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Responsibility Centers

• Examples: A specific store in a chain of grocery stores.What is a responsibility centers? • In simple words: an organizational unit for which a manager is made responsible. . • A work-station in a production line manufacturing automobile batteries. • The payroll data processing center within a firm.

• Should promote the long terms interests of the organization and should be compatible with other responsibility center activities.Attributes of a responsibility centers • It is like a small business. and its manager is asked to run that small business & preserve the interests of the larger organization. . • Goals for the center should be specific and measurable.

labor & Services.Nature Of Responsibility Centers • It exists to accomplish one or more purposes. termed its objectives. • It transforms inputs into outputs. Inputs Work Output Capital . • It receives inputs in the form of Materials .

Setting up of Res. Centers Organization Marketing Marketing Manager Marketing budget Finance Finance manager Finance Budget R&D R&D Manager R&D Budget Production Production Manager Production Budget HRD HRD manager HRD Budget .

Types of Responsibility centers • • • • Revenue center Expense/cost center Profit center Investment center .

and the manager is held responsible for the expenses incurred directly within the unit . • Typically these are marketing or sales units.Revenue center • In a revenue center output is measured in monetary terms. • Actual sales or orders booked are measured against budgets or quotas. • They do not have authority to set selling prices.

methods of manufacture and utilization of labour and equipment etc. • The manager of the profit center should be free to make decisions regarding purchases of materials economically. product mix. • Managers of profit centers control both the revenues and costs of the product or service they deliver. .Profit Centers • When a responsibility center’s financial performance is measured in terms of profit the center is called profit center.

• The speed of operating decisions may be increased since they do not have to be referred to corporate headquarters.Advantages of profit centers • The quality of decision may improve because they are being made by managers closest to the point of decision. • Managers subject to fewer corporate restraints are freer to use their imagination and initiative. • Headquarters management can concentrate on broader issues. .

) • Profit consciousness Enhanced since managers who are responsible for profits will constantly seek ways to increase them.Advantages of profit centers(cont. • Profit centers provide top management with a readymade information on the profitability of the company’s individual components. .

.Difficulties with profit centers • Decentralized decision making will force top management to rely more on management control reports than on personal knowledge of an operation. the quality of decision made at unit level may be reduced. • If headquarters management is more capable than average profit center manager. • Friction may increase because of arguments over various points.

and record keeping required. . • Divisionalization may impose additional cost because of the additional management staff personnel.Difficulties with profit centers(cont.) • Organization units that once cooperated as a functional units may now be in competition with each other. and may lead to redundancies at each profit center.

Examples of profit center • • • • • Functional units Marketing Manufacturing Service and support units Other organizations .

• Do not control their revenues or investment level.Expense/Cost Centers • Responsibility centers whose employees control costs. • Two types of costs: – Engineered: – Discretionary: . a dry cleaning business. • Examples: Production department in a manufacturing unit.