TITIN NEFIA LESTARI

1710532045

Responsibility Centers :
Revenue and Expense Centers

A responsibility centers is an organization unit that is headed by a manager who is

responsible for its activities. In a sense, a company is a collection of responsibility centers,
each of which is represented by a box on the organization.

These responsibility centers form a hierarchy

- At the lowest level are the centers for sections, work shifts, and other small
organization units.
- Departments or business units, comprising several of these smaller units are higher in
the hierarchy

A responsibility center exists to accomplish one or more purposes (its objectives):

 The company as a whole has goals, and senior management decides on a set of
strategies to accomplish these goals.
 The objectives of the company’s various responsibility centers are to help implement
these strategies.

Core operation of Responsibility Centers

 Receive inputs (in the form of materials, labor, and services)

 Using working capital (e.g., inventory, receivables), equipment and other assets, the
responsibility center performs its particular function,
-with the ultimate objective of transformingits inputs into outputs,
-either tangible or intangible
 In a production plant (output : goods)
 In staff units (output : services )

Operation of responsibility centers

The products are produced by a responsibility center , may be furnished either to
another responsibility center, where they are outputs of the organization as a whole.
TITIN NEFIA LESTARI
1710532045

Management is responsible to ensuring the optimum relationship between inputs and outputs.
Revenue is the amounts earned from providing these outputs

Cost is a monetary measure of the amount of resources used by a responsibility center

Efficiency and Effectiveness

Efficiency is the ratio of outputs or the amount ofoutput per unit of input. Efficiency
is measured by comparing actual costs with some standard of what.
Effectiveness is determined by the relationship between a responsibility center’s
output and its objectives.
Efficiency and effectiveness are not mutually exclusive, every responsibility center
ought to be both efficient and effective. A responsibility center is efficient if it does things
right, and it is effective if it does the right things.
A major objective of any profit oriented organization is to earn a satisfactory profit.
Profit measures both effectiveness and efficiency.

Type of Responsibility Centers (measure for control purpose)

1) Revenue Centers (output is measured in monetary terms)

2) Expense Centers (inputs are so measured)
3) Profit Centers (revenue / output and expense / input are measured)
4) Investment Centers (the relationship between profit and investment is measured)

1. Revenue Centers

In a revenue center, output (revenue) is measured in monetary terms but not formal
attemp is made to relate input (cost and expense) to output. Typically revenue centers are
marketing / sales units that do not have authority to set selling prices and are not charged for
the goods they market

2. Expense Centers

Expense centers are responsibility centers whose inputs are measured in monetary
terms, but whose outputs are not. There are 2 general types of expense center : Engineered
and Discretionary.
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1710532045

Engineered costs
The right or the proper amount can be estimated with reasonable reliability (e.g:DLC,DRM)
The characteristics :
 Input can be measured in monetary terms
 Their output can be measured in physical terms
 The optimum money amount of input required to produce one unit of output can be
determined

Discretionary cost
Cost incurred depend on management’s judgement as to the appropiate amount under the
circumstances. They include administrative and support units. The example is accounting,
legal, industrial relations, public relations, human resources, research and development
operation and most marketing activities. The output of these centers can not be measured in
monetary terms.

General Control Characteristics :

 Budget Preparation
 Cost Variability
 Type of Financial Control
 Measurement of Performance

Responsibility Centers
→ If these two types of responsibility centers are not carefully distinguished, management
may erroneously treat a discretionary expense center’s performance reportas an indication of
the unit’s efficieny, thus motivating those making spending decisions toexpend less than
budgeted amount, which in turn will lower output. For this reason this is unwise to reward
executives who spend less than the budgeted amount.