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Accounting – Responsibility Centres

revenue and profit associated with the centre are identified and recorded • Responsibility centres are an essential feature of cost accounting and budgeting in all but the smallest business organisations Accounting – Responsibility Centres .Responsibility centres • Responsibility centres are a feature of responsibility accounting • A responsibility centre is a segment of a larger organisation and is placed under the control of a manager • A segment could take the form of a department or a division or function or unit or product or even an individual item of equipment • The manager of the responsibility centre is directly responsible for its performance • Costs.

the boundaries of each segment are clearly established • Control .the business organisation is broken down into separate identifiable units or segments known as responsibility centres • Boundaries .segmental managers are given the authority to operate segments as autonomously as possible Accounting – Responsibility Centres .a manager is placed in charge of each segment. The manager is expected to take charge of the costs/revenues/profits associated with the centre and be expected to plan and control them • Authorization .Features of responsibility accounting • Segments .

manager responsible for profit.manager responsible for both costs and revenue • Investment centre .4 types of responsibility centre • Cost centre .manager responsible for revenue raised • Profit centre .manager responsible for costs incurred • Revenue centre . capital investment and financing Accounting – Responsibility Centres .

The unit manager’s responsibility Costs Revenue Profits Investment Cost centre Revenue centre Profit centre Investment Y Y Y Y Y Y Y Y Y Accounting – Responsibility Centres .

Data is collected on the cost of offering the subject and the revenue received from examination fees. cost of materials used plus an allocated share of the fixed overhead costs • If the college finance manager calculated the revenue generated by A level Business Studies then the course could be treated as a profit centre • The examination awarding bodies do treat A level Business Studies (and every other subject) as a profit centre.salary of teaching staff concerned.Example . Accounting – Responsibility Centres .A level Business Studies • Within a school or college A level Business Studies can be treated as a cost centre • It is possible to calculate the cost of offering this A level subject .

By dividing the business up in terms of centres a named post holder is identified as being responsible Accounting – Responsibility Centres .Why organise in terms of centres? • Improved accountability .costs/revenue can be monitored • They facilitates delegation by allowing autonomy for managers in the centre • Greater autonomy and empowerment of managers improves motivation • Greater autonomy aids decision making • The performance of the individual unit can be evaluated • By analysing the performance of individual units it means there is “no hiding place” for weak performing units • Senior management is able to trace problems • Centres are an aspect of budgetary control.

area or person within a business from which costs can be ascertained and to which costs can be allocated • An individual part of the business where costs are incurred and can easily be recorded • The manager responsible for the centre has control over costs but not revenue • A significant % of costs will be are directly attributable costs but there is no directly attributable revenue Accounting – Responsibility Centres .Cost centres • A cost centre is a responsibility centre in which the manager accountable for direct costs only • It is a specific and discrete department.

Examples of cost centres • • • • • • • Personnel/HRM department Finance department R and D department Transport department Warehouse & stock control department Buying department In all the above cases the department incurs costs but does not earn revenue • A item of equipment (such as an office photocopier) can also be regarded as a cost centre Accounting – Responsibility Centres .

Revenue centre • A responsibility centre in which the manager responsible for revenue only • Example: sales department • Most costs will be fixed and will be very small in relation to revenue earned Accounting – Responsibility Centres .

Profit centre • A profit centre is a business unit to which costs and revenues are allocated and recorded • It is a responsibility centre in which the manager is responsible for costs and revenue and therefore the profits of the unit • A profit centre is allowed to control itself as a separate part from the larger organisation • As costs and revenue can be attributable it makes sense to see the centre as a “business within a business” • Example: product department or division with a reasonable degree of autonomy Accounting – Responsibility Centres .

e. revenue and profit/loss are recorded • It is quite possible for a profit centre to produce a negative profit i.Profit centres can make a loss! • One common mistake is to see a profit centre as “the part of the business that makes a profit” whereas all other parts are presumably “loss centres” • This is entirely wrong • Profit centres are simply a part of the business for which data on costs. a loss Accounting – Responsibility Centres .

Examples of profit centres • • • • • • • An individual product within the product portfolio A range of products A brand A geographical region within the company A branch office A product division of the company In each case it is possible to identify and calculate the costs incurred and the revenue received Accounting – Responsibility Centres .

costs. revenue. profit and investment • Example: division of a large multinational company • The division is assessed in terms of its contribution to overall profits Accounting – Responsibility Centres .Investment Centre • This takes responsibility to a greater depth • An investment centre is a responsibility centre in which the manager responsible for all aspects of finance .

Advantages of organising in terms of responsibility centres • Decentralised decision making: faster and more responsive to local conditions • Responsibility centres facilitate delegation • Motivation is improved • Results in improved monitoring of budgets. targets and performance • Leads to greater accountability • Facilitates budgetary control • Prevents the performance of weak elements being hidden within the larger organisation Accounting – Responsibility Centres .

Problems and disadvantages • There is a danger that individual centres become too narrowly focussed • Managers of responsibility centres tend to be more concerned with unit objectives than corporate objectives • Rivalry between centres breaks out • Creates problems of co-ordination • Creates communications problems • The allocation of costs is complex. Any unfairness in the way costs are allocated can lead to be demotivating Accounting – Responsibility Centres .