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Meaning of Responsibility Centre: What Is A Responsibility Accounting?

A responsibility center is an operational unit within an organization that is responsible for tasks and activities assigned to it. There are different types of responsibility centers including cost centers, revenue centers, profit centers, and investment centers. Each center is responsible for specific goals and metrics such as controlling costs for cost centers, generating revenue for revenue centers, and profitability for profit centers. Responsibility centers allow large organizations to divide tasks and measure performance across divisions.

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79 views9 pages

Meaning of Responsibility Centre: What Is A Responsibility Accounting?

A responsibility center is an operational unit within an organization that is responsible for tasks and activities assigned to it. There are different types of responsibility centers including cost centers, revenue centers, profit centers, and investment centers. Each center is responsible for specific goals and metrics such as controlling costs for cost centers, generating revenue for revenue centers, and profitability for profit centers. Responsibility centers allow large organizations to divide tasks and measure performance across divisions.

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Meaning Of Responsibility Centre


A responsibility center is an operational unit or entity within an organization, that is responsible for all the activities and tasks structured for that unit.
These centers have their own goal, staffs, objectives, policies and procedures, and financial reports. And are used to balance responsibilities related to
expenses incurred, revenue generated, and funds invested to an individual.
In a multinational or large corporation, the organization tasks are divided into a subtask, and each task is given to various small division or groups. In
this context, all groups in that organization are responsibility centers.
Related links: What is a responsibility accounting?

Types of Responsibility Centre:

 Cost Centre- A Cost Centre is a department or a unit which supervises, allocates, segregates, and eliminates all sorts of the cost related to
a company. The cost center prime work is to check the cost of an organization and to limit the unwanted expenditure the company may
acquire. The cost can be the determination of both person and location. In multinational companies, the cost center is authorized to
decrease and manage the cost.
 Revenue Centre- This center is accountable for initiating and monitoring revenue. The management does not have any control over the
cost or investment but can monitor a few of the expenses in the marketing section. The production of the revenue center is calculated by
analyzing the budgeted revenue with actual revenue and actual marketing expenses with budgeted marketing expenses.
 Profit Centre-It is a division or department of a company which operates for the calculation of profit. In an organization, different profit
centers are managed by the managers, who identifies profits on the basis of costs and incomes. Profit Centre is accountable for all the
actions associated with the sales of goods and production.
 Investment Centre- This center is responsible for both investments and revenue. The investment manager can control expenses, income,
the fund invested in assets, etc. He also has the authority to form a credit policy, which has an immediate impact on debt collection.
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Concept of Responsibility Centers:


Any organizational or functional unit headed by a manager who is
responsible for the activities of that unit is called a responsible center.
The manager is responsible or accountable for the accomplishments of
the tasks set in his unit.

The total organizational task is divided into sub-tasks, which are


performed by different departments. In this sense, all departments in
an organization are responsibility centers.

All responsibility centers use resources [inputs or costs] to produce something [output or revenues].
Typically responsibility is assigned to a revenue, expense, profit and/or investment center.

The decision usually will depend on the activity performed by the organizational unit and on the manner
in which inputs and outputs are measured by organizational control system.

The organizational chart shows the sub-tasks being performed by different departments and also the tasks
to be performed by each responsibility center. The size of the responsibility center will, however, is
determined by the nature of the task, technology, people and the level in the organization hierarchy.

From the top management point of view, a division is a responsibility center, from the divisional
management’s point of view; the market department of that division is a responsibility center. And from
the marketing manager’s point of view, the sales, distribution, and advertising departments are
responsibility centers.

Types of Responsibility Centers:


The following are the types of responsibility centers:
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[a] Revenue Center,

[b] Expense center,

[c] Profit center, and


[d] Investment Center.

They are described below:


(a) Revenue Centers:
Revenue centers are those organizational units or segments in which
outputs are measured in monetary terms but are not directly
compared to input costs. The main focus of management’s efforts will
be on revenue generated by it. A sales department is an example for a
revenue center.

The effectiveness of the center is not judged by how much sales


revenue exceeds the cost of the center. Rather budgets [in the form of
sales quotas] are prepared for the revenue center and the budgeted
figures are compared with the actual sales.

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Generally the costs are not related to output. However, this does not
mean that efforts are not taken to control costs in revenue centers.
Though the management’s main focus is more on revenues, necessary
attempts are made to control costs.

(b) Expense Centers:


In expense centers, inputs [cost and expenses] are measured in
monetary terms but outputs are not. The main focus of the
management will be on the control of the expenses or costs incurred
by the responsibility center.
So budgets will be devised only for the input portion of these centers’
operations. Organizational units commonly considered expense
centers include administration service, and research departments.

There are two types of expense centers namely engineered


expense/costs center and discretionary expenses/costs center.
Engineered costs are those for which costs can be estimated with high
reliability based on the engineering or technical relationship that
exists between costs and output; for example the cost of direct
materials or direct labour.

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Discretionary costs are those for which costs cannot be reliably


estimated before hand and must depend to a large extent on the
manager’s discretion. In other words, it is not possible to determine
the optimum relationship between costs and outputs and the choice of
relationship is quite often highly subjective and is left to the discretion
of the manager.

For example, the amount spent on advertising, welfare schemes,


management training, etc., cannot be determined objectively. The
management has to make a judgment as to the right amount of such
costs in a given situation subjectively. The discretionary costs can be
varied at the discretion of the manager of the responsibility center.

There is no scientific way of determining the right amount. Other


examples of discretionary costs centers are the accounting
department, personnel department, research and product
development, and so on.

In the case of engineering costs center the objective is to reduce costs


as far as possible consistent with quality and safety standards. The
budgeted costs are calculated using the technical relationship for the
actual level of output. Hence, the performance can be evaluated by
comprising the actual costs incurred with the budgeted costs.

The manager in charge of the center is responsible for both levels of


budgeted output as well as cost efficiency. The costs should be reduced
without sacrificing the quality. Traditionally, the focus of cost
accounting has been on developing suitable systems for measurement
of performance of engineered cost centers.

The performance of a discretionary cost center is also evaluated by


comparing the actual expenses with budgeted expenses. However, the
performance evaluation is on the basis of the manager’s ability to
spend on the amount agreed upon. The actual should not exceed
budget commitment without the knowledge of the manager. This
system motivates managers to keep expenses within the budgeted
level.

However, difficulties may arise in the measurement of efficiency or


effectiveness since the output cannot be measured in monetary terms.
Further it is difficult to set cost standards and measure financial
performance against these standards. In an attempt to reduce costs,
the divisional manager may cut costs by ignoring maintenance or
avoiding training. But it may not be good for the company.

Similarly, the marketing manager may cut costs by reducing sales


promotional and advertising expenses. But this may affect the sales
and profitability of the concern in the long run. Thus, the conflict
between short-run goal [cutting costs] and long-run goal [improving
profitability] assumes particular importance in the evaluation of the
performance of discretionary cost centers.

(c) Profit Center:


A profit center generally refers to a segment of an organization that
generates revenue. It is a responsibility center, the manager of which
is responsible for the amount of profits earned. In a profit center,
performance is measured by the numerical difference between
revenues [outputs] and expenditures [inputs].

The managers in the profit center are therefore, responsible for both
revenues and costs. Such a measure is useful to determine the
economic efficiency of the center and individual efficiency of the
manager in charge of the center.

A profit center is created whenever an organizational segment


[division/department] is given responsibility for earning a profit. In
departmentalized organization in which each of the number of
segments is completely responsible for its own product line, the
separate divisions are considered profit centers.
Each division’s performance can be evaluated in terms of profits. Since
divisional managers take all decisions relating to technology, product
mixes strategies, and personnel, they may influence both revenues and
expenses. The expenditure of a department’s sub-units are added and
then deducted from the revenues derived from that division’s all
products and services.

The net result is the measure of that division’s profitability. In non-


divisionalized organizations, or within a division, individual
departments may also be made into profit centers by crediting them
for revenue and charging them for expenses. A manufacturing
department, for example, would normally be considered as a cost
center.

Allowing the manufacturing department to ‘sell’ its products at an


agreed rate [called transfer price] to the sale department would be a
method of making it a profit center. The difference between the
transfer price and the manufacturing costs per unit would represent
the manufacturing department’s profits.

(d) Investment Center:


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An investment center is a responsibility center whose manager is


responsible for earning a rate of return on the assets used in his
responsibility center. In an investment center, the control system
again measures the monetary value of inputs and outputs, but it also
assesses how those outputs compare with the assets employed in
producing them.

For example, divisions in an automobile manufacturing company,


individual departments in a departmental store and individual
branches of a multiple shop are investment centers.

It is important to realize that any profit center can also be considered


an investment center, because its activities require some form of
capital investment. In other words, an investment center can be
considered as a special type of profit center, in which focus is also on
assets employed.

However, a center’s capital investment insignificant [as a consultancy


firm] or its managers have no control over capital investment; it may
be more appropriately treated as a profit center. The distinguishing
feature of an investment center that it is evaluated on the basis of the
rate of return earned on the assets invested in that center, while a
profit center is evaluated on the basis of excess revenue over expenses
for the period.

Hence, it is better to designate a segment as an investment center


rather than a profit center in order to enhance the utility of
responsibility accounting. A segment may earn greater profits than
others not because of better performance but by using more assets to
earn such profi

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