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This is a term used to define the measuring of performance of decentralized units, using account results.
Responsibility accounting recognizes various decision centers throughout an organization and trace costs
(revenues, assets and liabilities) to the individual managers who are primarily responsible for making the
decisions about the costs in question. A responsibility centre is a unit in an organization headed by a manager
having direct responsibility for its performance. Examples of responsibility centers include cost centre, profit
centre and investment centre. These centers are defined below:
Performance measurement in a cost centre can be accomplished through variance analysis or through
efficiency measures such as output/input ratio.
Managers in a profit centre have control over costs, and revenue decisions. Performance measurement in a
profit centre can be accomplished through the use of profit margin or contribution/sales ratio.
Performance in an investment centre is measured by ratios such as return on investment, which relates the
profit earned to the amount of capital invested. Performance can also be measured from absolute measures
such as residual income.