4.
RESPONSIBILITY CENTERS
RESPONSIBILITY CENTER
• It constitute the structure of a control system & the
assignment of responsibility to organizational
subunits must reflect the organization's strategy.
Cont…
• A responsibility centre in an organization unit that is
headed by a manager who is responsible for its
activities.
• In a sense company is a collection of responsibility
centers, each of which is represented by a box on the
organization chart.
Cont…
• A responsibility center exists to accomplish the
objectives of the organization as the organization got
its own goals and objectives.
• As each organization is sum of the responsibility
centers and if all the centers achieve their goals and
objectives the overall organizational goals and
objectives will be achieved.
NATURE OF RESPONSIBILITY
CENTER
• Objective is to implement the Strategies.
• Organization is Sum of Responsibility Centers.
Inputs Work Outputs
• Material, • Capital, • Goods or
labor & equipment, services
services others
RELATION BETWEEN INPUTS &
OUTPUTS
• To ensure the optimum relationship
– causal & direct relationship
– Indirect relationship
EFFICIENCY
• Ratio of output to input
– Center A is more efficient than B
[Link] fewer resources but produce same output
[Link] same amount of resources but produces a
greater output
• Efficiency is the Ratio of outputs to inputs, or the
amount of output per unit of input.
EFFECTIVENESS
• It is determined by relationship between responsibility
center’s output & its objectives
• Difficult to quantify
• Efficiency & effectiveness are not mutually exclusive;
every responsibility center ought to be both efficient &
effective.
• In short,
– Efficient: if it does things right, &
– Effective: if it does the right things
ROLE OF PROFIT
• The goal of every profit-oriented organization is to earn
profits (effectiveness).
• If the organization could use the least input to get the
maximum earnings, profits will be high (efficiency).
• Therefore, profit is an indicator of both efficiency and
effectiveness.
• However, not every unit within an organization earns
profit and therefore, this measure cannot be used for all
responsibility centers.
• Therefore, an organization must establish various types
of responsibility centers.
TYPES OF RESPONSIBILITY
Revenue
Centers
Profit
Types of Investment
Centers Responsibility Centers
Centers
Cost
Centers
REVENUE CENTER
• Output is measured in monetary terms,
• But no formal attempt is made to relate input to
output.
• Its responsibility centers where
– Manager is responsible for generating revenues
– Manager is responsible only for costs directly
incurred by his/her unit
REVENUE CENTER (cont…)
Input not related to outputs
Example
Inputs Outputs
Marketing Function
(dollar only for cost
Work (dollar revenue)
directly incurred)
PROFIT CENTER
Input are related to outputs
Example
Inputs Outputs
Business unit
(dollar cost)
Work (dollar profit)
INVESTMENT CENTER
Profit are related to capital
employed
Example
Inputs CAPITAL Outputs
Business unit
(dollar cost) EMPLOYED (dollar profit)
EXPENSE/COST CENTER
• Inputs are measured in monetary terms, but whose
output are not.
• Types of Cost Centers:
Administrative
& support costs
Discretionary
R&D Costs
Costs
Expense
Centres
Engineered Marketing
Costs Costs
Engineered
Costs
those costs that can be reasonably
associated with a cost center –
direct labor, direct materials,
telephone/electricity consumed,
office supplies.
ENGINEERED EXPENSE CENTER
Optimal relationship can be
established
Example
Inputs Outputs
Manufacturing
(dollar)
Work (physical) function
Engineered Costs
• Here, the inputs can be measured in monetary terms,
because the engineered cost centre is basically found in
manufacturing operations.
• In engineered cost center output multiplied by the
standard cost of each unit gives the finished product
cost, means the output can be measured in the physical
terms.
• The optimum amount of input required to produce one
unit of output can also be measured in this center.
• The engineered cost center not only measure the cost
but it is also responsible for the quality of the products,
volume of the production as well as efficiency.
Discretionary
Costs
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).
DISCRETIONARY EXPENSE
CENTERS
Optimal relationship
cannot be established
Example
Inputs Work Outputs
R&D function
(dollar) (physical)
• This center include administrative and support units –
accounting, legal, human resources – research and
development and most marketing activities.
• This center shows the top management policies and
decisions for different departments to improve overall
efficiency and profitability of the organization and
appropriate amount to be spent on financial planning,
R&D, public relations etc.
• In discretionary cost center the budgets are given to
improve the working of different departments but there
are no variance analysis for this budgets, only control
systems are implemented.
GENERAL CONTROL
CHARACTERISTIC
For Discretionary expense
Budget preparation
Cost Variability
Types of financial control
Measurement of performance
1. BUDGET PREPARATION
• For discretionary expenses budgetary decisions
are differ from those for engineered expenses
Engineered expense is determined by actions of other
responsibility centers, while discretionary on the basis
of magnitude of the job needed
The work done discretionary expenses centre
falls into two categories :
I. Continuing work
[Link] work
PLANNING FUNCTION FOR
DISCRETIONARY EXPENSES
INCREMENTAL BUDGETING
• Current level of expenses is taken as starting point
• This level is adjusted for inflation, anticipated
changes in workload etc.
• Drawbacks
not reexamination of level
ZERO-BASE REVIEW
• Analysis of each discretionary expense at least
once every five years or so.
• Analysis based on questions like
Should the function under review be performed?
Add value or not ?
What should be quality ?
How much does it cost ?
EXAMPLES
Aetna, a large
Nissan motors insurance
restructuring company, began
program resulting such resulting
in disposing of non program in 1980
core business, resulting in
changing suppliers reduced workforce
, setting tough by 10 % and
targets , saving of $ 156
promotion. million.
General Control Characteristic
(Cont…)
2. Cost Variability
Preparing on the basis of changes in sales volume
Hiring or layoffs of personnel
Cost Variability: unlike the engineered cost which
are strongly affected by short run volume changes,
cost in discretionary centers, it reacts to short term
fluctuations in jobs and other activities.
3. Types of financial control
Control costs by planning , discussion ,and level of
effort needed
While in engineered expense center objective is
become cost competitive by setting standards.
4. Measurement of performance
the engineered cost center is having the output and
the volume as a measurement but in case of
discretionary cost center the manager has to obtain
the desired output in terms of planning.
TYPES OF DISCRETIONARY EXPENSE
CENTERS
• Administrative & Support Center
• R & D Center
• Marketing Center
ADMINISTRATIVE & SUPPORT CENTER
It includes senior corporate management and business
unit management
Control problems
Difficulty in measuring output
Some activities have engineered expenses, so
output cannot be measured, it is not possible to
set cost standards against which to measure
financial performance
Lack of goal congruence
Striving for excellence leads to “empire building”
or “safeguarding one’s position” without regard to
the welfare of the company.
Conti…
• BUDGET PREPARATION
• Budget for an administrative or support system
consists of list of proposed expense items, with
actual expanses
activities of the centers
All proposed increases in the budget
Basic cost + cost of all intrinsically necessary
activities
R & D CENTER
• Control problems
Difficulty in relating Results to Inputs
Semi tangible output in the form of patents,
new products , new process.
Difficult to measure on annual basis.
Lack of goal congruence
More expensive
People does not have sufficient knowledge of
direction of the research efforts.
Cont…
R&D Continuum
Projects moves along with continuum of from
basic research, to applied research, to development.
It includes basic research at one extreme and
product testing at another.
Basic research can be planned or unplanned.
Project involves product testing can estimate the
time and financial requirements.
Cont…
• R&D Program
Difficult to determine R & D budget
It includes list of programs + allowances
• Annual Budgets
Long range program will be easy
Measurement of performance
Compare actual expenses with budgeted
MARKETING CENTER
Logistics Activities
Referred to as order filling activities
Many costs are engineered expenses
Marketing Activities
Related to efforts to obtain orders
Includes marketing, training, supervision of sales
force, advertising, sales promotion
Costs are discretionary