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
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