Management Control Environment(Responsibility Centers)

8/3/2019 Management Control Environment(Responsibility Centers)

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Management control

environment(Responsibility centers)

Prof. Nilima das



An important component of Management Controls

Assigning responsibility for executing strategy.

Implementing strategies is not adequate if

individuals who must execute them fall

short.

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Therefore, management controls must

include

• How responsibility is assigned and measured.

• How tasks are measured (not necessarily tasks done

by humans but also by machines; e.g. units produced)

• Task controls such as when to order inventory, why

the actual differ from budgeted (the causes).

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3-4

Responsibility Centers



What is a responsibility center?

• In simple words: an organizational unit for

which a manager is made responsible.

• Examples:

1. A specific store in a chain of grocery stores.

2. The payroll data processing center within a

firm.



Responsibility centers have four

classifications:

• Cost Centers

•

Revenue Centers

• Profit Centers

• Investment Centers



Cost Centers

• Part of a business to which a cost is allocated for the

purposes of strategic planning.

• Cost centers can be large divisions of a business,

departments, small teams, or even individuals.

•A segment whose manager has control over costs,but not over revenues or investment funds.



Revenue Center

• A Revenue Center is responsible for selling an agreed

amount of products or services.

• It's manager is usually responsible to maximize

revenue given the selling price (or quantity) and

given the budget for personnel and expenses.



Profit Center

• Profit Centers directly add to its profit.

• Managers are held accountable for both revenues, andcosts or expenses. (Total revenues- total costs).

• Therefore, profits usually the different profit centers

are separated for accounting purposes so that themanagement can follow how much profit each center

makes and compare their relative efficiency and

profit.

• control over both costs and revenues, but no controlover investment funds.



Investment Centers

• It accounts for all uses of capital.

• The essential element of an investment center is that

it is treated as a unit which is measured against its useof capital, as opposed to a cost or profit center, which

are measured against raw costs or profits.

• manager has control over costs, revenues, and

investments in operating assets.



Performance report or responsibility reports

• preparing responsibility report of each centre.

•Reports should contain information in comparative form as to

show plans budget & the actual performance & should give details

of variances which are related to that centre.

•The variances which are not controllable at a particular

responsibility centre should also be mentioned in the separate report.



Responsibility Reports

Prepare budgets foreach responsibility center.

Prepare timely performance reports

comparing actual amounts with budgeted amounts.

Measure performance ofeach responsibility center.



Performance Reports

Shows the budgeted and actualamounts, and the variancesbetween these amounts, of key

financial results appropriate forthe type of responsibility center.



Specimen of performance report

Department………

PERFRMANCE REPORT

Month ending ……………………

ACTUAL (Rs.) BUDGET (Rs.) VARIANCE (Rs.)

CONTROLLABLE COSTS

D. Mat

D. Lab

D. Exp……….

Allocated &

uncontrollable costs

Depreciation

Rent

Insurance

………

TOTAL COST



Incremental Analysis in

the Responsibility Center

• Incremental analysis is used to find the impact of changes in costs or revenues, given a specific

potential scenario.• Decisions involving incremental analysis include the

following:

• Make or buy (Profit Center)

• Sell or process further (Revenue Center)

• Special order (Cost Center)

• Changes in production and/or technology(Investment Center)

Documents

Management Control Environment(Responsibility Centers)