FIKRIYAH ARINAL HAQ / 12010006/ TERM 5/

MANAGEMENT CONTROL SYSTEMS]

September 22, 2014

Resume Chapter 4
Responsibility Centers: Revenue and Expense Center

Responsibility center constitute the structure of a control system and the assignment
of responsibility to organizational subunits must reflect the organizations strategy. A
responcibility center is an organization unit that is headed by a manager who is responsible
for its activities.
A responsibilty center exist to accomplish one or more purposes, termed its objective.
The company as a whole has goals and they set strategies to accomplish these goals. The
objectives of the companys responsibility centers are to help implement these strategies.
Because, every organization is the sum of its responsibility centers, if each responsibility
center meets its objectives, the goals of the organization will have been achieved.
The inputs and outputs relationship in some centers is causal and direct, but in many
situations, inputs are not directly related to outputs. For example, advertising expense is an
input that is intended to increase sales revenue, but since revenue affected by many factors
other than advertising, the relationship between increased advertising and any subsequent
increase in revenue is rarely demonstrable and managements decision to increase advertising
expenditures is typically based on judgment rather than data.
Inputs are resources used by the responsibility center. Much of the input
responsibility centers use can be stated as physical measurement hours of labor, quarts of
oil, reams of paper, and kilowatt-hours of electricity. In MCS, its translated into monetary
terms; the monetary value of a given input is ordinarily calculated by multiplying a physical
quantity by a price per unit. The resulting monetary sum is called Cost. Cost is a monetary
measure of the amount of resources used by a responsibility center. Measure the cost of
inputs is easier than the value of outputs, for example annual revenue may be an important
measure of a profit-oriented organizations output, but that figure wont express all that
organization did during that year. The other example, in a college can easily measure the
number of students graduated, but it is difficult to measure how much education each of
them acquired.
The concepts of input, output and cost can be used to explain the meaning of
efficiency and effectiveness, which are the two criteria by which the performance of
responsibility center is judged. Efficiency is the ratio of outputs to inputs or the amount of
output per unit of input. It is said efficient if has same input but produce more output or has
the fewer input but produce the same output. Than, the effectivenes is determined by the
relationship between a responsibility centers output and its objectives. The efficiency and
effectiveness arent mutually exclusive; every responsibility center ought to be both efficient
and effective. A responsibility center is efficient if it does things the right, and it is effective
if it does the right things.
Responsibility Centers: Revenue and Expense Center
The Management Control Environment

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FIKRIYAH ARINAL HAQ / 12010006/ TERM 5/

MANAGEMENT CONTROL SYSTEMS]

September 22, 2014

Profit is an important measure effectiveness, but since the profit is the difference
between revenue and expense its also measure efficiency. Thus, profit measures both
effectiveness and efficiency.
There are 4 types of responsibility centers according to the nature of the monetary
inputs and/or outputs that are measured for control purposes:
1. Revenue centers, output is measured in monetary terms, but no formal attempt is made to
relate input to output.
2. Expense centers, theyre responsibility centers whose imputs are measured in monetary
terms, but whose outputs are not.
3. Profit centers, both revenue and expense are measured.
4. Investment centers, the relationship between profit and investment is measured.
There are two broad types of expense center:
1. Engineered expense centers, its possible to estimate the right amount of costs that
should be incurred to produce a given level of output. The characteristics of
engineered expense centers are:
a. Their input can be measured in monetary terms
b. Their output can be measured in physical terms
c. The optimum dollar amount of input required to produce one unit of output can be
determined
2. Discreationary expense centers, budgets describe the amounts that can be spent, but
its not possible to determine with exactitude the optimum levels of these expenses.
The principal types of discreationary expense centers are:
a. Administrative support centers, its include senior corporate management and
business unit management, along with the managers of supporting staff units.
Otherwise, support centers are units that provide services to other responsibility
centers. Control problems (difficulty in measuring output and lack of goal
congruence) and budget preparation are part of this section.
b. R&D centers, The activities conducted by R&D organizations lie along a
continuum, with basic research at one extreme and product testing at the other.
Basic research has two characteristics:
It is unplanned, with management at best, specifying the general area to be
explored.
There is often a significant time lapse between the initiation of research and the
introduction of a successful new product.
The R&D program consists of a list programs plus a blanket allowance for
unplanned work, it is usually reviewed annually by senior management. The
preparation of the annual budget of it is fairly simple matters, involving mainly
the calendarization of the expected expenses for this budget period.
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FIKRIYAH ARINAL HAQ / 12010006/ TERM 5/

MANAGEMENT CONTROL SYSTEMS]

September 22, 2014

To measurement of performances company, management receives two types of

financial reports on R&D activities. First, it compares the latest forecast of total
cost with the approved amount for each active product. Second, types of financial
report consist of a comparison between budgeted expenses and actual expenses in
each responsibility centers.
c. Marketing centers,their activities are those undertaken to obtain orders for
company products. Their activities include test marketing, the establishment,
training, and supervision of the sales force, advertising and sales promotion.
While it is possible to measure a marketing organizations output, evaluating the
effectiveness of the marketing effort is much more difficult. It is caused by the
changes in factors beyond the marketing departments control may invalidate the
assumptions on which the sales budgets were based.
GENERAL CONTROL CHARACTERISTICS:
Budget preparation: it used to decides whether the proposed operating budget represents
the unit cost of performing its task efficiently. Management makes diiferent budgetary
decisions for discreationary and engineered expense centers. In discreationary expense
centers, management formulate the budget by determining the magnitude of the job that
needs to be done. It falls into 2 general categories: continuing (work is done consistenly from
year to year) and special (work is a one-shot project).
Two ways are the planning function for discreationary expense centers:
a. Incremental budgeting: in this model the discretionary expense centers current level
of expenses is taken as a starting point. This amount is adjusted for inflation,
anticipated changes in the worload of continuing job, special job, comparable jobs.
This model has 2 drawbacks:
The discreationary expense centers current level of expenditure is accepted and
not re-examined during the budget preparation process
Managers of these centers typically want to increase the level of services and thus
tend to to request additional resources.
b. Zero-base review: an alternative budgeting approach is to make a thorough analysis of
each discretionary expense center on a rolling schedule, so that all are reviewed at
least once every five years or so. Its attempts to ascertain, de novo, that is, from
stratch, the resouces actually required to carry out each activity within the expense
center.
Cost variability: the cost of engineered expense centers is different with the cost of
discretionary expense centers. Costs in discretionary expense centers are comparatively
insulated from such short-term fluctuations. Management tends to approve changes that
correspond to anticipated changes in sales volume.

Responsibility Centers: Revenue and Expense Center

The Management Control Environment

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FIKRIYAH ARINAL HAQ / 12010006/ TERM 5/

MANAGEMENT CONTROL SYSTEMS]

September 22, 2014

Type of financial controls: The main purpose of its budget is to control costs by allowing
the manager to participate in the planning, sharing in the discussion of what tasks should be
undertaken and what level of effort is appropriate for each. Thus, in a discreationary expense
centers, financial control is primarily exercised at the planning stage before the costs are
incurred.
Measurement of performance: in discretionary expense centers as opposed to
engineered expense centers, the financial performance report isnt a means of evaluating the
efficiency of the manager.

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The Management Control Environment

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