What is a Responsibility Center?

A responsibility center is a functional entity within a business that has its own
goals and objectives, dedicated staff, policies and procedures, and financial
reports. It is used to give managers specific responsibility for revenues
generated, expenses incurred, and/or funds invested. This allows the senior
managers of a company to trace all financial activities and results of a business
back to specific employees Doing so preserves accountability and may also be
used to calculate bonus payments for employees.

There may be many responsibility centers in a business, but never less than one
such center. Thus, a responsibility center is usually a subset of a business.
These centers are usually stated on a firm’s organization chart.

From an accounting perspective, a financial report should be issued to each

responsibility center that itemizes the revenues, expenses, profits, and/or return
on investment for which the manager of each center is solely responsible. This
can result in quite a large number of customized reports being issued on an
ongoing basis.

The use of multiple responsibility centers requires a certain amount of

corporate infrastructure to develop each center, track its results, and manage
expectations with the various managers.

Types of Responsibility Centers

1. Investment Centre 
Investment centres are the subgroups in an organisation which is responsible for
making any investment-related decisions. From the acquisition of funds to
collection of debts, every cost and revenue related activity comes under this
section. 
The manager handling these subsections needs to assign tasks and make the right
decision regarding investment. In business, there are times when the available
working capital isn’t enough to carry the necessary business operations. 
In such times, businesses have to look for sources of investment, be it external
source or internal source. They need to decide if they will borrow from financial
institutions and other sources or want to acquire funds by liquefying an asset. All
these decisions are taken by these types of responsibility centres.

2. Cost Centre 
An expense centre or cost centre’s responsibilities are confined to cost incurred in
various business operations. They are responsible for budget planning and cost
control for various services in different departments in an organisation. 
To put simply, cost centres are responsible for managing costs of operation for
various departments and units. They can direct the accounting department,
production department, human resource department, maintenance department, etc. 
Lets take an example.
A product based company may treat various individual departments as cost centre
units wherein the respective managers act as cost centre managers. These managers
further report to the plant manager regarding cost-related matters. Or, there can be
a dedicated department which handles the cost operations of all other departments
working in the organisation.

3. Revenue Centre 
A revenue centre is responsible for generating and managing all the revenues a
business makes. Though these types of responsibility centre can’t interfere in the
matters of cost and expenses, they may have a say on budgeted marketing
expenses.
Revenue centres can assess the estimated expenditures for marketing with the
actual price and develop ways to generate more revenues for the organisation.
Here, sales representatives, marketing managers, etc. can be a part of this revenue
centre.

4. Profit Centre 
A profit is the surplus amount of revenue that a company generates, after excluding
the total cost of operation. A profit centre is concerned with the profit earned by a
company as they manage and operate different functions of sales. 
The entire team works upon the sales strategy and marketing tactics so that they
can improve the earned profit percentage. So, departments handling tasks of sales
and expenses are a part of the profit centre. 
Now that you have learned the basic concept of responsibility centres and their
importance in the organisation test your understanding by answering these
questions yourself. 
 Examples of Responsibility Center

Given below are the examples of the responsibility center.

1. Revenue Center: A good example would be the sales department or the

salesperson
2. Cost: A good example, in this case, would be the janitor department
3. Profit Center: This would be a product line for which the product manager
will be responsible
4. Investment Center: Example would be that of a subsidiary entity for which
the subsidiary’s president is held responsible.

Advantages of Responsibility Center

Given below is how the responsibility center helps an organization.

 Assignment of Role and Responsibility: 

When there is a responsibility attached to each segment, each and every individual
is aligned and directed towards a purpose with the responsibility that is in line with
their roles. The person or department will be tracked and nobody can shift the
responsibility to anybody else suppose anything goes wrong

 Improves Performance:
 The idea of having to assign tasks and responsibilities to a particular person would
stand to act as a motivational factor. Knowing that their performance will be
tracked and reported to the top management, the departments and persons involved
will try their best to give in their best performance

 Delegation and Control:

 The assignment of responsibility center with roles being assigned to various
segments helps the organization to bring about and achieve the purpose of
delegation. Responsibility of various persons to is fixed which will help the
management in controlling their work. Thus it now helps the management achieve
the desired dual objective of having delegation plus control over the tasks
 Helps in Decision Making:
 Responsibility centers help the management in decision making as the information
disseminated and collected from various centers helps them in planning all of its
future actions. It helps them understand the segment-wise breakups of revenues,
costs, issues, future plans of action, etc.

 Helps in Cost Control: 

By having a segment-wise breakup responsibility centers help the top management
in having to assign different budgets for the various centers thereby achieving cost
control as per the requirements.

Disadvantages of Responsibility Center

There are certain disadvantages along the way that may crop up and impair the
system of responsibility centers

 Presence of Conflict of Interest: 

There may be a possibility that a conflict of interest may arise between the
individual and that of the organization. A sales individual may try forceful selling
in certain restricted areas to increase his commissions identified under his/her
responsibility center whereas the management may have its policy prohibit the
same

 The requirement of Time and Effort: 

This system involves a lot of time and effort on the part of the management to
thoroughly plan and chalk out the required course of action. Should something go
wrong in the planning process the entire process is doomed to fail and would be
nothing but a recipe for disaster

 Ignores Personal Reaction and Feedback: 

 There may be at times resistance and reluctance on the part of the employee or
manager for whom a certain department/segment/role is assigned. The method
seems to neglect such feedback on part of the top man agreement and may seek to
focus only on the bottom line achieved through segregation of such centers

 Too much Process-Oriented: 

A lag in such a system is that it may too much of a process-oriented wherein the
focus is on segregation and assignment of responsibility into various segments.
Thus too much time, effort and focus is being given to such actions

Limitations of Responsibility Center

 A major limitation of such a system is attributed to too much focus given on

process-oriented methods, which tends to consume too much time and effort and
effort on part of the management in having to assign certain responsibilities

Conclusion

The method of assigning responsibility center within an organization to help

achieve the organizational goals through segregation and tagging to each manager
no doubt helps in achieving delegation and control apart from tracking the
performance that tends to act as a motivational booster. However, it becomes
important for management to realize that one should not be too focused or be
process-oriented that would cripple out the initial objects set. By doing so a
company is most likely to sabotage itself when it focuses on the hierarchical
scheme of things. Results may not be achieved and targets may just become
numbers to frown upon.

Hence to solve such problems it becomes imperative that the responsibility centers
is not process-oriented that they tend to miss out on the initial objectives set forth.
When done efficiently it helps in tracking and measuring the performance of each
of the segments as listed out.