Responsibility Centers : Revenue and Expense Centers Management Control Systems Chapter 4 July...

Responsibility Centers :Revenue and Expense Centers

Management Control Systems

Chapter 4

July 2014 Iwan Pudjanegara SE., MM. 1

Nature of Responsibility Centers

A Responsibility Center (RC) is an organization unit that is headed by a manager who is responsible for its activities.

Objectives: to help implement organization’s strategies to accomplish its goals ex. Transforming its input into outputs.


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EXHIBIT 4.1Responsibility Center

OUTPUTS

Goods or Services

CAPITALS

(Inventory, Receivables,

Equipment & Other Assets)

INPUTS

Resources used, measured by Cost

(Materials, Labor, Services, etc)


Relation between Inputs and Outputs

• Control focuses on using the minimum input necessary to produce the required output according to the correct specifications and quality standards, at the time requested, and in the quantities desired.


Relation between Inputs and Outputs

• In many situations, input are not directly related to outputs.

Example:• Advertising Expense (input) intended to

increase sales revenue (output), but revenue is also affected by other factors management’s decision to increase advertising expenditures is based on judgement rather than data.


Measuring Inputs

INPUT x MONETARY VALUE = COST

===============================Input = physical measurements/quantitative amounts/resources used by RC

Monetary Value = IDR, USD, etc.

Cost = a monetary measure of the amount of resources used by a RC.


Measuring Outputs

• It is harder to calculate the value of outputs than the cost of inputs.• Revenue is the value of outputs of a

profit-oriented organization.• But Revenue will not express all that

organization did during that year. (Ex. The work done by PR Dept./Legal Dept./QC Dept., R&D Activity, HR Training, etc.)


Efficiency and Effectiveness

Efficiency : the ratio of outputs to inputs, or the amount of output per unit of input.

RC-A is more efficient than RC-B if :If it uses fewer resources than RC-B

but produces the same output.If it uses the same amount of resources

but produces a greater output.



Effectiveness : the relationship between a RC’s output and its objectives.

Both objectives and outputs are difficult to quantify, so effectiveness tends to be expressed in subjective, nonanalytical terms.

The more outputs contributes to the objectives, the more effective the unit.July 2014 Iwan Pudjanegara SE., MM. 9


Summary: Efficiency and Effectiveness are not

mutually exclusive every RC ought to be

(=seharusnya) both efficient & effective.

A RC is efficient if it does things right, and it is effective if it does the right things.

Profit measures both effectiveness and efficiency.


Types of Responsibility Centers

Revenue CentersExpense Centers

Engineered Expense CentersDiscretionary Expense Centers

Profit CentersInvestment Centers


Revenue Centers

Output (Revenue) is measured in monetery terms, but no formal attempt is made to relate input (expense/cost).

Example of Revenue Centers are Sales/Marketing units that do not have authority to set selling prices and are not charged for the cost of the goods they market


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EXHIBIT 4.2TYPE OF RESPONSIBILITY CENTERS

Revenue Centers

INPUTS NOT RELATED

TO OUTPUTS

Examples

INPUTS OUTPUTS Marketing

(dollar only (dollar revenue) Function

for costs directly

incured)


Expense Centers

RC whose inputs are measured in monetary terms, but outputs are not.

Two types of Cost :1) Engineered Costs

2) Discretionary Costs (Managed Costs)


Engineered Expense Centers

Engineered Cost: the right amount can be estimated with reasonable reliability (ex. Factory’s cost for direct labor, direct material, etc.).

Usually found in manufacturing operations, warehousing, distribution, trucking, etc.



Characteristics:Input can be measured in monetary

terms.Output can be measured in physical

terms.The optimum of input (dollar amount)

required to produce one unit of output can be determined.


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OPTIMAL RELATIONSHIP

CAN BE ESTABLISHED

Examples

INPUTS OUTPUTS Manufacturing

(dollar) (physical) Function


Discretionary Expense Centers

Discretionary Cost = Managed Cost No such engineered estimate is

feasible the costs incurred depend on management’s judgment as to appropriate amount under the circumstances.


Discretionary Expense Centers

Incl. Administrative and supports unit (accounting, legal, PR, HR), R&D operations, and most marketing activities.

The output can be measured in monetery terms.

Management by Objectives (MBO) is a technique often used in preparing a discretionary expense center’s budget.


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Discretionery Expense Centers

OPTIMAL RELATIONSHIP

CAN NOT BE ESTABLISHED

Examples

INPUTS OUTPUTS Research &

(dollar) (physical) Development Function


General Control Characteristics

Budget Preparation Incremental Budgeting Zero-Base Review Cost Variability Type of Financial Control Measurement of Performance



Budget PreparationoManagement formulates the budget for a

discretionary expense center by determining the magnitude of the job that needs to be done (The Work Done)

o2 categories of The Work Done :Continuing WorkSpecial Work



oContinuing work: done consistently from year to year, such as the preparation of financial statements.

oSpecial work: a “one-shot” project, for example developing and installing a profit-budgeting system in a newly acquired division.



oManagement by Objectives (MBO)Is a technique often used in preparing a

discretionary expense center’s budget.A formal process in which a budgetee

propose to accomplish specific jobs and suggests the measurement to be used in performance evaluation.



The planning function for dicretionary expense center is Incremental Budgeting or Zero-base Review.

Incremental BudgetingoThe discretionary expense center’s current level

of expenses is used as a starting point.oThis amount is adjusted for inflation, anticipated

changes in the workload of continuing job, and the cost of comparable jobs in similar units.



oParkinson’s Second Law : Overhead costs tend to increase, period.

Zero-base ReviewoAn alternative budgeting approach to

make a thorough analysis of each discretionary expense center on a rolling schedule, so that all are reviewed at least once every five years or so.



oZero-base reviews are time-consuming.oIn the later ‘80s and 90s, many

companies conducted zero-base reviews, as a reaction to a downturn in profitability downsizing, rightsizing, euphemistically, restructuring, or proses reengineering.



Cost VariabilityoCosts in engineered expense centers are

strongly affected by short-run volume changes.

oCosts in discretionary expense centers are comparatively insulated from such short-term fluctuations.



Type of Financial ControloFinancial in an engineered expense center is to

become cost competitive by setting a standard and measuring actual costs against this standard.

oFinancial in a discretionary expense budget is to control costs by allowing the manager to participate in the planning, sharing in the discussion of what tasks should be undertaken, etc.


Administrative and Support Centers

Administrative Centers include Sr. Corporate Management and Business Unit Management, along with the managers of supporting staff units.

Support Centers are units that provide services to other RCs.


Administrative and Support Centers

Control Problems• Difficulty in Measuring Output• Lack of Goal Congruence

Budget Preparation• Consits of a list of expense items, with

the proposed budget being compared with the current year’s actual expenses.


R & D Centers

Control Problems• Difficulty in Relating Results to Inputs• Lack of Goal Congruence

The R&D ContinuumR&D ProgramAnnual BudgetsMeasurement of Performance July 2014 Iwan Pudjanegara SE., MM. 32

Marketing Centers

Logistic ActivitiesAre those involved in moving goods from

the company to its customers and collecting the amounts due from customers in return.

These activities incl. transportation to distribution centers, warehousing, shipping and delivery, billing and the related credit function, and the collection of A/R.


Marketing Centers

Marketing ActivitiesAre those undertaken to obtain orders

for company products.These activities incl. test marketing,

the establishment-training-and supervision of the sales force, advertising, and sales promotion.


Responsibility Centers : Revenue and Expense Centers Management Control Systems Chapter 4 July...

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