RESPONSIBILITY CENTERS

An important component of Management Controls – Assigning responsibility for executing strategy

Implementing strategies is not adequate if individuals who must execute them fall short.

Responsibility CenterIn simple words: an organizational unit for which a manager is made responsible.Examples: A specific store in a chain of grocery stores.A work-station in a production line manufacturing automobile batteries.The payroll data processing center within a firm.

Attributes of a responsibility center

It is like a small business, and its manager isAsked to run that small business and preserve the interests of the larger organization.Goals for the center should be specific and measurable, andShould promote the long terms interests of the organization and should be compatible with other responsibility center activities.

Input-Output AttributesMost organizations use financial controls – cost, revenue, and profits, etc.However, such measures are not applicable to all units within an organization.For example, how would you measure the contribution of a production department? It can only be done on a cost measurement basis.How would you measure the contribution of a sales department – only by revenue generated.

EFFECTIVENESS AND EFFICIENCYEffectiveness: It means how well the responsibility center does its job- that is, the extent to which it produces the intended or expected results.

Efficiency: It is used in its engineering sense – that is, the amount of output per unit of input.

A responsibility center must both be efficient and effective.

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Types of Responsibility centers

Cost centers Expense Centers Revenue Centers Profit Centers

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Cost centresOutput can be measured and specify the

amount of inputManagers are held responsible for cost

incurred in the centers.Efficiency is measured by the amount of input

consumed.Managers are not responsible for volume

variances.

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Expense CentresCenters that produce outputs that are

not measurable in financial terms.No strong relation exits between

resources and resultsPerformance evaluation on the basis

of the inter and intra firm comparison of expenses.

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Revenue CentresGenerally a revenue centre acquires

finished goods and is responsible for selling and distributing them.

If pricing is not within its control, then the manager is held responsible for the volume and mix variances.

If pricing is within its control, then it can be made responsible for gross revenue.

They are not profit centres because the expenses are incomplete.

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Profit Centres

In this case managers have almost complete operational decision-making.

They are evaluated on the basis of profit generated.

Principal functions manufacturing and marketing are performed.

It sells majority of its output to the outside world.

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