Dwitya Aribawa / MM 61 Int /343554 CHAPTER 4 RESPONSIBILITY CENTERS: REVENUE & EXPENSE CENTERS An important component of Management Controls

s is assigning responsibility for executing strategy. Implementing strategies is not adequate if individuals who must execute it fall short. Responsibility Centers is an organization unit that is headed by a manager who is responsible for its activities (Input, work and output). In Responsibility Accounting, revenues and costs information are collected and reported by responsibility centers. A decentralized environment results in highly dispersed decision making. As a result, it is imperative to monitor and judge the effectiveness of each manager. In simple words responsibility centers define as an organizational unit for which a manager is made responsible. In this chapter, there are five main of responsibility centers that would be discuss. The first is a revenue center, which is related where managers are accountable only for financial outputs in the form of generating sales revenue. The second is expense centers, which is manager responsible for the costs that are controllable by them and their subordinates. Third one is Administrative and Support Centers, which is related to senior corporate managers and business unit manager, together with manager of supporting staff units in order to maintain discretionary expenses to provide service to other responsibility centers. The other support center is research and development centers and marketing centers, which is related to maintain R&D program input and budgeting in order to support company reach goal congruence. The last is marketing centers, which is responsible to maintain logistic and marketing activity to sustain with company objective. Revenue Centers, a manager of a revenue center is held accountable for the revenue attributed to the sub-unit. Revenue centers are responsibility centers where managers are accountable only for financial outputs in the form of generating sales revenue. A revenue center's manger may also be held accountable for selling expenses such as sales persons' salaries, commissions, and order receiving costs. Expense Centers, whose manager is held accountable for the costs incurred in that division. Manager of a cost center is responsible for controllable costs incurred in the department, but is not responsible for revenue, profit or investment in that center. Expense centers are responsible in which inputs, but not outputs are measured in monetary value. Administrative and Support Centers, an administrative centers are the part of routine management (corporate and business unit) plan that responsible for necessity budgeting of staff. In the other hand Support Centers is more related to units that provide service in order to maintain other responsibility centers running well. The problems that arise in this responsibility centers are difficult to measuring output (ex: setting cost standard for daily operations) and lack of goal congruence in term of company directing and the cost of support service to other responsibility centers.

2nd MCS Assignment: Responsibility Centers Summary and Vershire Company Case Analysis

Research and Development Centers Main objective of R&D Centers is to make sure all of program in R&D division including input, processing and output is relevance to company budget in order to support company reach goal congruence. Difficulty appear in R&D centers is to measure input and output (some of them are intangible) and the lack of goal congruence (ambitions of R&D managers to make R&D is a central key of changes in company, even broader). To remember activity that held in R&D division is also related to other part of company to reach goal congruence. Marketing Centers In marketing centers, there are two main activities inside in order to responsible to maintain the delivering end product to consumers and make sure the product is marketable. First is Logistic activity, involve to the distributing goods from company to customers. Activities that related in logistic are transportation, warehousing, shipping and delivering. Those activities related to many stakeholders of company, so maintain the invoice and control the goods in and out will be important activity to gather in order to minimize mistaken in process of transferring value to customers. Second is marketing activity itself, as mention before marketing activity related to some activities to make sure the product is marketable. These activities including product testing to market, training and development of sales forces, advertising and sales promotions campaign. There are three main concern in marketing centers, first is logistic concern to make sure cost are engineering expense, second is generation of revenue, usually related to evaluating of by actual revenue and physical quantity sold compare to budget to gain revenue and budgeted per unit. The third is order getting cost, which is related to variable cost (discretionary) that difficult to counting in application but to control it should be measure by the pricing scheme strategy in order to reach efficiency and effectiveness. CASE 4-1 : VERSHIRE COMPANY Introduction Vershire Company is a large business in the packaging industry with several major divisions. The focus of this case is on the aluminum can division and its control systems including the budgeting process and performance measurement. This division is one of the largest manufacturers of aluminum beverages cans in the US. However, if customers expectations for cost, quality, and service are not met, they can easily purchase from another manufacturer. Therefore, it is important for Vershire to keep tight control over their plants, budgets, and performance in terms of efficiency and effectiveness. The major concern currently facing Vershire Company is that each plant within the division is being treated as a profit centre, rather than an engineered expense centre. Problem Insight from Case: As a manufacturing plant, in which outputs produced are quantifiable in terms of units produced, there is a need to focus on expenses rather than profit. This error in classification is the root of many other control, communication, and performance measurement problems.

2nd MCS Assignment: Responsibility Centers Summary and Vershire Company Case Analysis

Analysis and Recommendation Strength and Weakness of Vershire Company Plan and Control System Strengths: (1) Corporate controllers visit each plant for half a day prior to the final submission of the budget. (2) Divisional managers are required to predict market conditions and capital expenditures five years out and prepare a forecast for the subsequent two years. (3) The forecasting is done at the corporate level and is then sent to the divisional managers for finetuning. (4) Divisional managers are given full control over their divisions except in the areas of raising capital and labor relations. (5) Regular communication in various hierarchies in company. Weaknesses: (1) Profit is the main measure for assessing plant managers performance and determining bonuses. (2) Lack of Performance evaluation system. (3) The initial sales forecast uses assumptions, which are entirely derived from corporate headquarters analyses. (4) The forecasting method is the same for all product lines. (5) Plant managers do not come up with the sales budgets the district sales managers do it. Responsibility of Plant Manager for Profit? Vershire wants to satisfy the customer since they can easily switch to other competitors. This is reduces plant managers ability to maintain control over profitability in the plant since production can be interrupt by the sales manager and break down efficiency of outputs and of course in the end will resulting higher costs. Profit is made up of two components, revenue and expense. Plant managers should be responsible only for the measures that they can directly control, which are the expenses. The area of expenses that plant manager can control are direct materials, direct labor, variable manufacturing and fixed overhead budget. The plant should be considered an engineering expense centre as there are no direct revenues generated from the plant rather the revenue is generated in the sales department. This is an important factor when monitoring management compensation for improved plant performance. Recommendation (1) More frequent communication between corporate and division manager as the part to remind division general managers of the overall goals of the company (to reach goal congruence). (2) Motivate plant manager to maximize profit using variable they can control, which is expense. (3) Improve comparisons of manufacturing efficiency between divisions and plants.

2nd MCS Assignment: Responsibility Centers Summary and Vershire Company Case Analysis