for the decisions taken by them.
• Delegation and control: This system helps to delegate responsibility to individuals based on there skills, knowledge and expertise.
• Decision making: This system helps in decision making. As information from various sources are collected and reported this helps in planning and decision making.
• Availability of information: As all the data required are present this can be used to establish a system of performance appraisal for managers.

Quality costs are used to determine what amount of organization resources are used for prevention and maintaining quality in comparison to the cost resulting from internal and external failures. It is an important communication tool. It helps the management to know the potential savings that can be gained by improving the process that are implemented from time to time.

Types of quality costs:

• Prevention costs: These are the cost which are incurred to prevent failures or to reduce it to minimum. For example cost associated with family planning, new product development, employee training. These cost helps to prevent the failures that might occur( due to less trained employees, etc) and thus can improve the profitability and efficiency of an organization.
• Appraisal cost: These costs are associated with activities related to quality. Under this customer and suppliers are evaluated in terms of purchases made in respect of materials, services, etc. Appraisal cost includes verification, Quality audits and supplier ratings. This proves as a handy tool in the hands of an organization to improve its profitability and efficiency as under this verification of incoming materials, process are made so as to ensure that they meet the specifications required.
• Internal failure cost: These are the costs that are incurred due to defects that are found before the product reaches the customer. An analysis of this cost can help organization to improve its product and can help to reduce costs such as excessive scraps, reduce waste, machine breakdown, etc.
• External failure cost:These costs are associated with situations when defects are found after the customers receive the product. Example warranty claims, shipping damage, customer complaints. A thorough analysis of these costs can reduce the total cost which will improve the profitability of an organization. Analysis of these costs helps the organization to improve organizations image in the eyes of customer which improves profitability an efficiency of the organization.

Analysis of these costs can improve the efficiency and profitability of the organization. These costs are a measure of the quality effort. Analysis of these costs helps to analyse and assess how effective the management is. This also helps to know the problem areas within the organization so that corrective measures can be taken on time. Analysis of these costs also helps the organization to know the opportunity that is present and let it know which activity or action should be on priority and thus increases the efficiency of an organization.