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Responsibility Centers

Prof. C.S.Balasubramaniam

Responsibility Centre
Chartered Institute of Management Accountants (UK) defines Responsibility Centre as a segment of the organization where an individual manager is held responsible for the segments performance It is a department, function, business unit of an organization headed by a manager who is directly responsible /answerable for its performance . RC facilitate management control and help in implementing the strategies chosen to accomplish the organizations goals.

Responsibility Centers
For a RC, accounting system generates information on the basis of managerial responsibility ,allowing that information to be used directly in motivating and controlling the action of the manager in charge of the RC. Every RC uses inputs (material,labour etc) and needs working capital ,equipment , and other assets to function effectively. While the costs of inputs are easily measurable outputs are not always easy to measure.

Performance of RC
RCs performance can be judged using the effectiveness and efficiency criteria. The lesser the input used to achieve a certain level of output or greater the output for a given level of input ,higher the efficiency of the organization. Effectiveness of the unit is judged on the basis of units output and its goals . The greater the contribution of the outputs to the accomplishment of organizational goals ,the more effective is the unit.

Cost Center
Cost Centers are held responsible for the costs incurred but not for generating revenue i.e. ., either the costs or the level of outputs can be independently controlled but not both. It operates in 2 ways Either the cost budget is specified and the goal is to maximize the output Or the expected output is specified and the goal is to minimize the cost.

Cost Center
In the first case , a certain fixed budget is allocated to the cost centre and it is expected to achieve the best possible result within the allocated budget An example is the Public Relations Department of an organization. In the second case, the goal is to achieve the required level of output at minimum cost ; the performance level depends on the cost incurred by that centre. An example is the Maintenance department of an organization.

Control of the Cost Centers


Managers often err by assessing the performance with a view to only minimize the costs. In doing so,they may ignore the non financial indicators of performance , as for example, quality of output ,safety issues, or ethical and environmental issues. As there is no direct incentive to improve the quality in the short term and the whole focus is either on cost reduction or on how to increase the output within a given cost budget and the quality of the output may be affected.

Control of the Cost Centers


Production Manager may concentrate on reduction of unit costs by the use of long & continuous production runs .This may lead to increased inventory & the organization may become less responsive to customer demands & which may lead to reduction in sales .Thus controls in a cost center should recognize all factors that have an impact on organizational goals

Types of Cost centers


Standard cost center or engineered expense centre - manufacturing /service organizations that have a repetitive tasks being performed. Manager responsible for direct costs and overhead expenses. He is also responsible for quality & quantity of outputs . His objective is to prevent /reduce unfavourable variance between the actual & budgeted costs, while maintaining the quality and quantity in the desired levels.

Discretionary expense Centers


It is difficult to measure the outputs in monetary terms against level of inputs . Generally a budget is decided upon a chosen time period (a year) Managers are expected to maximize the services offered while keeping within the budgeted limits . Accounting , human resources, corporate communications ,research & development

Revenue Centers
Managers are held responsible for revenues (outputs ) . Generally these centers are not directly responsible for profits. Revenue centers are seen as incurring certain costs which are controllable to an extent . Costs are seen as to providing customized services to boost sales.

Revenue centers
Revenue Centers are closest points of contact with existing & potential customers Its main objective - to maximize net revenues . Tanishq Manager is held responsible for increase in net revenue /output measured in monetary terms but not responsible for the cost of goods sold thru the outlet.

Profit Centers
Manager of profit center has control over both input ( cost of resources) as well as output (revenue earned ). However a profit center manager does not have control over the level of investment ,which may be controlled by the top management /pre decided. Objective of profit center is to achieve profit targets focusing on both cost reduction & revenue maximization. He cannot afford to reduce quality /cost as that would lead to reduced sales revenue and profit.

Profit Centers
Manager may allow sales on extended credit terms , in order to increase sales for the current period ,though revenue receipts may not be realized . Traditional cost centers information systems / IT dept may provide services to internal customers on chargeable terms of a transfer price . In this scenario the buying center also has the option of contracting with a firm outside and selling center has the option of selling its services to other firms

Investment Centers
Investment Centers are held responsible for overall economic performance in terms of cost incurred ,revenue generated ,as well as the associated investment. Its performance is measured in terms of ROCE /Economic Value Added (EVA) Managers have control over inputs , outputs and investments to make best utilization of the capital employed.