Responsibility Centers

Chapters 4 & 5, Management Control Systems, 11th Ed., Anthony and Govindarajan

Strategy (From Previous Lecture)

Corporate Strategy
To maximize use of resources

Business Strategy
To compete in selected markets

Goals and Strategy (From Chapter 1)

Strategy Formulation
Goals How to attain

Strategy Implementation (Execution)

Objectives Management Control Systems

Where Are We Going???

Develop a Strategy Develop Goals (to support the strategy) Develop Objectives (to achieve the goals) Refine Organizational Structure (in support of the objectives) Develop Evaluation Items (in support of achieving the objectives) Assign Responsibility Centers (within the organizational structure)

Responsibility Center
An organizational unit with a manager responsible for its activities Usually refers to a unit within the organization Exists to accomplish an objective

Inputs & Outputs

Optimum relationship between inputs and outputs Within management control system, must be measurable
Unit measurements
Hours of labor, quantities of materials, etc.

Monetary measurements
Costs, revenues

Efficiency & Effectiveness

Not mutually exclusive Two criteria used to judge responsibility centers
Efficiency:
Ratio of outputs to inputs Higher is better!

Effectiveness:
Relationship of output to predetermined objectives Again, higher is better!

Types of Responsibility Centers

Revenue centers Expense centers (cost centers) Profit centers Investment centers [Chapter 6]

Revenue Center
Output, and only output, is measured Measurement is normally in monetary terms Typically, sales/marketing
Cannot set price Have no control over costs

Expense (Cost) Center

Inputs, and only inputs, are measured Measurement is normally in monetary terms Two types
Engineered expense centers
Optimal relationship between inputs and outputs

Discretionary expense centers

Optimal relationship cannot be established between inputs and outputs

Conflicts & Goal Congruence

Managers of revenue and expense centers
May seek excellence at high costs
Many $$$ for slight improvement in output

May seek output rather than quality

Increase of lesser quality products

Need special budgetary controls Must consider goal congruence

Profit Center
Both inputs and outputs are measured Measurement is in monetary terms Inputs are related to outputs

Profit Center
Two conditions must be met to create a profit center
Relevant information must be available Effectiveness of managers decisions must be measurable

Business Units
Full autonomy normally not feasible Goal congruence risk of loss increases Capital Budgeting normally limited

Selection of Measurement Items

If manager can influence an item, it could/should be used as a measurement of performance
Total control is not necessary Degree of control is relevant

Remember Two Things

Not all units within an organization need to be the same! Profit centers do not have to make a profit!