SUMMARY OF CHAPTER 4- ASSIGNMENT 2

Responsibility Centers: Revenue and Expense Centers

BY : DINI RAHMADIANTI (1610531008) – GROUP 5

NATURE OF RESPONSIBILITY CENTER

A responsibility center is an organizational unit head by a manager who is responsible

for its activities.
Responsibility center is an object for which costs/revenues/capital expenditures are
specifically collected and analyzed. Each responsibility center is usually managed and
controlled by a separate manager.
Examples of responsibility centers : department (group of departments) – usually each
department has its own responsibility center, production hall, factory, machine, project.
A responsibility center exists to accomplish one or more purposes, termed its objectives. The
objectives of the company’s various responsibility centers are to help implement these
strategies. Responsibility centers receive inputs such as materials, labor, working capital,
equipment, etc and performs its particular function, with the ultimate objective of
transforming its inputs into outputs, either tangible or intangible. in a production plant, the
outputs are goods
Relation between inputs and outputs : Management is responsible for ensuring the
optimum relationship between inputs and outputs.
Measuring inputs and outputs : The monetary value of given input is ordinarily : Q X P, the
sum we called as cost. The cost is a monetary measure of the amount resources used by a
responsibility centers. Measuring outputs is more difficult. This is because: Input may be
extended this year but outputs (benefits) may be received over several years (e.g. employee
training).

THE OBJECTIVES OF RESPONSIBILITY CENTERS

 As the basis of planning, controlling and manager’s skill assessment and its organizational
udit headed
 To help the organization achieve the goals easily
 To facilitate the establishing of goal congruence
 Delegating the assignment and responsibilities to the units which has competencies so that
could reduce the manager’s responsibility center overload tasks
 Encourage the employee’s creativity and innovation
 As te tools of the strategic implementation effectively and efficiently
 As the tools of the budget controlling
 EFFICIENCY AND EFFECTIVENESS

Efficiency is the ratio of outputs to inputs, or the amount of output per unit of input.
Many responsibility centers, efficiency is measured by comparing the actual costs with
some standard of what those costs should have been at the measured output. The
more this output contributes to the objectives, the more effective the unit. Both
objectives and outputs are difficult to quantify, so effectiveness tends to be expressed
insubjective. A responsibility center which carries out its charge with the lowest possible
consumptionof resources, may be efficient, but if its output fails to contribute adequately to the
attainment of the organizations goals, it is not effective.
 Effective : Adequate to accomplish a purpose; producing the intended or expected result.
 Efficient : Performing or functioning in the best possible manner with the least waste of time
and effort.

TYPES OF RESPONSIBILITY CENTERS

The types of responsibility centers are divided based on :

• The nature of work performed (whether related to earning income or profit)
• Authority given by the top leaders.
• Measurement of achievement.

So, there are 4 types of responsibility centers :

1. Revenue Centers : Output is measured in monetary terms

2. Cost/Expense Centers : Inputs are so measured in profit centers
3. Profit Centers : Both revenues (output) and expenses (input) are measured
4. Investment Centers : The relationship between profit and investment is measured

Each type of responsibility center requires a different planning and control system.

REVENUE CENTERS

Revenue centers are responsibility centers whose managers are held accountable for generating
revenues, which is a financial measure of output. Common examples are the sales managers and, in not-
for-profit organizations, fundraising managers. Responsibility here means having authority over things
that can increase revenues , such as determining the selling price and costs that can be indirectly
relevant or not at all. Revenue is something that is more influenced by external factors (market
sentiment), so that efforts to increase it are not proportional to the direct costs or costs incurred.
This is a sign for the leader to be careful in assessing the relative control of costs intended to
increase revenue. For example: Cost of Marketing Research.
At the revenue center there are two kinds of marketing activities:
 ORDER-GETTING, it is an effort to lure the market. This activity includes the advertising, the
promotion, and searching for orders. The controlling usually goes through the budget.
 ORDER-FILLING (LOGISTIC ACTIVITIES), is a visible activity that is repetitive, for example
packaging, shipping, and administration related to marketing or sales. In analyzing the
performance of the head of the income center, do not just look at the ability to generate
profits, but also must be considered the level of market control that can be covered. In this
case, industry analysis became very relevant. The stages in the use of industry analysis are as
follows:
a. Make market demand projections
b. Assess the company's position in competition

COST OR EXPENSE CENTER

The cost center is the responsibility center that has these following characteristics:
 Carry out tasks / jobs that are not related to revenue or profit.
 Authorized to manage costs in order to carry out the work that is his duty.
 Achievement is measured based on the comparison of the budgeted costs with the
realization. Input or costs at the cost center are measured in monetary units (value of
money) but the output cannot always be measured in monetary units.

Cost (or expense) centers are responsibility centers whose managers are held accountable
for some elements of cost. Costs are financial measures of the inputs to, or resources
consumed by, the responsibility center.

The cost center consists of:

o Standard cost center (engineered expenpense center)
It is a cost center that most of the costs have a close physical relationship with the output
produced. Direct and relatively stable. control can be exercised by comparing a standard
cost with the cost that was actually incurred.
Characteristics:
a. Inputs and outputs can be measured by monetary units
b. The input and output can be measured in physical form
c. The optimum amount of input to be produced for one unit of production output can be
measured.
d. The measurement of its performance is its cost efficiency, in addition to its product
quality and production volume.
Example: The cost of producing an item in a production unit.
o Discretionary cost centers ( Managed cost centers)
It is a cost center which most of the cost does not have a close or direct physical relationship
with the output that produced. Like the research and development departments and
administrative departments (e.g. personnel,npurchasing, accounting, and facilities), the
outputs produced are difficult to value in monetary terms. In addition, the relationship
between inputs and outputs is not well known. Thus, evaluations of discretionary cost center
managers’ performances often have a large subjective component to them. Control is
usually exercised by ensuring that the discretionary cost center adheres to a budgeted level
of expenditures while successfully accomplishing the tasks assigned to it.
 REVENUE CENTER Output measured in
monetary terms

COST/EXPENSE CENTER Input measured in

monetary terms