Reason why organizations should go for Responsibility Accounting system: Direct materials and direct labor are generally directly identifiable with specific products, jobs, or processes. Factory overhead, however, consisting of indirect supplies, indirect labor, and numerous factory expense items such as power, water, utilities, repairs and maintenance, taxes, insurance, and depreciation, creates two distinct problems.
1. Its allocation to products for the purpose of inventory costing and profit determination, and 2. Control of factory overhead with the aid of responsibility accounting. The well-designed information system yields product costs for inventory costing and profit determination. However, it should also provide a control mechanism encompassing responsibility accounting system and make available meaningful cost data useful in setting policies and making decisions.
The predetermined or budgeted revenue and expense items form the foundation for comparison with actual results leading to the variance analysis or management by exception principle. The establishment of such a responsibility accounting system would allow and maintain the most efficient and profitable balance between manufacturing and marketing. On the one hand, management needs to decide the kinds and costs of its products; on the other hand, management must decide the kinds and prices of its products.
The best profit results from the proper balance of these considerations. For these reasons, product costs must be fairly accurate, include all relevant costs, and recognize cost differentials among products.