RESPONSIBILITY

CENTERS
The Boundaries of Management
Control
Activity Nature of End Product

Strategy Goals, Strategies, and Policies

Formulation

Management Implementation of strategies

Control

Task Control Efficient and effective

performance of individual tasks
 RESPONSIBILITY CENTERS
 A responsibility centre,
 is an organization unit that is headed by a manager who
is responsible for its activities.

 The nature:
1. A responsibility centre is established to support in
achieving corporate goals by reaching its objectives.
2. A responsibility centre must comply to the
determined corporate strategies.
3. A responsibility centre is measured for its efficiency
and effectiveness.
 Efficiency
 Efficiency is the ratio of outputs to inputs, or the
amount of output per unit input.
 A responsibility centre is more efficient than another
when:
it uses fewer resources than another but produces
the same output, or
it uses the same resources but produces a greater
outputs.

Inputs Outputs

Resources used, Goods or services

measured by cost
 Effectiveness
 Effectiveness is the relationship between a
responsibility centre and its objectives.
the more this outputs contributes to the objectives,
the more effective the unit.
Efficiency and effectiveness is not mutually
exclusive.
 Types of Responsibility
centres
1. Revenue centre
Functions
2. Expense centre
3. Profit centre
Business Unit
4. Investment centre
 Revenue Centre
when a responsibility centre is measured for its outputs
(revenues) but not for the inputs (expenses).
outputs (revenues) are under control but not for the inputs.
more outputs, better performance
Marketing, Selling Department.

Inputs not related to

outputs

Inputs Outputs

(dollar only for costs (dollar revenues)

directly incurred)
 Expense Centre
 when a responsibility centre is measured for its inputs
(expenses) but not for the outputs (revenues).
 when the inputs (expenses) are under control but not
for the outputs (revenues).
 outputs are not measured in monetary unit but the
input.
 the focus of performance measurement is based on the
efficiency of expenses consumed.
 manufacturing department, human resources
department, R&D.
1. Engineered Expense Centre
2. Discretionary Expense Centre
 Engineered Expense Centre
 the input can be measured in monetary units.
 the output can be measured in physical units but not in
monetary units.
 the optimum dollar amount of input required to produce
one unit output can be determined.
Optimum relationship
can be determined

Inputs Outputs

(dollar) (physical)
Discretionary Expense Centre
 the input can be measured in monetary units.
 the output cannot be measured in physical units nor in
monetary units.
 the optimum dollar amount of input required to
produce one unit output cannot be determined exactly.
 the inputs (expense) is in the discretion of management
 efficiency is measured in the long-run term, and is not
the difference between budget and actual expense.
Discretionary Expense Centre
(cont.)

Optimal relationship
cannot be established

Inputs Outputs

(dollar)
 Discretionary Expense Centre (cont.)
 General Control Characteristics
Budget Preparation
1. Budget is based on the magnitude of the job that needs to be
done.
2. The job could be continuing work (work that is done
consistently from year to year, such as the preparation of
financial statements by the controller’s office); or special
work (work that is a “one-shot” project, such as developing
and installing a profit-budgeting system in newly acquired
division).
3. A technique often use in preparing the budget is
management by objectives (a formal process in which a
budgetee proposes to accomplish specific jobs and suggests
the measurement to be used in performance evaluation).
 Budget Preparation (cont.)

 The planning function for discretionary expense centres

is usually carried out in one of two ways: incremental
budgeting or zero-base review.
 Incremental budgeting:
The discretionary expense centre’s current level of
expenditure is accepted and not re-examined during
the budget preparation process.
Managers of this centres typically want to increase
the level of services, and thus tend to request
additional resources, which if they make sufficiently
strong case-are usually provided.
 Budget Preparation (cont.)

 Zero-Base Review
 A thorough analysis of each discretionary expense centre
is conducted on a rolling schedule, so that all are reviewed
at least once every five years.
 Certain basic questions are often raised:
1. Should the function under review be performed at all?
Does it add value from the standpoint of end use
customers?
2. What should the quality level be? Are we doing too
much?
3. Should the function be performed in this way?
4. How much should it cost?
 Administrative and Support
Centres
 Administrative centres include senior corporate
management and business unit management, along
with the managers of supporting staff units.
 Support centres are units that provide services to other
responsibility centres.

Control Problems:

1. Difficulty in Measuring Output,

2. Lack of Goal Congruence.
 Research and Development
Centres
 Control Problems:
1. Difficulty in Relating Results to Inputs
2. Lack of Goal Congruence
 Profit Centres
A profit centre is a responsibility centre which its
financial performance is measured in terms of profit (the
difference between the revenues and expenses)

Inputs are related to

outputs

Inputs Outputs

(dollar costs) (profits)

 Advantages of Profit Centres
 The quality of decision may improve because they are being
made by the managers closest to the point of decision.
 The speed of operating decision may be increased since they do
not have to be referred to corporate headquarters.
 Headquarters management, relieved of day-to-day decision
making, can concentrate on broader issues.
 Managers, subject to fewer corporate constraints, are freer to use
their imagination and initiative.
 Because profit centres are similar to independent companies, they
provide an excellent training ground for general management.
 Advantages of Profit Centres
(cont.)
 Profit consciousness is enhanced since managers who are
responsible for profits will constantly seek to increase them.
 Profit centres provide top management with ready-m
ade information on the profitability of the company’s
individual components.
 Because their output is so readily measured, profit center are
particularly responsive to pressures to improve their
competitive performance.
 Difficulties with Profit
Centres
 Decentralized decision-making will force top management to
rely more on management control reports than on personal
knowledge of an operation, entailing some loss of control.
 If headquarters management is more capable or better
informed than the average profit centre management, the
quality of decisions made at the unit level may be reduced.
 Friction may increase because of arguments over the
appropriate transfer price, the assignment of common costs,
and the credit for revenues that were formerly generated
jointly by two or more business units working together.
 Organization units that once cooperated as functional units
may now be in competition with another.
 Difficulties with Profit
Centres (Cont.)
 Divisionalization may impose additional costs because of the
additional management, staff personnel, and record keeping
required, and may lead to task redundancies at each profit
centre.
 Competent general managers may not exist in a functional
organization because there may not have been sufficient
opportunities for them to develop general management
competencies.
 There may be too much emphasis on short-run profitability
at the expense of long-run profitability.
 There is no completely satisfactory system for ensuring that
optimizing the profits of each individual profit centre will
optimize the profits of the company as a whole.