Types of Responsibility Center

There are usually 4 types of responsibility center which are identified

as under.

1. Cost Center – Under the cost center, the manager is held responsible

only for the costs, including a production department, maintenance
department, human resource department, etc.
2. Profit Centers –  Under the profit center the manager is responsible
for all costs and revenues. Here the manager would have all of the
responsibility to make decisions that would affect both the price and
the revenue.
3. Revenue Center – This segment is primarily responsible for attaining
sales revenue. The performance would be evaluated by comparing the
actual revenue attained with the budgeted revenue.
4. Investment Center – Apart from looking into the profits, this center
looks into returns on the funds invested in the group’s operations
during its time.

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 individual is aligned and
directed towards a purpose with the responsibility 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 assigning 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 to give their best performance.
 Delegation and Control: The assignment of responsibility center with
roles assigned to various segments helps the organization bring about
and achieve the purpose of delegation. The responsibility of multiple
persons is fixed, which will help the management control their work.
Thus, it now helps the management achieve the desired dual objective
of delegating and controlling 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 plan their future actions. It
helps them understand the segment-wise breakups of revenues, costs,
issues, plans of action, etc.
 Helps in Cost Control: Having 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
Certain disadvantages 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 their
responsibility center, whereas the management may prohibit the
same.
 The requirement of Time and Effort: This system involves a lot of
time and effort on 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: At times, there may be
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 top management 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 on
process-oriented methods, which tends to consume too much time
and effort and effort on the part of the management in having to
assign certain responsibilities.

Break Even Analysis: Benefits and

Limitations
A break-even analysis is a financial method for evaluating when a business, a
new service, or a product will become profitable. 
 
To put it another way, it's a financial formula that determines how many things
or services a business should sell or offer to pay its costs (particularly fixed
costs).
Understanding Break Even analysis
 
Break-even analysis is the process of calculating and evaluating an entity's
margin of safety based on collected revenues and corresponding costs. To
put it another way, the research demonstrates how many sales are required to
cover the cost of doing business.
 
The break-even analysis establishes what level of sales is required to cover
the company's total fixed expenses by analyzing various pricing levels in
relation to various levels of demand. 
 
A demand-side study would provide a seller with a lot of information about
their selling ability. From stock and options trading to corporate planning for
various initiatives, break-even analysis is widely utilized.
 
(Related blog: Cost-benefit Analysis)
 
 
What is the Break-Even Point?
 
The breakeven point (break-even price) for trade or investment is computed by
comparing the market price of an item to its initial cost; the breakeven point is
reached when the two values are equal.
 
In a corporate accounting, the breakeven threshold is derived by dividing all
fixed manufacturing costs by revenue per individual unit minus variable
expenses per unit. 
 
In this case, fixed expenses are those that do not change depending on the
number of units sold. The breakeven point, to put it another way, is the point at
which a product's total revenues equal its total costs.
 
The formula for BEP Break-Even point (Units)= Fixed Costs ÷ (Revenue per
Unit – Variable Cost per Unit).
 
(Also read: Cost of production)
 
 
How does break-even analysis work?
 
A break-even analysis is a financial calculation used to identify a company's
break-even point (BEP).It's an internal management tool, not a calculation,
that's typically shared with outsiders like investors or regulators. 
 
Financial institutions, on the other hand, could ask for it as part of your bank
loan application's financial forecasts. In terms of unit pricing and profit, the
calculation considers both fixed and variable costs. 
 
Fixed costs are those that do not change regardless of how much of a product
or service is sold. Fixed costs include facility rent or mortgage, equipment
expenditures, salaries, capital interest, property taxes, and insurance
premiums, to name a few.
 
Variable expenses grow and decrease in response to sales fluctuations.
Variable expenses include direct hourly worker payroll costs, sales
commissions, and raw material, utility, and shipping costs, to name a few. The
total of the labor and material expenses required to create one unit of your
product is known as variable costs.
 
By multiplying the unit cost by the number of units produced, the total variable
cost is calculated. For example, if producing one item costs $20 and you
make 50 of them, the total variable cost is $20 x 50 = $1000
 
The contribution margin is the difference (more than zero) between the
product's selling price and its total variable cost. If a suitcase is sold for $125
and the variable cost is $15, the contribution margin is $110. This margin aids
in the offset of fixed expenses. (source)
 
 
8 Benefits of Break-even analysis
 
1. Pricing

 
Break-even analysis is a very valuable technique for a corporation, and it
has a lot of benefits. It demonstrates how many things they must sell in
order to make a profit. It determines if a product is worth selling or is too
dangerous to sell. It indicates how much money the company will make
at each level of output.
 
2. Gaining funds

 
When it comes to collecting financing, break-even analysis is usually an
important part of a company's strategy. If you want to get funding for
your firm or startup, you'll almost certainly need to do a break-even study.
Furthermore, a low break-even point will likely help you feel more at ease
about taking on extra debt or funding.
 
 
3. Setting revenue targets

 
 A break-even analysis may also be a useful tool for determining precise
sales goals for your team. When you have a precise quantity and a
timeframe in mind, it's typically easier to decide on revenue goals.
 
 
4. Reduce risk

 
Some company concepts are simply not intended to be followed. Break-
even analysis can help you reduce risk by guiding you away from
investments or product lines that are unlikely to be successful.
 
 
5. Relying on accurate data

 
Costs can sometimes be classified as both fixed and variable. This can
make computations difficult, and you'll almost certainly have to fit them
into one of the two.
 
Correct data is required for your break-even point to be accurate. You
won't obtain a trustworthy result if you don't enter good data into the
calculation.
 
 
6. Competitors are ignored

 
 As a newcomer to the market, you will have an impact on rivals and vice
versa. They might modify their pricing, affecting demand for your goods
and forcing you to adjust your prices as well. If they expand swiftly and a
raw resource that you both use becomes scarce, the price may rise.
 
Finally, break-even analysis will provide you with a firm knowledge of the
prerequisites for success. It's a must-have. However, it isn't the only
study you should conduct before beginning or changing a firm.
 
 
7. Pays of fixed expenses

 
Most people think about price in terms of how much it costs to make
their product. These are referred to as variable costs. You must still pay
for fixed expenditures like insurance and web development. You may
achieve this by performing a break-even analysis.
 
 
8. Make better choices

 
Entrepreneurs frequently make decisions based on their emotions. If they
are enthusiastic about a new enterprise, they will pursue it. It's necessary
to know how you feel, but it's not enough. 
 
 Entrepreneurs that are successful make judgments based on facts.
When you've put in the effort and have meaningful data in front of you,
making a decision will be much easier.
 
(Suggested blog: Types of Trade Barriers and their effects)
 
 

Some Limitations of Break-even analysis

 
1. The assumption behind break-even analysis is that all costs and
spending can be clearly divided into fixed and variable components. In
reality, however, a clear distinction between fixed and variable expenses
may be difficult to make.
 
2. Assuming that the selling price remains constant results in a straight
revenue line, which may or may not be accurate. The selling price of a
product is determined by a variety of factors such as market demand
and supply, competition, and so on, and it seldom remains constant.
 
3. In actuality, it's rare to discover the assumption that just one product
will be created or that the product mix would remain stable.
 
4. It presupposes that production and sales quantities will be equal, and
that there would be no change in the opening and closing stock of
completed goods; however, this is not true in actuality.
 
5. The quantity of capital used in the firm is not taken into account in the
break-even analysis. In reality, the amount of capital utilized is a key
factor in determining a company's profitability.
 
6. It is proven to be inappropriate in sectors such as shipbuilding. If fixed
expenditures are not taken into account while valuing work in progress,
losses may occur each year until the contract is finished. It may result in
income tax issues.
 
7. A corporation may choose to place an excessive order at a cheaper
price based on the marginal cost concept, ignoring plant capacity. It
may entail extra labor and the expansion of manufacturing capacity,
both of which might raise production costs and cause changes in fixed
expenses. Often, the company will lose money.
  
8. Fixed costs are assumed to be constant at all levels of activity. Fixed
expenses, it should be mentioned, tend to vary after a given degree of
activity.
 
9. It is assumed that variable costs are proportional to output volume.
They move in correlation with production volume in practice, although
not always in exact proportions.
 
10. Sales income and variable expenses do not grow in lockstep with
the production value. They are less proportional than they should be at
greater levels of output. This is due to trade discounts, bulk buying
economies, concessions for bigger sales, and so on. (source)
 
11. The distribution of fixed costs across a number of items is
problematic, and it believes that business circumstances will remain
constant, which is not the case.