Responsibility Centers

Responsibility Centre-- definition

RC is a unit headed by a manager who is responsible for its activity

Responsibility Centre-- nature

A responsibility centre exists to accomplish one or more purposes, termed objectives

Every Organization is the sum of itsResponsibility centers, If each responsibility centre meets its objectives, the goals of the organization will be achieved

Organizational Objectives

•Profit Maximization Revenue maximizationExpenditure control

•Focus on revenue•Focus on Expenditure •Fixing responsibility

Inputs and Outputs

WORKInputs

Resources UsedMeasured by Cost

Outputs

Goods or Srvices

Capital

Efficiency and Effectiveness

Efficiency is the ratio of outputs to inputs or the amount of outputs per unit of input

Efficiency and Effectiveness

Effectiveness is determined by theRelationship between a responsibilityCenter’s output and its objectives

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Types of Responsibility Centers

•Revenue Centers•Expenses Centers•Profit Centers •Investment Centers

Output is measured in monitory terms, but no formal attempt is made to relate input to output

Marketing &Sales Units

Actual Sales are measured against budgetsPrimary measurement is Revenue

Revenue Budget

Expense Centre

Expense Centers are those centers whose inputs are measured but not the outputs

Engineered Expense

Which can be estimated with reasonable reliabilityDM, Components, Supplies..

Discretionary Expense

Which cant be estimated Depends upon Judgment…

Engineered Expense Centre- characteristics

Their inputs can be measured in monetary terms

Their outputs can be measured in physical terms

The amount of input required to produce one unit of output can be determined

ManufacturingAdministration

DistributionWarehousing

Discretionary Expense Centre- characteristics

AccountingLegalIndustrial RelationsHuman ResourceResearch and DevelopmentMost Marketing Activities

General Control Characterstics

Budget PreparationIncremental BudgetingZero Base BudgetingCost VariabilityType of Financial ControlMeasurement of Performance

Administrative and Support Services

Administrative Centers include senior Corporate management and business unit Management, along with managers of supporting staff units

Support Centers are units that Provide services to other Responsibility Centers

Administrative and Support Services- Control Problems

Difficulty of Measuring Output

Budget PreparationLack of Goal Congruence

Research and Development Centers

Control Problems

•Difficult to relate results to inputs•Lack of Goal Congruence

Research and Development Centers

R& D Continuum

•Basic Research, production, Testing•Amount spent increase Substantially•Control and Estimation become difficult

Research and Development Centers

R & D Programmes

No scientific way of determining the optimum size of R&D budget – generally % of sales revenue.

Research and Development Centers

Annual Budget

Preparation of annual budget for R& D isDifficult exercise

Research and Development Centers

Measurement of Performance• Compare latest forecast cost with approved amount of active

projects• Comparisons between actual and budgeted in each responsibility

center

Marketing Centers

Marketing Activities

Test Marketing,Supervision of Sales force, Advertising,Sales Promotion

Logistics Activities

transportation, distribution, warehousing, shipping and delivery, billing and related credit functions

Marketing Centers

BUDGET : • Companies follow marketing budget as a

certain % of sales revenue • Higher the sales volume higher the budget.• Spend more to get more. • Spending justify sales revenue.

Marketing Centers

BUDGET : • Companies follow marketing

budget as a certain % of sales revenue

• Higher the sales volume higher the budget.

• Spend more to get more. • Spending justify sales revenue.

BUDGET : • Historical• Zero Base Budgeting• Incremental Budgeting

Marketing Centers- control

•Classification Of Expenses

•Budgetary Control• Functional budgets• Master budget

•Standard Costing Techniques•Insulating costs against variability (escalation) by futures contract / swaps etc.

Read Case 4.1 Vershire Company