Benefits-Drawbacks

What Is Responsibility Accounting ?

Responsibility accounting means identifying different responsibility centers (branch, department, units etc.) in the organization and measuring their inputs and output in order to understand their performance. It is an internal accounting system that compares actual performance of different responsibility centers with budget. It helps the company to achieve the accounting objectives.

Benefits Or Advantages Of Responsibility Accounting

The major advantages of responsibility can be highlighted as follows:

1. It Promotes Decentralization

In responsibility accounting, whole organization is divided into different units such as production department, marketing department, maintenance department etc. and responsibility is assigned to departmental managers. So, it encourages decentralization and delegation of responsibility which helps to manage organizational tasks efficiently.

2. It Reduces The Burden Of Top Manager

This system assigns the responsibility and duties to the managers of different departments, units, or responsibility centers. So, it reduces the workload of top managers and they can use their time and effort to make future plans and policies.

3. Fair Performance Evaluation

It evaluates the performance or achievement of  departments or units with the help of pre-established standards. It helps to measure the efficiency of each manager and employee of different responsibility centers. 

4. It Increases Motivation

Lower level managers know that they are under supervision and their achievement will be compared with pre-planned goals. So, it create awareness and motivates them to perform better to obtain good results.

5. Better Decision Making

Responsibility accounting provides data and information about the performance and outcomes of each department to the top level management. It helps the managers to make important decision regarding future planning and actions.

6. Corrective Action

It provides performance report of each responsibility center to the management as quickly as possible. It helps to take appropriate steps and corrective actions to improve operating activities in the organization.

7. Helpful For Cost Control

Responsibility centers are encouraged to perform activities within the limits of budget. It helps to minimize unnecessary costs in the workplace.

8. Suitable For Big Organizations

It is suitable for big business organizations with various departments, segments, units etc. because they cannot be monitored, controlled and managed by a single management.

Drawbacks Or Disadvantages Of Responsibility Accounting

The major disadvantages of responsibility accounting can be pointed out as follows:

1. It Is A Costly System Of Accounting

As we know that this system promotes decentralization, it requires skilled and competent line managers to manage departments properly. So, it requires more cost to hire capable managers and personnel.

2. Possibility Of Employee Frustration

Because of strict supervision and control, employees may feel frustrated and stressed. Frustration and depression adversely affect their performance which may reduce productivity and profitability.

3. Only For Controllable Costs

Responsibility accounting is applicable to measure and control controllable costs only. It does not work with uncontrollable costs.

4. May Lack Accuracy

Results obtained from responsibility accounting may lack accuracy if there is no quick and effective reporting system in the organization. Delayed report makes top management difficult to measure the performance and take appropriate steps in case of any mistake. 

5. It Is A Complex System

It is very difficult to establish organizational chart and to assign authority and responsibility properly to the right person. It is hard task to set goals or objectives for each center. So, it is a complex method of accounting.

6. Not Suitable For Small Organizations

Responsibility accounting is complex and costly system. So, it is not suitable for small business organizations with less operational activities and fewer resources.

Pros:

- It is helpful for performance evaluation of each department.

- It helps the management to make future plans and to make sound decisions

- It helps to minimize unnecessary expenses

- It is suitable for big companies 

- Because of decentralization, it minimizes the load of top management

- It improves the morale of the departmental heads because they can develop managerial skills

Cons:

- It is costly as well as complex system, so responsibility accounting is not applicable for small companies having limited resources

- Subordinates may be frustrated because of strict supervision and control . So, there is a possibility of conflict between individual goals and organizational goals.

- It only works for controllable costs

- It is difficult to define responsibility centers

Benefits Or Advantages Of Leasing

The main advantages of leasing can be described as follows:

1. It Promotes Entrepreneurship

2. It Enhances Liquidity

Leasing saves huge amount of fund which increases liquidity of the firm. Saved fund can be used to fulfill working capital requirement or can be invested in other profitable activities.

3. It Provides Tax Benefit

A company can enjoy tax benefit because lease rental payments are operating expenses and deducted from taxable income. So, leasing saves costs.

4. Convenience Method Of Financing

Leasing is cheaper and convenience than other sources of financing. It does not require various steps and formalities like borrowing loan from banks and financial companies.

5. Suitable For Small And New Business

Leasing is beneficial for small and newly established business firms because it helps to acquire assets without huge capital expenditure and formalities.

6. Provides Protection Against Obsolescence

Another advantage of leasing is that it avoids the risk of obsolescence. Lease agreement is beneficial for lessee (user of asset) because he does not need to bear the risk of obsolescence during the leasing period.

7. Flexible Source Of Financing

Lease rentals and period can be structured, changed or terminated with the mutual understanding between lessor and lessee. So, it is flexible than other sources of long term financing.

8. Not Affected By Inflation

Another notable advantage of leasing is that lease rental is not affected by inflation. Lessee pays same amount of rental payments till the end of the agreement.

Drawbacks Or Disadvantages Of Leasing

Some of the major disadvantages of leasing can be described as follows:

1. Decreases The Return On Equity

Lease rental is deducted from the net income of the company. So, it reduces return on the equity shares.

    

       Also Read: 

Advantages And Disadvantages Of Hire Purchase

Features Of Leasing

2. No Ownership

Leasing does not provide ownership of asset to the user (lessee). Such assets cannot be pledge to obtain loan from banks and financial institutions.

3. It May Increase Cost

Although lessee is not a owner of the asset, he is responsible for repairing and maintenance . So, it increases the cost for the company.

4. No Alteration

Another disadvantages of leasing is, user cannot alter the asset in any situation. If the asset is bought, a company can modify it or make changes to improve its efficiency. But in case of , assets should not be altered by user.

Pros And Cons Of Leasing In Short

Pros:

- It helps to improve the liquidity of the firm

- It is a convenience, flexible and cheaper method of long term financing

- It saves costs because lease rentals are tax deductible

-  It saves the lesser from the risk of obsolescence

Cons:

- It reduces the return of equity shareholders

- It is costlier than debt financing

- Ownership of the asset remains with lessor

Merits Or Advantages Of Process Costing

The main advantages of process costing can be highlighted as follows:

1. Simple Method Of Costing

Process costing is very simple method of computing costs of each stage or process of production. Because of homogeneous products, average cost of product can be calculated easily in less time.

2. Periodic Calculation Of Cost

Cost of each process and per unit cost of finished products can be determined periodically at short intervals with less clerical and paper works. 

3. Suitability

Process costing is suitable for standardized products, large scale production, identical or homogeneous products etc.

4. Better Managerial Control

Cost and performance of each process or department can be evaluated regularly at short intervals. With the help of standard costing, management can take appropriate steps to minimize unnecessary costs and wastage. So, process costing facilitates the management for better control.

Manufacturing firms can add or remove process as per their needs and requirements in order to control the cost of production. So, process costing facilitates flexibility in the production process.

Demerits Or Disadvantages Of Process Costing

The main disadvantages of process costing can be highlighted as follows:

1. Historical Value

This costing method uses historical or past cost data. So, it may not provide accurate cost information for better control.

      Also Read:

Advantages And Disadvantages Of Activity Based Costing

Advantages And Disadvantages Of Job Order Costing

Advantages And Disadvantages Of Standard Costing

2. Inaccuracy

There exists a chance of inaccuracy or error while estimating the cost of work in progress or finished goods because it is based on average cost.

3. Unsuitability

Process costing is not suitable for diverse products. It is suitable only for identical products.

4. Difficulty In Average Cost

It is very difficult and complex to find out average cost if the company manufactures more than one type of products.