Responsibility centers

Introduction

Nature of Responsibility centers



A responsibility center exists to accomplish its purpose termed as objectives. The company has goals and senior management decide on set of strategies to accomplish these goals. The objectives of various responsibility center are to help implement these strategies .

Responsibility centers
Sum of all responsibility centers = Organization Objectives achieved Goals achieved

Management Control Systems



 

It is concerned with achievement of goals and objectives with ease and at least cost. Purpose of MCS is being in control, not controlling. It is concept based on decentralization. The key feature is strategy implementation.

Responsibilty centers
 

Responsibility centers are the feature of responsibilty accounting. It is a segment of a larger organization and is placed under the control of the manager. A segment could take the form of:  Department  Division  Function  Unit  Product  Item of equipment

Responsibilty centers


The manager of responsibilty center is directly responsible for its performance. Cost, revenue and profits associated with the centers are recorded. Responsibilty centers are the important feature of cost accounting and budgeting

Responsibilty Accounting
FEATURES:  Segments: Business organizations is broken into several identifiable units or segments known as responsibilty centers.


Boundaries: The boundaries of each segment are clearly established. Control: The manager is placed in charge of each segment. The manger is expected to take charge of cost / revenue / profits associated with the center. He is expected to plan and control those centers

Responsibilty Accounting
FEATURES:


Authorization: Segmental managers are given the authority to operate segments as autonomously as possible

4 types of responsibility center

Cost center Revenue center Profit center Investment center Manager responsible for costs incurred Manager responsible for revenue raised Manager responsible for both costs and revenue Manager responsible for profit, capital investment and financing

Relationship b/w Inputs & Output

Inputs
Resources used (measured by cost)

Work

Output
Goods or Services

Capital

The unit managers responsibility

Costs Revenue Profit Investment Cost center

Y Y Y Y Y Y Y Y Y

Revenue center Profit center Investment

Example: A level business studies

Within a school or college A level business studies can be treated as a cost center It is possible to calculate the cost of offering this A level subject salary of teaching staff, cost of materials used plus an allocated share of the fixed overhead costs If the college finance manager calculated the revenue generated by the A level business studies then the course could be treated as a profit center The examination awarding bodies do treat A level business studies (and every other subject) as a profit center. Data is collected on the cost of offering the subject and the revenue received from the examination fees.

Why organize in terms of centers?

1. Improved accountability costs/revenues can be monitored 2. Facilitate delegation by allowing autonomy for managers in the center 3. autonomy and empowerment of managers improves motivation 4. Greater autonomy aids decision making

Why organize in terms of centers?

5. The performance of an individual unit can be measured 6. Analysis of performance of individual units means that there is no hiding place for weak performing units 7. Senior management is able to trace problems 8. centers are an aspect of budgetary control. By dividing up the business in terms of centers a named post holder is identified as being responsible.

Cost / Expense centers

A responsibility center in which the manager is accountable for direct costs only It is a specific and discrete department, area or person within a business form which costs can be ascertained and to which costs can be allocated An individual part of a business where costs are incurred and can be easily recorded The manager responsible for the center has control over the costs but not revenue A significant fraction of the costs are directly attributable costs but there is no directly attributable revenue.

Cost / Expense centers

Here inputs are measured in monetary terms but outputs are not. Two types of Expense centers: Engineered Cost: Those for which the right or proper amount can be estimated with reasonable reliability. Ex: Direct material, Direct labour cost, Supplies etc. Discretionary Cost: Those for which no such engineered estimate is feasible.

Engineered Cost centers

Their inputs can be measured in monetary terms. Their output can be measured in physical terms. The optimum Re amount of input required to produce one unit of output can be determined.
Optimum relationship can be established

Inputs Rs.

Work

Output Physical

Manufacturing Function

Discretionary Cost centers

Discretionary centers include administrative and support units. Ex: accounting, legal, industrial relation, public relation, HR, R&D & marketing services. Their output can not be measured in monetary terms.
Optimum relationship can not be established

Inputs Rs.

Work

Output Physical

R & D Function

Examples of cost centers

Personnel / HR department Finance department R&D department Transport department Warehouse and stock control department Buying department In all the above cases the department incurs costs but does not earn revenue An item of equipment (such as a photocopier) can also be regarded as a cost center

Revenue center
A responsibility center in which the manager is responsible for revenue only Example: sales department Most costs will be fixed and will be very small in relation to the revenue earned
Inputs not related to outputs

Inputs
Rs. Only .for cost incurred

Work

Output Rs. Revenue

Marketing Function

Profit center
A business unit to which costs and revenues are allocated and recorded A responsibility center in which the manager is responsible for costs and revenue and therefore the profits of the unit A profit center is allowed to control itself as a separate part from the larger organization As costs and revenue can be attributable it makes sense to see the center as a business within a business Example: product department or division with a reasonable degree of autonomy

Profit centers can make a loss

It is entirely wrong to see a profit center as the part of the business that makes a profit whereas all the other parts are presumably loss centers Profit centers are simply a part of the business for which data on costs, revenue and profit/loss are recorded It is quite possible for a profit center to produce a negative profit i.e. a loss

Profit center
Inputs are related to outputs

Inputs Rs. Cost

Work

Output Rs. Profits

Business Unit

Examples of profit centers

An individual product within the product portfolio A range of products A brand A geographical region within the company A branch office A product division of the company In each case it is possible to identify and calculate the costs incurred and the revenue received

Investment center
This takes responsibility to a greater depth A responsibility center in which the manager is responsible for all aspects of finance costs, revenue, profit and investment Example: a division of a large MNC The division is assessed in terms of its contribution to overall profits
Inputs are related to Capital Employed

Inputs Rs. Cost

Capital Employed

Output Rs. Profits

Business Unit

Advantages of organizing in terms of responsibility centers

Decentralized decision making: faster and more responsive to local conditions Responsibility centers facilitate delegation Motivation is improved Improved monitoring of budgets, targets and performance Greater accountability Facilitates budgetary control Prevents the performance of weak elements being hidden within the larger organization

Problems and disadvantages

There is a danger that the individual centers become too narrowly focused Managers of responsibility centers tend to be more concerned with the unit objectives than the corporate objectives Rivalry between centers breaks out Creates problems of coordination Creates communication problems Allocation of costs is complex; any unfairness in the way costs are allocated can lead to demotivation