Responsibility Center

Responsibility Center
-
Responsibility center is an entity, held accountable
for an activity/function under consideration, that
becomes its objective/goal
Organization can be looked upon as collection of
responsibility centers.
Each RC consumes certain amount of resources
“INPUTS” and produces certain results “OUTPUT”
Best option to assess the performance of RC starts
with establishing relationship among INPUT and
OUTPUT and then applying it scrupulously

10/17/08 hmahesh45@yahoo.com; VIM Pune 1

 Responsibility Centers -
1. Revenue Center -
Prime concern of the REVENUE CENTER –
“TOPLINE”
e.g. Marketing center
Inputs Output
(Money directly RC’s (Sales Generated
spent on achieving TASK in money terms)
sales i.e. Mktg. Exp.)
Generate Sales

• RC has no authority to decide price.

• RC is charged with cost of Marketing and not with cost of
goods produced
• No formal relationship possible between I & O
• Performance Measure for the RC can be Revenue Budgets.
10/17/08 hmahesh45@yahoo.com; VIM Pune 2
 Revenue Center - Issues
Decision Rights –
Promotion Mix –
Performance Measures –
Maximize total sales for a given promotion budget
Actual sales in comparison with budgeted sales
Typically used when –
RC manager has thorough knowledge about
market
Promotion plays significant role in generating
sales
RC manager can establish optimal promotion mix
He can set optimal quantity and appropriate
rewards
10/17/08 hmahesh45@yahoo.com; VIM Pune 3
 2. Expenses Center:
Engineered Expenses V/s Discretionary Expenses
e.g. Manufacturing a e.g. R&D Project
product
Can be established Can not be established
scientifically scientifically
Cost varies with even Costs varies with bigger
small fluctuations in volume changes
volume
Control is easier. Control Review of task is the only
starts with planning & control measure for cost
ends with finished task. control. Control is
Financial Performance exercised during planning
measure suffice the stage itself, by way of
purpose of evaluation. establishment of budget
Financial as well as non
financial Performance
10/17/08 measure
hmahesh45@yahoo.com; VIM Pune need to be 4
 Cost Center
Inputs RC’s Output
(Money spent on (Physical units
TASK
production) Produced)

Decision Rights –
Input Mix – Labor, Material, Supplies
Performance Measures –
Minimize total cost for a fixed output
Maximize output for a given “cost budget”
Typically used when –
RC manager can measure output & quality of output
knows cost functions, optimal input mix
can set optimal quantity and appropriate rewards
10/17/08 hmahesh45@yahoo.com; VIM Pune 5
 2. Expenses Center –
2.1)Engineered Exp. Center e.g. Production
Department
Engineered expenses are those expenses which
are arrived at with reasonable reliability.e.g.
Material cost , labor cost.

Inputs RC’s Output

(Money spent on (Physical units
TASK
production) Produced)

• Performance Measure for the RC is std.cost: -

Std Cost of doing actual activity = Std. cost of unit activity *
Quantum of Actual activity
• One can establish relationship between I & O , hence
performance measurement is relatively easy
10/17/08 hmahesh45@yahoo.com; VIM Pune 6
 2. Expenses Center –
2.2) Discretionary Expenses Center -e.g. R&D,
Advt. Dept, a Movie Project
Discretionary expenses are those expenses
which can not be established with perfect accuracy

Inputs RC’s Output

(Money spent on (Product
TASK
R & D) Development)

• Difficult to estimate Input (hence called MANAGED

costs)
• Output can not be measured in monetary terms.
• Difficult to establish optimal relationship between I
and O
• Performance Measure for the RC is Budgeted Input and
Actual Input.

10/17/08 hmahesh45@yahoo.com; VIM Pune 7

Control Characteristics of Discretionary Cost
Center
• Heavy Reliance on Budgets
• For on going activity its bit easier than a new
project
• Budgeting technique used for controlling could be -
• Incremental Budgeting
• Zero Base Budgeting
• Difficult to control short term fluctuations, as
Discretionary costs usually remain unaffected in short term
unlike engineered costs.

10/17/08 hmahesh45@yahoo.com; VIM Pune 8

 Discretionary Expenses Center - Examples
i) Administrative and Support Centers- senior
management units at corporate level e.g. planning
dept., IT dept., Audit dept.
• Inherent control problem is the output can not be
measured
• Goals before these interacting units are different -
e.g. a legal advisory unit may be striving for a
perfect contract document but at what cost? Money/
time involved may lead to loosing the deal itself.

ii) Research and Development Centers –

Basic question is what should be the optimum size of R&D
budget?
• Very difficult to relate inputs with output
• The input and output may span over different and
uneven time periods.
10/17/08 hmahesh45@yahoo.com; VIM Pune 9
 Discretionary Expenses Center - Types

iii) Marketing Centers -

• These RC’s are responsible to bring in the orders
for the company and to execute these orders.
•They are not concerned with what profits their
efforts yield, rather more interested in what
revenues/sales they bring in.
•Their input is expenses incurred for getting the
sales and output is what sales they bring to
company.

10/17/08 hmahesh45@yahoo.com; VIM Pune 10

 Engineered Cost & Role of Budget

• Since these are the costs which can be pre-

determined scientifically. Budgeting becomes a easier
exercise.
• e.g. cost of production- material cost, labor cost,
overheads.

• Determine the level of activity desired.

• Determine the standard cost for a unit.

• Establish the budget for desired level of activity.

10/17/08 hmahesh45@yahoo.com; VIM Pune 11

 Discretionary Cost and Budget –
• Difficult to establish relationship between Input and
output.
• Hence difficult to establish budget/quantum of
expenses for a given activity.
• The basis for such expenses budget’s is the
magnitude of job/task to be done.
• Alternatively and most cases companies earmark
certain percent/portion of profits/sales for
discretionary expenses
• The projects involving such kind of expenses are
divided into two categories – On Going Projects and
Special projects.

10/17/08 hmahesh45@yahoo.com; VIM Pune 12

 Committed Cost & Budget –
• The expenses which are beyond control of
BU/RC manager (at least during the FY). OR
expenses that can be changed only in extra
ordinary circumstances
• e.g. Depreciation, Lease rentals, salaries of
Key Personnel

• One cannot apply management control over

such expenses.

• The committed cost are budgeted cost, they

represent fixed cost burden on RC . So budget
reflects the said costs as it is.

10/17/08 hmahesh45@yahoo.com; VIM Pune 13

 Thank You….

10/17/08 hmahesh45@yahoo.com; VIM Pune 14