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Responsibility Centres

Responsibility Centres

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Published by Paramjit Sharma
Creating SBU's and fixing their responsbilities, Cost centre, Profit Center, Investment center
Creating SBU's and fixing their responsbilities, Cost centre, Profit Center, Investment center

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Published by: Paramjit Sharma on Nov 12, 2010
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06/25/2013

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Responsibility Centers

Responsibility Centre-- definition

RC is a unit headed by a manager who is responsible for its activity

Responsibility Centre-- nature

A responsibility centre exists to accomplish one or more purposes, termed objectives

Every Organization is the sum of its Responsibility centers, If each responsibility centre meets its objectives, the goals of the organization will be achieved

Organizational Objectives

‡Profit Maximization
Revenue maximization Expenditure control

‡Focus on revenue ‡Focus on Expenditure ‡Fixing responsibility

Inputs and Outputs

Outputs Inputs Resources Used Measured by Cost

WORK
Goods or Srvices

Capital

Efficiency and Effectiveness

Efficiency is the ratio of outputs to inputs or the amount of outputs per unit of input

Efficiency and Effectiveness

Effectiveness is determined by the
Relationship between a responsibility Center s output and its objectives

Types of Responsibility Centers

‡Revenue Centers ‡Expenses Centers ‡Profit Centers ‡Investment Centers

Revenue Budget

Output is measured in monitory terms, but no formal attempt is made to relate input to output

Marketing & Sales Units

Actual Sales are measured against budgets Primary measurement is Revenue

Expense Centre
Expense Centers are those centers whose inputs are measured but not the outputs

Engineered Expense
Which can be estimated with reasonable reliability DM, Components, Supplies..

Discretionary Expense
Which cant be estimated Depends upon Judgment

Engineered Expense Centre- characteristics

Their inputs can be measured in monetary terms Their outputs can be measured in physical terms The amount of input required to produce one unit of output can be determined
Manufacturing Administration Distribution Warehousing

Discretionary Expense Centre- characteristics

Accounting Legal Industrial Relations Human Resource Research and Development Most Marketing Activities

General Control Characterstics

Budget Preparation Incremental Budgeting Zero Base Budgeting Cost Variability Type of Financial Control Measurement of Performance

Administrative and Support Services

Administrative Centers include senior Corporate
management and business unit Management, along with managers of supporting staff units

Support Centers are units
that Provide services to other Responsibility Centers

Administrative and Support Services- Control

Problems

Difficulty of Measuring Output

Lack of Goal Congruence

Budget Preparation

Research and Development Centers

Control Problems
‡Difficult to relate results to inputs ‡Lack of Goal Congruence

Research and Development Centers

R& D Continuum
‡Basic Research, production, Testing ‡Amount spent increase Substantially ‡Control and Estimation become difficult

Research and Development Centers

R & D Programmes
No scientific way of determining the optimum size of R&D budget generally % of sales revenue.

Research and Development Centers

Annual Budget
Preparation of annual budget for R& D is Difficult exercise

Research and Development Centers

Measurement of Performance
‡Compare latest forecast cost with approved amount of active projects ‡Comparisons between actual and budgeted in each responsibility center

Marketing Centers

Logistics Activities
transportation, distribution, warehousing, shipping and delivery, billing and related credit functions

Marketing Activities
Test Marketing, Supervision of Sales force, Advertising, Sales Promotion

Marketing Centers

BUDGET :
‡Companies follow marketing budget as a certain % of sales revenue ‡Higher the sales volume higher the budget. ‡Spend more to get more. ‡Spending justify sales revenue.

Marketing Centers

BUDGET :
‡Companies follow marketing budget as a certain % of sales revenue ‡Higher the sales volume higher the budget. ‡Spend more to get more. ‡Spending justify sales revenue.

BUDGET :
‡Historical ‡Zero Base Budgeting ‡Incremental Budgeting

Marketing Centers- control

‡Classification Of Expenses ‡Budgetary Control
‡Functional budgets ‡Master budget

‡Standard Costing Techniques ‡Insulating costs against variability
(escalation) by futures contract / swaps etc

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