This document discusses responsibility accounting and responsibility centers. It defines different types of responsibility centers such as cost centers, revenue centers, profit centers, and investment centers. Cost centers are used to track costs, revenue centers track revenue, profit centers track both costs and revenues, and investment centers evaluate performance based on investments and revenues. The document also covers coordination among responsibility centers, performance measurement, factors that affect performance like coordination, integration, transfer pricing, and management information systems.
2. Learning Objectives
1. Concept of responsibility accounting.
2. Concept and significance of responsibility centers.
3. Concept and functions of cost center.
4. Concept and functions of revenue center.
5. Concept and functions of profit center.
6. Concept and functions of investment center.
7. Performance measurement process of responsibility centers.
8. Need for coordination and integration among responsibility centers.
9. Concept and practical applications of transfer price in business situations.
10. Methods of transfer pricing and their uses.
3. Responsibility Centre
A responsibility center in Cost Accounting denotes a segment of a
business organization for the activities of which responsibility is
assigned to a specific person.
Thus a factory may be split into a number of centers and a supervisor
is assigned with the responsibility of each center. All costs relating to
the center are collected and the Manager responsible for such a cost
centers judged by reference to the activity levels achieved in relation
to costs.
Even an individual machine may be treated as responsibility center
for cost control and cost reduction
5. • Cost Center : CIMA defines a cost center as “a location, a person, or an
item of equipment (or a group of them) in or connected with an
undertaking, in relation to which costs ascertained and used for the
purpose of cost control”. The determination of suitable cost centers as
well as analysis of cost under cost centers is very helpful for periodical
comparison and control of cost.
• Revenue Center : Revenue center are the centers that are assigned the
tasks of managing & controlling revenue only. The performance
evaluation of a revenue center depends basically on the revenue it
generates to the organisation.
6. • Profit Center : Profit center is a segment of a business that is responsible for
all the activities involved in the production and sales of products, systems and
services. Thus a profit center encompasses both costs that it incurs and
revenue that it generates. Profit centers are created to delegate responsibility to
individuals and measure their performance.
• Investment Center : An investment center is a business unit in a firm that
can utilize capital to contribute directly 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.
7. Coordination Among Responsibility Centers
1. Meeting the service commitment to the customer, that is, professionally,
politely, on time and without damage or loss, in picking the mail or package
up from the shipper.
2. Delivering the mail or package to the recipients in time.
Setup of Responsibility Center
1. Parameters that measure efficiency of a responsibility center.
2. Process as an evaluation criterion.
3. Parameters to measure the effectiveness of the responsibility centers.
8. Factors Affecting Responsibility Center’s Performance
1. A good amount of coordination among various responsibility centers is
essential, which will lead to better performance in terms of goal
achievements by individual responsibility collectively.
2. Integration of various activities among the responsibility centers is also
important. This will encourage responsibility center managers to perform
collectively.
3. The monitoring and control systems have to be perfect to evaluate the
performance of the individual responsibility centers to assess their
performance and accordingly guide them to take suitable strategies for better
performance.
4. There has to be proper transfer price mechanism for transferring business
transactions among the divisions. This should be encouraged while keeping
in view the interests of both the divisions, that is, transferor and transferee
divisions.
9. 5. A firm should establish a well-organized management information system
(MIS) to collect and analyze all the related information and data. The MIS
system should be very perfect to provide required information and support
to all the responsibility centers. The information by MIS should be collected
on both financial and non-financial parameters.
6. For financial evaluation of responsibility centers, information and data on
various components, such as sales, inventories, production levels at different
periods, fund flow, cash flow, profit margins, return on investments, etc.,
need to be built up.
7. There should be proper controlling system designed for individual
responsibility centers such as marketing, finance, administration, etc.
8. A firm should develop a system of value analysis also. Value analysis
primarily focuses on systematic analysis and evaluation of various activities.