Responsibility Centers

What is a responsibility centre? Responsibility centre is a unit or function of

an organization headed by a manager who is directly responsible for its performance.

Responsibility centers help managers implement strategies of the organization.

Every responsibility centre uses inputs (material, labour) and needs working capital and other assets to function effectively.

The responsibility centre produces output in the form of goods and services

Types of responsibility centres Expense centres Revenue centres Profit Centres Investment Centres

Relation between inputs and outputsResponsibility centre

Inputs Outputs Remarks

Engineered Expense Centre

Monetary terms Physical terms Optimal relationship can be established

Discretionary Expense Centre

Monetary terms Physical terms Optimal relationship cannot be established

Revenue Centres

Monetary terms Monetary terms( revenue)

Input not related to outputs

Profit Centres Monetary terms Monetary terms(profit)

Inputs are related to outputs

Investment Centres

Monetary terms Monetary terms(profit)

Profits are related to capital employed

Expense centres : Engineered expense centres Engineered expense centres: Input can be

measured in monetary terms. Input can be measured in physical terms.

Usually found in manufacturing operations. Output multiplied by standard cost of

each unit measures what the finished product should have cost.

Difference between the theoretical cost and the actual cost represents the efficiency of the expense centre

Expense centres : Engineered expense centres Some tasks of engineered expense

centres are not measured by cost alone such as quality of the goods, training etc.

Not all cost items in a responsibility centre can be engineered. Amount of indirect labour and other services can vary with management discretion.

Discretionary expense centres Output cannot be measured in

monetary terms. Includes administrative and support

units like legal and accounting, Research and development and most marketing activities

Efficiency is between the budgeted input and actual input.

It does not measure the value of output.

Control characteristics for expense centres: Budget preparation

Engineered expense centres

Discretionary expense centres

Costs are determined by the management taking into view the operating budget required to perform the task effectively in the future

Principal task is to determine the magnitude of the task . These tasks are – continuing and special

Volume is not a major concern

MBO is a technique used for preparing budgets Incremental and zero based budgeting

Control characteristics for expense centres: Cost variability

Engineered expense centres

Discretionary expense centres

Strongly affected by short run volume changes

Tend to vary from year to year but are not influenced by short run fluctuations within a year.

Control characteristics for expense centres: Financial Control

Engineered expense centres

Discretionary expense centres

Operating costs are minimized by setting a standard for the costs and comparing the actual costs with the standard . Control is exercised at the execution stage after the costs are incurred.

Costs are controlled by determining the tasks that have to be undertaken and the amount of effort that is required for each task.Control is exercised at the planning stage, before the costs are incurred.

Control characteristics for expense centres: Measurement of performance Engineered

expense centresDiscretionary expense centres

Primary task of the manager is to control costs.

Primary task of the manager is to obtain the desired output.Spending on budget – satisfactory;Spending more than budget- cause for concern;Spending less than the budget- planned work is not being done