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Management Accounting · Responsibility Accounting

Responsibility Accounting and Types of Responsibility Centres

Updated 10 October 2026 · Fact-checked

Responsibility accounting is a system that collects, reports and reviews costs, revenues and investments by the manager who controls them. The organisation is split into responsibility centres: cost, revenue, profit and investment. To answer questions, identify what the manager controls, then match the centre and the right performance measure.

Understand Responsibility Accounting Concept and Responsibility Centres

Responsibility accounting is a control system in which the organisation is divided into units, and each unit has a manager who is held accountable for the items that manager can influence. Reports go to that manager and to the next level up, showing planned figures, actual figures and the differences.

The core idea is controllability. A manager should be judged only on what the manager can control or significantly influence. If a plant manager cannot decide the price of electricity bought from the head office, that price should not count against the manager's performance.

A responsibility centre is a part of the organisation whose head is responsible for a defined set of activities and results. There are four types, and the difference lies in what the manager controls:

  • Cost centre: the manager controls costs only. Output is not sold at a price the manager sets. Examples: a factory maintenance department, a stores section, the HR department. Performance is judged by comparing actual cost with budgeted or standard cost.
  • Revenue centre: the manager controls revenue only, not the cost of the goods sold. Example: a regional sales office of a company that sells through branches. Performance is judged by actual sales against budgeted sales.
  • Profit centre: the manager controls both revenue and cost. Example: a branch or product division that sets prices and buys inputs. Performance is judged by profit against budget.
  • Investment centre: the manager controls revenue, cost and also the investment (assets) used. Example: a strategic business division that can decide on new plant. Performance is judged by measures such as Return on Investment (ROI) and Residual Income (RI), which relate profit to capital employed.

Objectives of responsibility accounting include: fixing accountability for results, helping planning and budgeting at each level, motivating managers through clear targets, supporting management by exception (only significant variances are investigated), and giving a base for performance evaluation and rewards.

Process (steps in the system): divide the organisation into responsibility centres; define the authority and responsibility of each centre head; set targets or budgets for each centre, agreed with the manager; record actual results centre-wise; prepare performance reports comparing actual with budget; analyse variances, separating controllable from non-controllable items; and take corrective action and give feedback.

Key rules to remember

Cost centre performance
Variance = Actual cost − Budgeted (standard) cost
Actual higher than budget is adverse. Compare on the same activity level, so use a flexed budget where output differs.
Revenue centre performance
Sales variance = Actual sales − Budgeted sales
Actual higher than budget is favourable. Revenue centres are judged on revenue, not on profit.
Profit centre performance
Profit = Revenue − Costs charged to the centre
Include only costs the manager controls when judging the manager. Judging the centre itself may include allocated costs.
Return on Investment
ROI = Profit ÷ Capital employed × 100
Used for investment centres. Use the profit and capital definition given in the question.
Residual Income
RI = Profit − (Capital employed × Required rate of return)
Used for investment centres. Positive RI means the division earns more than the required return.
Controllability rule
Evaluate a manager only on controllable items
A cost controllable at one level may be non-controllable at a lower level.

How to solve Responsibility Accounting Concept and Responsibility Centres questions

Use this method for definition, classification and performance-report questions.

  1. 1Read what the manager can decide: costs only, sales only, both, or both plus assets.
  2. 2Name the centre type from that answer: cost, revenue, profit or investment.
  3. 3State the correct performance measure for that centre: cost variance, sales against budget, profit, or ROI and RI.
  4. 4Separate controllable items from non-controllable items. Exclude allocated or uncontrollable items when judging the manager.
  5. 5Compute the figures: variances, profit, ROI or RI, showing each working line.
  6. 6Mark each variance as favourable or adverse and say what it means.
  7. 7Close with one line of interpretation and a suggested action, in line with management by exception.

Quickest way: Control test for classifying a centre

When to use it: Use it for MCQs and short classification questions where you have under two minutes.

  1. Ask: does the head control only cost? Then it is a cost centre.
  2. Ask: does the head control only sales? Then it is a revenue centre.
  3. Ask: does the head control both sales and cost? Then it is a profit centre.
  4. Ask: does the head also decide on assets or capital? Then it is an investment centre.
  5. Match the measure: cost variance, sales target, profit, or ROI and RI.

Common mistakes in Responsibility Accounting Concept and Responsibility Centres

  • Calling every department a cost centre or a profit centre without checking what the manager controls.

    Students classify by the name of the department instead of by authority.

    Fix: Apply the control test: costs only, sales only, both, or both plus investment.

  • Judging a profit centre manager on costs allocated from head office.

    Students forget the controllability principle.

    Fix: Separate controllable and non-controllable items and judge the manager only on the controllable ones.

  • Using ROI or RI for a cost centre or profit centre.

    Students remember ROI as the general divisional measure.

    Fix: Use ROI and RI only where the manager controls investment, that is, an investment centre.

  • Comparing actual cost with a fixed budget when activity level differs.

    Students skip flexing the budget.

    Fix: Flex the budget to actual output before calculating the cost centre variance.

  • Writing objectives as a list of keywords with no explanation.

    Students memorise headings only.

    Fix: Write each objective in one short sentence, with a one-line reason, for example fixing accountability so that each variance has an owner.

Worked examples

Example 1

Classify each unit and name the main performance measure: (a) the maintenance department of a factory in Pune; (b) a sales office in Chennai that sells goods supplied by the factory at fixed transfer prices and does not control product cost; (c) a division that sets prices, buys materials and decides on new machinery; (d) a division that sets prices and buys materials but cannot make capital decisions.

Show the solution
  1. (a) The manager controls cost only. It is a cost centre. Measure: actual cost against budgeted cost.
  2. (b) The manager controls sales but not product cost. It is a revenue centre. Measure: actual sales against budgeted sales.
  3. (c) The manager controls revenue, cost and investment. It is an investment centre. Measure: ROI and RI.
  4. (d) The manager controls revenue and cost but not investment. It is a profit centre. Measure: profit against budget.

Answer: (a) Cost centre, cost variance; (b) Revenue centre, sales against budget; (c) Investment centre, ROI and RI; (d) Profit centre, profit against budget.

Example 2

A machining cost centre budgeted ₹4,00,000 of controllable cost for 2,000 units. It produced 2,200 units at an actual controllable cost of ₹4,18,000. Assume the cost is fully variable. Evaluate the manager.

Show the solution
  1. Budgeted cost per unit = ₹4,00,000 ÷ 2,000 = ₹200.
  2. Flexed budget for 2,200 units = 2,200 × ₹200 = ₹4,40,000.
  3. Variance = Actual − Flexed budget = ₹4,18,000 − ₹4,40,000 = ₹22,000 favourable (actual is lower).
  4. Comparison with the original budget (₹4,18,000 − ₹4,00,000 = ₹18,000 higher) would wrongly show an adverse result, because output was 10% higher.
  5. Interpretation: the manager has controlled cost well. Cost per unit actual = ₹4,18,000 ÷ 2,200 = ₹190, against ₹200 budgeted.

Answer: The cost centre shows a favourable variance of ₹22,000 against the flexed budget of ₹4,40,000. Actual cost per unit is ₹190 against ₹200, so performance is good.

Exam tips

  • Begin classification answers with the control test sentence, then name the centre. This earns marks even if the example is imperfect.
  • For performance reports, always show Actual, Budget, Variance and F or A in a table-like layout, and add one line of interpretation.
  • If a question mentions allocated head-office costs, show the manager's controllable result separately from the full result.
  • In MCQs, watch for traps that pair the wrong measure with a centre, such as ROI for a cost centre.
  • For theory questions on objectives or process, write short numbered points of one sentence each rather than long paragraphs.

Practice questions from Responsibility Accounting

Responsibility Accounting Concept and Responsibility Centres in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Responsibility Accounting Concept and Responsibility Centres: frequently asked questions

What is responsibility accounting?

It is a system that assigns costs, revenues and investments to the managers who control them. Each manager gets reports comparing actual and budgeted results. This fixes accountability and supports management by exception.

What is the difference between a cost centre and a profit centre?

A cost centre manager controls costs only and is judged on cost against budget. A profit centre manager controls both revenue and costs and is judged on profit. The profit centre therefore has wider authority.

What are the four types of responsibility centres?

They are cost centres, revenue centres, profit centres and investment centres. They differ in what the manager controls. Investment centres are the widest, as the manager also controls the assets used.

Which measures are used for investment centres?

Return on Investment and Residual Income are the usual measures because they relate profit to the capital employed. Other measures may also be used with them. Follow the definitions given in the question.