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 its

Responsibility centers, If each responsibility centre meets
its objectives, the goals of the organization will be achieved
 Organizational Objectives

•Profit Maximization
Revenue maximization
Expenditure control
•Focus on revenue
•Focus on Expenditure
•Fixing responsibility
 Inputs and Outputs

Outputs
Inputs WORK
Goods or Srvices
Resources Used
Measured by Cost
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 the

Relationship between a responsibility
Center’s output and its objectives

●
Types of Responsibility Centers

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

Output is measured in monitory terms,

but no formal attempt is made to relate input to
output

Marketing & Actual Sales are measured against budgets

Sales Units Primary measurement is Revenue
 Expense Centre

Expense Centers are those centers whose

inputs are measured but not the outputs

Engineered Expense Discretionary Expense

Which can be estimated Which cant be estimated
with reasonable reliability Depends upon Judgment…
DM, Components, Supplies..
 Engineered Expense Centre- characteristics

Their inputs can be measured in monetary terms

Manufacturing
Their outputs can be measured in physical terms Administration
Distribution
The amount of input required to produce one unit Warehousing
of output can be determined
Discretionary Expense Centre- characteristics

Accounting
Legal
Industrial Relations
Human Resource
Research and Development
Most Marketing Activities
General Control Characterstics

Budget Preparation
Incremental Budgeting
Zero Base Budgeting
Cost Variability
Type of Financial Control
Measurement 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

Lack of Goal Congruence Budget Preparation

 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 is
Difficult 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
Logistics Activities
Test Marketing,
transportation, distribution,
Supervision of Sales force,
warehousing, shipping and
delivery, billing and related
Advertising,
credit functions Sales Promotion
 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
BUDGET :
revenue • Historical
• Higher the sales volume higher • Zero Base Budgeting
the budget. • Incremental Budgeting
• Spend more to get more.
• Spending justify sales revenue.
 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