DEFINITION

• A RESPONSIBILITY CENTER IS AN ORGANIZATION UNIT THAT IS HEADED BY A MANAGER WHO IS

RESPONSIBLE FOR ITS ACTIVITIES
• RESPONSIBILITY CENTERS FORM A HIERARCHY
• AT LOWEST LEVEL : CENTERS FOR SECTIONS, WORK SHIFTS OTHER ORGANISATIONAL UNITS
• AT HIGHER LEVEL: DEPARTMENTS OR BUSINESS UNITS COMPRISING SMALLER UNITS
• SENIOR MANAGEMENT AND BOARD OF DIRECTORS SEES THE ENTIRE COMPANY AS A RESPONSIBILITY
CENTER
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NATURE OF RESPONSIBILITY CENTERS
• TO ACCOMPLISH ONE OR MORE PURPOSES OR OBJECTIVES
• SENIOR MANAGEMENT DECIDES ON SET OF STRATEGIES TO ACCOMPLISH THOSE COMPANY GOALS
• RESPONSIBILITY CENTERS SHOULD IMPLEMENT THESE STRATEGIES
• RESPONSIBILITY CENTERS RECEIVE INPUTS IN FORM OF MATERIAL, LABOR AND SERVICE
• REVENUES ARE AMOUNTS EARNED FROM PROVIDING THESE OUTPUTS
• ADVERTISING AND R&D COSTS DO NOT DIRECTLY RELATE TO REVENUE
MEASURING INPUTS AND OUTPUTS

• INPUTS ARE MEASURED IN HOURS OF LABOR, QUARTS OF OIL, REAMS OF PAPER, AND KILOWATTS HOURS
OF ELECTRICITY
• MONETARY VALUE IS CALCULATED BY MULTIPLYING A PHYSICAL QUANTITY BY A PRICE PER UNIT (COST)
• COST IS MONETARY MEASURE OF AMOUNT OF RESOURCES USED BY A RESPONSIBILITY CENTER
• IT IS MUCH EASIER TO MEASURE THE COST OF INPUTS THAN TO CALCULATE THE VALUE OF OUTPUTS.
PERFORMANCE MEASUREMENT: EFFICIENCY
AND EFFECTIVENESS
• EFFICIENCY IS THE RATIO OF OUTPUTS TO INPUTS, OR THE AMOUNT OF OUTPUT PER UNIT OF INPUT
• A RESPONSIBILITY CENTER IS MORE EFFICIENT IF: (1) IT USES FEWER RESOURCES THAN OTHER
RESPONSIBILITY CENTER; (2) IF IT USES THE SAME AMOUNT OF RESOURCES BUT PRODUCES A GREATER
OUTPUT
• EFFECTIVENESS IS DETERMINED BY THE RELATIONSHIP BETWEEN A RESPONSIBILITY CENTER’S OUTPUT
AND ITS OBJECTIVES
• THE MORE THE OUTPUT CONTRIBUTES TO THE OBJECTIVES, THE MORE EFFECTIVE THE UNIT
ROLE OF PROFIT

• PROFIT CAN BE USED TO MEASURE BOTH EFFECTIVENESS AND EFFICIENCY

• BUT THERE MAY BE CONFLICT BETWEEN THE TWO
TYPES OF RESPONSIBILITY CENTERS

• REVENUE CENTERS: OUTPUT ARE MEASURED IN MONETARY TERMS

• EXPENSE CENTERS: INPUTS ARE MEASURED IN MONETARY TERMS
• PROFIT CENTERS: BOTH INPUTS AND OUTPUTS ARE MEASURED IN MONETARY TERMS
• INVESTMENT CENTERS: RELATIONSHIP BETWEEN INVESTMENT AND PROFIT IS MEASURED
REVENUE CENTER

• IN A REVENUE CENTER, OUTPUT (I.E., REVENUE) IS MEASURED IN MONETARY TERMS, BUT NO FORMAL
ATTEMPT IS MADE TO RELATE INPUT (I.E., EXPENSE OR COST) TO OUTPUT. (
TYPES OF EXPENSE CENTERS

• ENGINEERED EXPENSE CENTERS

• DISCRETIONARY EXPENSE CENTERS
ENGINEERED EXPENSE CENTERS

• CHARACTERISTICS:
- INPUT CAN BE MEASURED IN MONETARY TERMS
- OUTPUT CAN BE MEASURED IN PHYSICAL TERMS
- USUALLY FOUND IN MANUFACTURING OPERATIONS EG. DISTRIBUTION, TRUCKING, WAREHOUSING AND
SIMILAR UNITS
DISCRETIONARY EXPENSE CENTERS

• INCLUDES ADMINISTRATIVE AND SUPPORT UNITS EG. (ACCOUNTING, LEGAL, INDUSTRIAL RELATIONS,
PUBLIC RELATIONS, HUMAN RESOURCES)
• THESE EXPENSES ARE MOSTLY BASED ON THE MANAGEMENTS EXPENSES
• IN DISCRETIONARY EXPENSE THE DIFFERENCE BETWEEN BUDGET AND ACTUAL INPUT AND DOES NOT
INCORPORATE THE VALUE OF THE OUTPUT
GENERAL CONTROL CHARACTERISTICS
• BUDGET PREPARATION FOR DISCRETIONARY EXPENSE:
- INCREMENTAL BUDGETING
- ZERO BASE BUDGETING
• COST VARIABILITY
• TYPE OF FINANCIAL CONTROL
• MEASUREMENT OF PERFORMANCE
• DISCRETIONARY EXPENSE CENTERS CATEGORIES: CONTINUING AND SPECIAL.
• CONTINUING WORK IS DONE CONSISTENTLY FROM YEAR TO YEAR
• SPECIAL WORK IS A “ONE SHOT” PROJECT
• A TECHNIQUE OFTEN USED IN PREPARING A DISCRETIONARY EXPENSE CENTER'S BUDGET IS
MANAGEMENT BY OBJECTIVES, A FORMAL PROCESS IN WHICH A BUDGETEE PROPOSES TO ACCOMPLISH
SPECIFIC JOBS AND SUGGESTS THE MEASUREMENT TO BE USED IN PERFORMANCE EVALUATION.
INCREMENTAL BUDGETING
• IN THIS MODEL, THE DISCRETIONARY EXPENSE CENTER'S CURRENT LEVEL OF EXPENSES IS TAKEN AS A
STARTING POINT. THIS AMOUNT IS ADJUSTED FOR INFLATION, ANTICIPATED CHANGES IN THE WORKLOAD OF
CONTINUING JOB, SPECIAL JOB, AND—IF THE DATA ARE READILY AVAILABLE—THE COST OF COMPARABLE JOBS
IN SIMILAR UNITS.
• LIMITATIONS :
- DISCRETIONARY EXPENSE CENTER'S CURRENT LEVEL OF EXPENDITURE IS ACCEPTED AND NOT REEXAMINED
DURING THE BUDGET PREPARATION PROCESS.
- MANAGERS OF THESE CENTERS TYPICALLY WANT TO INCREASE THE LEVEL OF SERVICES, AND THUS TEND TO
REQUEST ADDITIONAL RESOURCES, AS A RESULT OVERHEADS COST INCREASES
ZERO BASE REVIEW
• AN ALTERNATIVE BUDGETING APPROACH IS TO MAKE A THOROUGH ANALYSIS OF EACH DISCRETIONARY
EXPENSE CENTER ON A ROLLING SCHEDULE, SO THAT ALL ARE REVIEWED AT LEAST ONCE EVERY FIVE YEARS
OR SO. SUCH ANALYSIS IS OFTEN CALLED A ZERO-BASE REVIEW.
• ADVANTAGES: IT CAN HELP FOR COMPARATIVE ANALYSIS WITH THE BENCHMARK
• LIMITATION:
- ZERO-BASE REVIEWS ARE TIME-CONSUMING
- TRAUMATIC FOR THE MANAGERS WHOSE OPERATIONS ARE BEING REVIEWED (THIS IS ONE REASON FOR
SCHEDULING SUCH REVIEWS SO INFREQUENTLY).
COST VARIABILITY
• COST IN ENGINEERED EXPENSE CENTERS, WHICH ARE STRONGLY AFFECTED BY SHORT-RUN VOLUME
CHANGES, COSTS IN DISCRETIONARY EXPENSE CENTERS ARE COMPARATIVELY INSULATED FROM SUCH
SHORT-TERM FLUCTUATIONS.
• THIS DIFFERENCE STEMS FROM THE FACT THAT IN PREPARING THE BUDGETS FOR DISCRETIONARY
EXPENSE CENTERS, MANAGEMENT TENDS TO APPROVE CHANGES THAT CORRESPOND TO ANTICIPATED
CHANGES IN SALES VOLUME
• FOR EXAMPLE, ALLOWING FOR ADDITIONAL PERSONNEL WHEN VOLUME IS EXPECTED TO INCREASE, AND
FOR LAYOFFS OR ATTRITION WHEN VOLUME IS EXPECTED TO DECREASE. PERSONNEL AND PERSONNEL-
RELATED COSTS ARE BY FAR THE LARGEST EXPENSE ITEMS IN MOST DISCRETIONARY EXPENSE CENTERS;
THUS, THE ANNUAL BUDGETS FOR THESE CENTERS THEREFORE TEND TO BE A CONSTANT PERCENTAGE OF
BUDGETED SALES VOLUME.
• LIMITATIONS: MANAGERS CANNOT ADJUST THE WORK FORCE FOR SHORT-RUN FLUCTUATIONS; HIRING
AND TRAINING PERSONNEL FOR SHORT-RUN NEEDS IS EXPENSIVE, AND TEMPORARY LAYOFFS HURT
MORALE.
TYPE OF FINANCIAL CONTROL
FINANCIAL CONTROL IN DISCRETIONARY EXPENSE CENTRE IS PRIMARILY EXERCISED AT THE PLANNING STAGE BEFORE THE COST ARE INCURRED WHERE AS IN
ENGINEERED EXPENSE CENTRE IS DIFFERENT

MEASUREMENT OF PERFORMANCE
• THE PRIMARY JOB OF A DISCRETIONARY EXPENSE CENTER'S MANAGER IS TO OBTAIN THE DESIRED OUTPUT
• THE FINANCIAL REPORT IS NOT MEANS TO EVALUATE THE PERFORMANCE OF THE MANAGER
• IF THESE TWO TYPES OF RESPONSIBILITY CENTERS ARE NOT CAREFULLY DISTINGUISHED, MANAGEMENT MAY ERRONEOUSLY TREAT A DISCRETIONARY EXPENSE
CENTER'S PERFORMANCE REPORT AS AN INDICATION OF THE UNIT'S EFFICIENCY, THUS MOTIVATING THOSE MAKING SPENDING DECISIONS TO EXPEND LESS THAN
THE BUDGETED AMOUNT, WHICH IN TURN WILL LOWER OUTPUT
• FOR THIS REASON, IT IS UNWISE TO REWARD EXECUTIVES WHO SPEND LESS THAN THE BUDGETED AMOUNT
• CONTROL OVER SPENDING CAN BE EXERCISED BY REQUIRING THE SUPERIOR'S APPROVAL BEFORE THE BUDGET IS OVERRUN. SOMETIMES, A CERTAIN PERCENTAGE
OF OVERRUN (SAY, 5 PERCENT) IS PERMITTED
ADMINISTRATIVE AND SUPPORT CENTERS

• CONTROL PROBLEMS
• DIFFICULTY IN MEASURING OUTPUT
• LACK OF GOAL CONGRUENCE
• BUDGET PREPARATION
RESEARCH & DEVELOPMENT CENTERS

• CONTROL PROBLEMS
• DIFFICULTY IN RELATING RESULTS TO INPUTS
• LACK OF GOAL CONGRUENCE
• THE R&D CONTINUUM
• ANNUAL BUDGETS
• MEASUREMENTS OF PERFORMANCE
MARKETING CENTERS

• LOGISTICS ACTIVITIES
• MARKETING ACTIVITIES
VERSHIRE COMPANY CASE STUDY

• IN 1996 VERSHIRE COMPANY WAS A DIVERSIFIED PACKAGING COMPANY WITH SEVERAL MAJOR
DIVISIONS, INCLUDING THE ALUMINUM CAN DIVISION.
• THIS ALUMINUM CAN DIVISION WAS ONE OF THE LARGEST ALUMINUM BEVERAGE CANS
MANUFACTURERS IN UNITED STATES
 Divisional
General
Manager

Manufacturing Marketing
Manager Manager
• THE DIVISION HAD PLANTS SCATTERED THROUGHOUT THE UNITED STATES. EACH PLANT SERVED
CUSTOMERS IN ITS OWN GEOGRAPHIC REGION, OFTEN PRODUCING SEVERAL DIFFERENT SIZES OF CANS
FOR A RANGE OF CUSTOMERS THAT INCLUDED BOTH LARGE AND SMALL BREWERIES AND SOFT DRINK
BOTTLERS.
• MOST OF THESE CUSTOMERS HAD BETWEEN TWO AND FOUR SUPPLIERS AND SPREAD PURCHASES
AMONG THEM.
• ALL ALUMINUM CAN PRODUCERS EMPLOYED ESSENTIALLY THE SAME TECHNOLOGY, AND THE DIVISION'S
PRODUCT QUALITY WAS EQUAL TO THAT OF ITS COMPETITORS.
• CONTAINERS WERE MADE FROM ONE OF SEVERAL MATERIALS: ALUMINUM, STEEL, GLASS, FIBER-FOIL
(PAPER AND METAL COMPOSITE), OR PLASTIC.
• THE METAL CONTAINER INDUSTRY CONSISTED OF THE HUNDRED-PLUS FIRMS THAT PRODUCED
ALUMINUM AND TIN-PLATED STEEL CANS.
• ALUMINUM CANS WERE USED FOR PACKAGING BEVERAGES (BEER AND SOFT DRINKS).
• WHILE TIN-PLATED STEEL CANS WERE USED PRIMARILY FOR FOOD PACKAGING, PAINT AND AEROSOLS .
• IN 1970 STEEL CANS ACCOUNTED FOR 88% OF THE METAL CAN PRODUCTION.
• IN 1996 ALUMINUM CANS ACCOUNTED FOR OVER 75% OF METAL CAN PRODUCTION.
• THAN SOFT DRINKS BOTTLERS WERE PURCHASED BY SMALL INDEPENDENT FRANCHISES OF COCO-COLA
AND PEPSI COLA .
• FIVE BEVERAGE CONTAINER MANUFACTURES ACCOUNTED FOR 88% OF THE MARKET.
• MINIMUM EFFICIENT SCALE FOR A CONTAINER PLANT WAS 5 LINES AND IT COST $ 20 MILLION IN EQUIPMENT
PER LINE
• RAW MATERIALS :64%
• OTHER COST (INCLUDES LABOUR) : 15%
• MARKETING AND GENERAL ADMINISTRATION 9%
• TRANSPORTATION 8%
• DEPRECIATION 2%
• R & D 2%
• IN BEVERAGE PROCESSES CONTAINER ACCOUNTING FOR APPROXIMATELY 40% OF TOTAL
MANUFACTURING COST
• IN EARLY 1970’S CAN WERE PRODUCED BY ROLLING A STEEL SOLDERING AND CUTTING IT TO SIZE.
• IN 1970 THE INDUSTRY WAS REVOLUTIONIZED WHEN ALUMINUM PRODUCERS PERFECTED A 2 PIECE
PROCESS IN WHICH A FLAT SHEET OF METAL WAS PUSHED INTO A DEEP CUP AND TOP WAS ATTACHED . BY
1996 MANUFACTURING HAD BECOME EVEN MORE EFFICIENT, BY PRODUCING OVER 2,000 CANS PER
MINUTE
• IT WAS EASIER TO SHAPE
• IT REDUCED THE PROBLEM OF FLAVOURING
• IT PERMITTED MORE ATTRACTIVE PACKAGING
• REDUCED TRANSPORTATION COST
• MORE ATTRACTIVE RECYCLING MATERIAL
• SCRAP VALUE
QUESTIONS
1- OUTLINE THE STRENGTHS AND WEAKNESSES OF VERSHIRE COMPANY PLANNING AND CONTROL
2. TRACE THE PROFIT BUDGETING PROCESS AT VERSHIRE, STARTING IN MAY AND ENDING WITH THE BOARD OF DIRECTORS'
MEETING IN DECEMBER. BE PREPARED TO DESCRIBE THE ACTIVITIES THAT TOOK PLACE AT EACH STEP OF THE PROCESS AND
PRESENT THE RATIONALE FOR EACH.
3. SHOULD THE PLANT MANAGERS BE HELD RESPONSIBLE FOR PROFITS? WHY? WHY NOT?
4. HOW DO YOU ASSESS THE PERFORMANCE EVALUATION SYSTEM CONTAINED IN EXHIBITS 2 AND 3?
5. ON BALANCE, WOULD YOU REDESIGN THE MANAGEMENT CONTROL STRUCTURE AT VERSHIRE COMPANY? IF YES, HOW AND
WHY?
THANK YOU