Slide 1
Presentation on : Responsibility Center and its TypesMANAGEMENT
CONTROL SYSTEMPresented To: Priya MaamFinance - 1Group Members:Jay
Thakkar 013003Pratyuesh Agarwal 013004Ketan Jain 013006Roshan
Sawant 013007Nirav Thakkar 013010Supriya Bhoir 013011Anita Raj
0130122Roadmap Introduction to Responsibility centerTypes of
Responsibility centerRevenue CenterCost CenterProfit
CenterInvestment CenterEngineered Expense Center
Problems in Responsibility AccountingAdvantages of
Responsibility Centers3What is a responsibility center?In simple
words: an organizational unit for which a manager is made
responsible.Examples: A specific store in a chain of grocery
stores.A work-station in a production line manufacturing automobile
batteries.The payroll data processing center within a
firm.4Attributes of a responsibility centerIt is like a small
business, and its manager isAsked to run that small business and
preserve the interests of the larger organization.Goals for the
center should be specific and measurable, andShould promote the
long terms interests of the organization and should be compatible
with other responsibility center activities.5Example: A courier
service (DHL)Courier operations dispatch trucks to pick up or
deliver shipments from local terminals.It could be sent to one or
more central terminals and then sorted and redirected.Success of
this service would depend on:Service commitment to customers (on
time, without damage) andControlling costsLet us suppose that each
terminal is treated as a responsibility center.How should the
company measure the performance of each terminal, its mangers, and
its employees?6Measuring the performance of the courier-terminal
responsibility centerTo focus on efficiency: we could measure no.
of parcels picked up, sorted or delivered, per route, per employee,
per vehicle, per hour or per shift.To focus on customer service, we
could measure each groups contribution to customers: proportion of
the time the terminal met its deadlines, when terminals are
required to sort shipments, what the sorting error rate was.We
could also measure customer service by: no. of complaints
operations group receives, average time taken by the operation
group to respond to complaints, and no. of complaints of poor, or
impolite service.7Types of Responsibility CentersRevenue
CentersCost Centers or Expense CentersProfit Centers andInvestment
CentersEngineered Expense Centers8REVENUE CENTRERevenue CenterA
Revenue centers are responsibility centers where managers are
accountableonly for financial outputs in the form of generating
sales revenue. In other words, A Revenue Center is responsible for
selling an agreed amount of products or services. In a revenue
centre output is measured in monetary terms, but no formal attempt
is made to relate input to outputIt's manager is usually
responsible to maximize revenue given the selling price (or
quantity) and given the budget for personnel and expenses.
10Typical examples of these organizational entities are Sales
organizations.1011Inputs (Money directly spent on achieving sales
i.e. Mktg. Exp.) Output (Sales Generated in money terms)
RCsTASK RC has no authority to decide price. RC is charged with
cost of Marketing and not with cost of goods produced Performance
Measure for the RC can be Revenue Budgets.Generate Sales E.g.
Marketing center11Revenue Center - IssuesDecision Rights Promotion
Mix Performance Measures Maximize total sales for a given promotion
budget Actual sales in comparison with budgeted salesTypically used
when RC manager has thorough knowledge about market Promotion plays
significant role in generating sales RC manager can establish
optimal promotion mix He can set optimal quantity and appropriate
rewards1212COST CENTRE13Cost centreA cost center is an
organizational sub-unit such as department or division, whose
manager is held accountable for the costs incurred in that
division.In other words, A cost center is a department within a
company. The manager and employees of a cost center are responsible
for its costs but are not responsible forrevenues or investment
decisions.Two types of costs: Engineered: those costs that can be
reasonably associated with a cost center direct labor, direct
materials, telephone/electricity consumed, office
supplies.Discretionary: where a direct relationship between a cost
unit and expenses cannot be reasonably made; Management allocates
them on a discretionary basis (e.g. depreciation expenses for
machines utilized). R&D Project
14Decision Rights Input Mix Labor, Material, Supplies
Performance Measures Minimize total cost for a fixed output
Maximize output for a given cost budgetTypically used when RC
manager can measure output & quality of output knows cost
functions, optimal input mix can set optimal quantity and
appropriate rewards
Inputs (Money spent on production)Output (Physical units
Produced)RCsTASK15Profit Centre16PROFIT CENTRESManager of a profit
centre is held accountable for revenue, costs & profits of the
centre.It is the responsibility centre in which inputs are measured
in terms of expenses and output are expressed in terms of
revenues.A profit center is a section of a company treated as a
separate business. Thus profits or losses for a profit center are
calculated separately.
Examples-Engineering, design or other such departments within a
company. 171.Improves the quality of decisions taken.2.Improves the
speed of the decision making.3.Provides a training ground for
general management.4.Psychological benefits to the division
manager.5.Provides best performance indicators of companys
individual components.6.Imbibes a sense of independence &
responsibility.7. Facilitates motivation of the
employees.ADVANTAGES OF PROFIT CENTERS181.Caliber of the manager or
the lack of it may hamper the quality of decisions taken.2.In case
of integrated company, there may be a problem of cost sharing,
transfer pricing etc.3.Divisionalistaion may impose additional cost
of administration/support units.4.May give rise to conflicts &
competition instead of co-operation within the
business.5.Decentralization makes the top management to rely more
on the MC reports.
DISADVANTAGES OF PROFIT CENTERS19INVESTMENT CENTERS 20INVESTMENT
CENTERS
DEFINITION OF 'INVESTMENT CENTER'A business unit that can
utilize capital to directly contribute to a company's
profitability. Companies evaluate the performance of an investment
center according to the revenues it brings in through investments
in capital assets compared to the overall expenses.21Objectives An
investment centers is the responsibility for the production
,marketing and investments in the assets employed in the
segment.
An investment centers manager decides on the aspects such as the
credit policies and within broad framework.
Investment centers mangers responsible for profits in relation
to amount invested in the division 22A advantage is that the
investment center will help consumers and businesses understand the
benefits of investing because they have the time to share and
educate customers.
A disadvantage is the fact that focusing on one area of business
can restrict your business growth. 23AdvantagesDrawbackSince the
value of capital employed is taken from the balance sheet, the
value of ROI or ROCE may depend on accounting technique adopted by
organization.
The manager of an investment center may postpone new investments
like purchasing new equipment or expanding capacity, as the ROCE
will decrease in the short run, though the organization may benefit
from these investments in long run.24ENGINEERED EXPENSES
CENTER25These are centres whose-Cost can be estimatedInputs can be
measured in monetary termsOutputs can be measured in physical terms
This center is usually found in manufacturing operations.
EXAMPLES :-WarehousingDistributionTruckingOther similar units
within the market organization.ENGINEERED EXPENSES CENTER26
Responsibility centers whose employees control costs, butDo not
control their revenues or investment level.Examples: Production
department in a manufacturing unit, a dry cleaning businessTwo
types of costs: Engineered: those costs that can be reasonably
associated with a cost center direct labor, direct materials,
telephone/electricity consumed, office supplies.Discretionary:
where a direct relationship between a cost unit and expenses cannot
be reasonably made; Management allocates them on a discretionary
basis (e.g. depreciation expenses for machines
utilized).27Discretionary Expenses Center - ExamplesAdministrative
and Support Centers- Senior management units at corporate level
e.g. Legal, Planning , IT , Audit Departments Goals may differ and
hence performance ii) Research and Development Centers The input
and output may span over different and uneven time periods.
28Problems29Problems in Responsibility AccountingWhile
implementing the system of responsibility accounting, the following
difficulties are likely to be faced by the management:
1. Classification of costs
2. Inter-departmental Conflicts
3. Delay in Reporting
4. Overloading of Information
5. Complete Reliance will be deceptive
30Advantages ofResponsibility Centers31Advantages1. Provides a
way to manage a large diversified organization. Better decisions
can be made at the local level.2. Provides incentives to department
managers and individuals to optimize their individual
performances.3. Provides managers with the freedom to make local
decisions.4. Provides top management with more time to make policy
decisions and engage in strategic planning.5. Allows management to
avoid understanding the system by using top down remote control
based on accounting measurements. 6. Supports management and
individual specialization based on comparative advantage.7.
Overall, it supports individualistic capitalism.32A simple summary
of the responsibility centersRevenue CenterOutput measured in
monetary termsInput measured in monetary termsOutput measured in
monetary termsCost CentersProfit CentersInvestment CentersOutput
measured in monetary terms33THANK YOU!!!34
