RESPONSIBILITY ACCOUNTING- A SUGGESTED TOOL FOR PERFORMANCE MEASUREMENT IN THE MSMES

Decentralization is now days a common process followed in all types of business organizations. It is the process of delegating decision authority and responsibility to the functional divisions. In centralization, a limited amount of authority is delegated. In decentralization, a significant amount of authority is delegated to the middle or lower level management. The large scale organizations always believe in decentralization and operate their key functional activities such as production, marketing, sales etc. accordingly. The decentralization is quite common now days due to the product or service varieties, branch networks and wide spread business areas.

In the small and medium scale organizations, (MSME) usually the decision making is often rest in the hands of the top management or the owners.  They highly follow the system of centralization. But the changing scenario of the small and medium scale organizations is now also demanding for the decentralization at least up to a certain extent. When the division is decentralized, then it considers as a separate responsibility center which carries entire responsibility of the given task. The responsibility center shows input output relationship very intensely. The divisional managers are held responsible for the performances of their respective divisions and the performance of each division is to be measured in the financial terms.   Such a financial performance of the division can be measured by adopting the system of responsibility accounting. 

Responsibility accounting is a management control system based on the principles of delegating and locating responsibility at the divisional level. Responsibility accounting is a system under which managers are authorized to decisions making, and holding responsibility for each activity that occurs within a specific area of the company. Under this system, managers are made responsible for the activities of segments. These segments may be called departments or branches or divisions or units.

So, can it be possible to apply this accounting tool in MSMEs? Yes, Why Not?

Suppose you are the production manager in small manufacturing company. Then you are planning your department's budget and hence are accountable for keeping it under control. No need to say that as a head, you must have all of the necessary information about the department's costs. You should look for the problem and take the necessary actions and processes to correct it if the expenditure exceeds the allocated amount. This is what your department’s performance measurement as per the Responsibility Accounting logic.

Now as you are interested and ready to apply Responsibility Accounting in your department, then need not to be worried about the accounting calculations. You can use the simple formula for your department-

Sales of company (-) Department Variable Costs = Contribution margin - Fixed costs (of your department if possible. Otherwise proportionate fixed costs) = Segment Margin (-)

Common Fixed Costs = Net Income

Here, the Red highlighted elements are your department performance indicators.

In this way, the Responsibility Accounting is strong tool for MSMEs to measure performance at divisional level or even at activity level.

Dr.Aniruddha Thuse

Associate Professor

IGSB, Pune