9. Responsibility Centers

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TYPES OF RESPONSIBILITY

CENTERS

Revenue centers

Expense centers

Engineered expensecenters

Discretionary expense

centers


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Revenue centers

Revenue centers are those organizational units inwhich outputs are measured in monetary terms.

These centers are marketing organizations and they

are not directly responsible for profits. Revenue

centers are also called expense centers, as therevenue center managers are held responsible for

expenses incurred by the unit. The main objective of

revenue centers is to maximize revenues.


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Expense centers

In expense centers, inputs or expenses are

measured in monetary terms whereas the outputs

are not measured in monetary terms


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TYPES OF EXPENSE CENTERS

Engineered expense centers and Discretionary expense centers.

Engineered costs are costs that can be estimated to

a reasonable extent by the management. Examples

are direct labor and direct material. Discretionarycosts, on the other hand, are costs that cannot be

estimated by the management.


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Engineered expense centers

In these centers, inputs or expenses are measuredin monetary terms and outputs are measured in

physical terms. These centers are usually found in

the manufacturing units that use a standard cost

system. There are certain responsibility centerswithin administrative and support departments that

actually are engineered expense centers. In these

centers, the cost of the product is determined by

multiplying the output of each unit with its standardcost. Its efficiency is measured by comparing the

actual cost with the standard cost.


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Discretionary expense centers

In discretionary expense centers, the output cannot

be measured in monetary terms. Discretionary

expense centers include administrative and support

units like legal, accounting, industrial and publicrelations units. Here, the efficiency is not the

difference between budgeted and actual expense,

but the difference between the budgeted input and

actual input. In discretionary expense centers the

management decides on certain policies that should

govern the company's operation. These relate to the

amount of money that should be spent on R&D,

financial planning, public relations, etc.


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RESEARCH AND DEVELOPMENT CENTERS

Control problems in research and

developmentThe problems in researchand development are :

Difficulty in measuring quality :The inputs for an R&D activity can be measured whereas the outputs are

difficult to measure. For R&D activities, the time taken for a particular

research cannot be estimated as it may take months or sometimes years

for a particular activity. Also the output is difficult to measure because of

its technical nature.

Lack of goal congruence :As in administrative centers, goal congruency is lacking in R&D centers,

too. Conflict may arise between the research manager and the business

unit manager. The research manager may want to build the best research

and development center, no matter what the expense be, while it may notbe possible for the company to afford it. Also, the researchers may not

have sufficient knowledge about the business, in some cases. The

research and development costs cannot be controlled on a year-to-year

basis because a research project may take years to show results and the

organization would have to bear the cost of the project for that period of

time, mainly the cost on labor.


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Marketing centers

There are two types of marketing activities in every organization:

Order filling (logistics) : Order filling activities includetransferring goods from the company to the customer, and

receiving the appropriate pay from the customer. Theseare mostly engineered expense centers.

Order getting : Order getting activities include

test marketing, training sales force, advertising,

sales promotion, etc. Though the output of a

marketing organization can be measured, it is

difficult to evaluate the marketing effort, as themarketing department has no control over

economic conditions or competitors actions.

These actions may be different from what was

expected when the sales budgets wereestablished.


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Profit centersWhen financial performance of a

responsibility center is measured in terms of the organizations

profit, then it is called a profit center. In a profit center,

performance is measured in terms of the numerical difference

between revenues (outputs) and expenditure (inputs). A profit

center is given the responsibility of earning profits. It is

involved in the manufacture and sale of outputs, and it

measures how well the center is doing economically. The profitcenter also determines the efficiency of the manager in charge

of the center.A profit center helps in motivating

managers to perform well in areas they control and also

encourages managers to take initiatives. The profit centerhelps the organization to make the best use of specialized

market knowledge of the divisional managers, and entrusts

the local managers the responsibility of tradeoffs. Profit

centers have been used as a major management control tool.


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The major advantages of profit centers are:

These help in increasing the speed of making operating decisions

as they do not have to be referred to corporate headquarters.

As the decision-making authority lies with the managers they

can make better decisions related to the task they are

performing, because they can understand the nature of the work

better. Since profit centers make their day-to-day decisions themselves

headquarters can concentrate on broader issues of the

organization.

Managers are motivated to perform more effectively, as they areresponsible for increasing the profit of their unit.

Managers use their imagination, take initiatives to perform

more effectively, to increase the profit of their unit.


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TYPES OF PROFITABILITY

MEASURES:

The parameters that can be used for measuring theprofitability of a profit center are

contribution margin,

direct profit,

controllable profit,

income before taxes and

net income.


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Investment centers Cost centers

9. Responsibility Centers

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