MANAGEMENT

CONTROL SYSTEM
Presentation on :
Responsibility Center
and its Types
Presented To: Priya Maam
Finance - 1

Group Members:
Jay Thakkar
013003
Pratyuesh Agarwal 013004
Ketan Jain
013006
Roshan Sawant
013007
Nirav Thakkar
013010
Supriya Bhoir
013011
Anita Raj
013012
2

Roadmap
Introduction to Responsibility center
Types of Responsibility center
1. Revenue Center
2. Cost Center
3. Profit Center
4. Investment Center
5. Engineered Expense Center

Problems in Responsibility Accounting

Advantages of Responsibility Centers

What is a responsibility
center?
In simple words: an organizational unit for which a
manager is made responsible.
Examples: A specific store in a chain of grocery
stores.
A work-station in a production line manufacturing
automobile batteries.
The payroll data processing center within a firm.

Attributes of a
responsibility center
It is like a small business, and its manager is
Asked to run that small business and preserve the
interests of the larger organization.
Goals for the center should be specific and
measurable, and
Should promote the long terms interests of the
organization and should be compatible with other
responsibility center activities.

Example: A courier
service (DHL)
Courier operations dispatch trucks to pick up
or deliver shipments from local terminals.
It could be sent to one or more central
terminals and then sorted and redirected.
Success of this service would depend on:
Service commitment to customers (on time, without
damage) and
Controlling costs

Let us suppose that each terminal is treated

as a responsibility center.
How should the company measure the
performance of each terminal, its mangers,
and its employees?

Measuring the performance of

the
courier-terminal responsibility
center
To focus on efficiency: we could measure no.
of parcels picked up, sorted or delivered, per
route, per employee, per vehicle, per hour or
per shift.
To focus on customer service, we could
measure each groups contribution to
customers: proportion of the time the
terminal met its deadlines, when terminals
are required to sort shipments, what the
sorting error rate was.
We could also measure customer service by:
no. of complaints operations group receives,
average time taken by the operation group to
respond to complaints, and no. of complaints

Types of Responsibility
Centers

Revenue Centers
Cost Centers or Expense Centers
Profit Centers and
Investment Centers
Engineered Expense Centers

REVENUE
CENTRE

Revenue Center
A Revenue centers are responsibility centers
where managers are accountableonly for
financial outputs in the form of generating sales
revenue.
In other words, A Revenue Center is responsible
for selling an agreed amount of products or
services.
In a revenue centre output is measured in
monetary terms, but no formal attempt is made to
relate input to output
It's manager is usually responsible to maximize
revenue given the selling price (or quantity) and
given the budget for personnel and expenses.

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E.g. Marketing center

Inputs
(Money directly
spent on achieving
sales i.e. Mktg. Exp.)

RCs
TASK

Output
(Sales Generated
in money terms)

Generate Sales

RC has no authority to decide price.

RC is charged with cost of Marketing and not with cost
of goods produced
Performance Measure for the RC can be Revenue
Budgets.

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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

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COST CENTRE
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Cost centre
A cost center is an organizational sub-unit such as
department or division, whose manager is held accountable
for the costs incurred in that division.
In other words, A cost center is a department within a
company. The manager and employees of a cost center are
responsible for its costs but are not responsible forrevenues
or investment decisions.

Two types of costs:

Engineered: those costs that can be reasonably
associated with a cost center direct labor, direct
materials, telephone/electricity consumed, office supplies.
Discretionary: where a direct relationship between a
cost unit and expenses cannot be reasonably made;
Management allocates them on a discretionary basis (e.g.
depreciation expenses for machines utilized). R&D Project

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Inputs
(Money spent on
production)

RCs
TASK

Output
(Physical units
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

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PROFIT CENTRE
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PROFIT CENTRES
Manager of a profit centre is held accountable for revenue,
costs & profits of the centre.
It is the responsibility centre in which inputs are measured
in terms of expenses and output are expressed in terms of
revenues.
A profit center is a section of a company treated as a
separate business. Thus profits or losses for a profit center
are calculated separately.
Examples-Engineering, design or other such departments
within a company.

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ADVANTAGES OF PROFIT CENTERS

1.Improves the quality of decisions taken.

2.Improves the speed of the decision making.
3.Provides a training ground for general management.
4.Psychological benefits to the division manager.
5.Provides best performance indicators of companys individual
components.
6.Imbibes a sense of independence & responsibility.
7. Facilitates motivation of the employees.

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DISADVANTAGES OF PROFIT
CENTERS
1.Caliber of the manager or the lack of it may hamper the quality of
decisions taken.
2.In case of integrated company, there may be a problem of cost
sharing, transfer pricing etc.
3.Divisionalistaion may impose additional cost of
administration/support units.
4.May give rise to conflicts & competition instead of co-operation
within the business.
5.Decentralization makes the top management to rely more on the
MC reports.
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INVESTMENT
CENTERS
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INVESTMENT CENTERS
DEFINITION OF 'INVESTMENT CENTER'

A business unit that can utilize capital to

directly contribute to a company's
profitability. Companies evaluate the
performance of an investment center
according to the revenues it brings in through
investments in capital assets compared to the
overall expenses.
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Objectives
An investment centers is the responsibility for the production
,marketing and investments in the assets employed in the
segment.
An investment centers manager decides on the aspects such
as the credit policies and within broad framework.
Investment centers mangers responsible for profits in relation
to amount invested in the division

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Advantages
A advantage is that the investment center will
help consumers and businesses understand the
benefits of investing because they have the
time to share and educate customers.
A disadvantage is the fact that focusing on one
area of business can restrict your business
growth.

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Drawback

Since the value of capital employed is taken from the

balance sheet, the value of ROI or ROCE may depend
on accounting technique adopted by organization.

The manager of an investment center may postpone

new investments like purchasing new equipment or
expanding capacity, as the ROCE will decrease in the
short run, though the organization may benefit from
these investments in long run.

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ENGINEERED
EXPENSES
CENTER
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ENGINEERED EXPENSES CENTER

These are centres whose Cost can be estimated
Inputs can be measured in monetary terms
Outputs can be measured in physical terms
This center is usually found in manufacturing
operations.
EXAMPLES :1. Warehousing
2. Distribution
3. Trucking
4. Other similar units within the market organization.

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 Responsibility centers whose employees control

costs, but
Do not control their revenues or investment
level.
Examples: Production department in a
manufacturing unit, a dry cleaning business
Two types of costs:
Engineered: those costs that can be
reasonably associated with a cost center
direct labor, direct materials,
telephone/electricity consumed, office
supplies.
Discretionary: where a direct relationship
between a cost unit and expenses cannot be
reasonably made; Management allocates

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Discretionary Expenses Center Examples

i) Administrative and Support Centers) Senior management units at corporate level e.g.
Legal, Planning , IT , Audit Departments
)

Goals may differ and hence performance

) ii) Research and Development Centers

)

The input and output may span over different

and uneven time periods.

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Problems

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Problems in Responsibility
Accounting
While implementing the system of responsibility accounting, the
following difficulties are likely to be faced by the management:

1. Classification of costs
2. Inter-departmental Conflicts
3. Delay in Reporting
4. Overloading of Information
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5. Complete Reliance will be deceptive

Advantages
of
Responsibility Centers
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Advantages
1. Provides a way to manage a large diversified organization.
Better decisions can be made at the local level.
2. Provides incentives to department managers and individuals to
optimize their individual performances.
3. Provides managers with the freedom to make local decisions.
4. Provides top management with more time to make policy
decisions and engage in strategic planning.
5. Allows management to avoid understanding the system by
using top down remote control based on accounting
measurements.
6. Supports management and individual specialization based on
comparative advantage.
7. Overall, it supports individualistic capitalism.

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A simple summary of
the
responsibility centers
Revenue Center

Output measured in
monetary terms

Cost Centers

Input measured in
monetary terms

Profit Centers

Output measured in
monetary terms

Investment Centers

Output measured in
monetary terms

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THANK
YOU!!!
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