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Chapter 4
RESPONSIBILITYCENTERS: REVENUEAND EXPENSE CENTERS
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Responsibility Centers
A responsibility centeris an organization unitthat is headed by a manager who is responsiblefor its activities
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Nature ofResponsibility Centers
Work
Inputs
Resources used,
measured by cost
Outputs
Goods or services
Capital
Outputs
Another responsibility centers
Outside marketplace
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Relation betweenInputs and Outputs
Management is responsible for ensuring theoptimum relationshipbetween inputs and
outputs.
Relationships
Causal & Direct Not Direct
Ex: Production department Ex: Advertising expense,
R & D
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Measuring Inputs & Outputs
In a MCS, inputs in quantitative amountsare translated into monetary terms.
Physical quantity x price per unit
Cost
It is much easier to measure the cost ofinputs than to calculate the value of outputs
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Efficiency and Effectiveness
Efficiencyis the ratio of outputs to inputs, orthe amount of output per unit of input.
Effectivenessis determined by the relationshipbetween a responsibility centers output and itsobjectives.
Efficient does things right
Effective does the right things
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Types of Responsibility Centers
Classification the nature of the monetaryinputs and/ or outputsthat are measured for
control purpose.
Types of responsibility centers:
Revenue centers
Expense centers
Profit centers
Investment centers
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Revenue Centers
In revenue centers, output (i.e., revenue) ismeasured in monetary terms, but no formalattempt is made to relate input (i.e., expense orcost) to output.
Ex: marketing/sales unit that do not have
authority to set selling prices and are notcharged for the cost of gods they market.
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Expense Centers
Expense centersare responsibility centerswhose inputs are measured in monetary terms,but whose output are not.
Types of expense center:
Engineered costsare those for which the right orproper amount can be estimated with reasonable
reliability. Discretionary costs (managed cost)are those for
which no such engineered estimate is feasible.
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Engineered Expense Centers
Characteristic:
Their input can be measured in monetary terms.
Their output can be measured in physical terms.
The optimum dollar amount of output requiredto produce one unit of output can bedetermined.
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Discretionary Expense Centers
Include administrative & support units, R & Doperation, most marketing activities.
The difference between budget & actual expense
is not a measure of efficiency.
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General Control Characteristics
Budget Preparation
Engineered expense center: efficiency
Discretionary expense: management by objectives
Cost Variability
Type of Financial Control
Measurement of Performance
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Administrative& Support Centers
Administrative centersinclude senior corporatemanagement and business unit management,along with the managers of supporting staff units.
Support centersare units that provide servicesto other responsibility centers.
Control problems:Difficulty in measuring output
Lack of goal congruence
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Research& Development Centers
Control problems:
Difficulty in relating results to inputs.
Lack of goal congruence. The R&D Continuum
Basic
Research
Product
TestingAppliedresearch
DevelopmentProduct
Engineering
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Marketing Centers
Two types of marketing activities:
Logistic activities (order filling)
Fundamentally similar to expense centers inmanufacturing plants.
Marketing activities (order getting)
It is difficult to evaluating effectiveness of
marketing efforts because changes in factorsbeyond