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  1. 1. Responsibility Centers <ul><li>It is an organization unit that is headed by a manager who is responsible for its activities. </li></ul><ul><li>Based on principle of responsibility accounting which holds that managers should be evaluated on the activities which they can influence or control </li></ul><ul><li>It exists to accomplish one or more purposes, termed its objectives. </li></ul><ul><li>Objective is to help implement the strategies set by senior management. </li></ul><ul><li>The products produced may be furnished either to another responsibility center – input for them or, to the outside marketplace – outputs of the organization as a whole. </li></ul><ul><li>Relationship between inputs and outputs </li></ul>
  2. 2. MEASURING INPUTS AND OUTPUTS <ul><li>The inputs (resources) are translated into monetary terms called – cost. </li></ul><ul><li>Easier to measure the cost of inputs than to calculate the value of outputs. It can be stated as physical measurements – hours of labour, materials etc.. </li></ul><ul><li>E.g. annual revenue for profit oriented organization is an important measure, but it will not reflect work done by R&D, PR Dept, advertising, human resource training, quality control department or a legal staff. </li></ul>
  3. 3. EFFICIENCY AND EFFECTIVENESS <ul><li>Both can be measured only on comparative basis. </li></ul><ul><li>Efficiency is the ratio of outputs to inputs </li></ul><ul><ul><li>Lesser inputs same output or </li></ul></ul><ul><ul><li>Same input, more output or </li></ul></ul><ul><ul><li>Comparison of actual costs with some standard </li></ul></ul><ul><li>Effectiveness is determined by the relationship between a responsibility center’s output and its objectives. The more this output contributes to the objectives, the more effective the unit is. </li></ul><ul><li>It is normally expressed in subjective, non-analytical terms </li></ul><ul><li>Both are not mutually exclusive. </li></ul>
  4. 4. CONTD.. <ul><li>A responsibility center is efficient if it does things right and it is effective if it does the right things. </li></ul><ul><li>E.g. credit department if handles the paperwork connected with delinquent accounts at a low cost per unit, it is efficient but if, at the same time, it is unsuccessful in making collections (or needlessly antagonizes customers in the process), it is ineffective. </li></ul><ul><li>Profit is an important measure of effectiveness.. </li></ul><ul><li>As profit is the difference between revenue and expense, it is also a measure of efficiency. </li></ul><ul><li>Thus profit measures both effectiveness and efficiency. </li></ul>
  5. 5. TYPES OF RESPONSIBILITY CENTERS <ul><li>Revenue centers : </li></ul><ul><ul><li>Output is measured in monetary terms. </li></ul></ul><ul><ul><li>No formal attempt to relate input (i.e. expenses or costs) to output. </li></ul></ul><ul><ul><li>They are marketing organizations that don’t have profit responsibility. </li></ul></ul><ul><ul><li>Area primarily responsible for generating sales such as a sales office / marketing unit </li></ul></ul><ul><ul><ul><li>Measurement of actual sales to the budgeted. </li></ul></ul></ul><ul><ul><ul><li>Unit manager is responsible for the direct expenses within the unit but the primary measurement is revenue </li></ul></ul></ul><ul><ul><ul><li>Manager doesn’t have knowledge that is needed to make the cost / revenue trade off required for optimum marketing decisions. </li></ul></ul></ul><ul><ul><ul><li>They don’t set selling prices and are not charged for the cost of goods. </li></ul></ul></ul>
  6. 6. TYPES OF RESPONSIBILITY CENTERS <ul><li>Expense centers: </li></ul><ul><li>Inputs or expenses are measured in monetary terms, but outputs are not. </li></ul><ul><li>Two general types of expense centers: </li></ul><ul><ul><li>Engineered expense centers : </li></ul></ul><ul><ul><ul><li>Engineered costs are for which the ‘right’ or ‘proper’ amount can be estimated with reasonable reliability’ </li></ul></ul></ul><ul><ul><ul><li>Inputs can be measured in monetary terms </li></ul></ul></ul><ul><ul><ul><li>Their outputs can be measured in physical terms </li></ul></ul></ul><ul><ul><ul><li>The optimum amount of input required to produce one unit of output can be determined </li></ul></ul></ul><ul><ul><ul><li>Usually found in manufacturing operations, warehousing, distributions </li></ul></ul></ul>
  7. 7. CONTD.. <ul><ul><ul><li>The difference between the theoretical and the actual cost represents the efficiency of the expense center being measured. </li></ul></ul></ul><ul><ul><ul><li>Expense supervisors are responsible for the quality, volume of production etc also in addition to cost efficiency. </li></ul></ul></ul><ul><ul><ul><li>So, the type and amount of production is prescribed with quality standards. </li></ul></ul></ul><ul><ul><ul><li>They are also responsible for training, not related to production. </li></ul></ul></ul>
  8. 8. CONTD.. <ul><ul><li>Discretionary expense centers: </li></ul></ul><ul><ul><ul><li>Discretionary costs (managed costs) for which no such engineered estimate is feasible. </li></ul></ul></ul><ul><ul><ul><li>The costs incurred depend on the management’s judgment as to the appropriate amount under the circumstances. </li></ul></ul></ul><ul><ul><ul><li>E.g. number of staff members </li></ul></ul></ul><ul><ul><ul><li>Management’s view about the proper level of costs is subject to change with change in management. </li></ul></ul></ul><ul><ul><ul><li>Includes administrative and support units like accounting, legal, PR, HR, R&D, operations </li></ul></ul></ul><ul><ul><ul><li>The output can’t be measured in monetary terms </li></ul></ul></ul><ul><ul><ul><li>The difference between budget and actual expense is not a measure of efficiency rather, it is simply the difference between the budgeted input and the actual input and does not incorporate the value of the output. </li></ul></ul></ul>
  9. 9. CONTD.. <ul><li>Administrative and Support centers </li></ul><ul><ul><li>Administrative centers include sr. corporate management and business unit management along with the mangers of supporting staff units. </li></ul></ul><ul><ul><li>Support centers are units that provide services to other responsibility centers and they often charge for the same. </li></ul></ul><ul><ul><li>Support centers often charge the other responsibility centers for the services that they provide. </li></ul></ul><ul><ul><li>E.g. IT dept can charge sales dept for the services </li></ul></ul><ul><ul><li>Functions are virtually impossible to quantify & evaluate. </li></ul></ul>
  10. 10. CONTD.. <ul><ul><li>Difficulty in measuring output ( advice, service), so not possible to set cost standards </li></ul></ul><ul><ul><li>E.g. development of an accounts receivable system job to finance staff- comparison of costs would not tell effectiveness of the job done. </li></ul></ul><ul><ul><li>Typically managers of admin staff offices strive for functional excellence. </li></ul></ul><ul><ul><li>It seems to be congruent with company goals. Results in safeguarding one’s position without regard to the welfare of the company. E.g. legal staff or controller. </li></ul></ul>
  11. 11. CONTD.. <ul><li>Research and Development centers </li></ul><ul><ul><li>Carry some R&D activities, like product development. Product testing, developing improved production and quality methods, market research etc. </li></ul></ul><ul><ul><li>Difficulty in relating results to inputs </li></ul></ul><ul><ul><li>Lack of goal congruence </li></ul></ul><ul><ul><ul><li>Research manager wants to build the best research organization money can buy, might be unaffordable to company. </li></ul></ul></ul><ul><ul><ul><li>Research people many a times don’t have sufficient business knowledge to determine the optimum direction of the research efforts. </li></ul></ul></ul><ul><ul><ul><li>Projects involving testing, no precise time and cost estimation </li></ul></ul></ul>
  12. 12. RESPONSIBILITY BUDGETING <ul><li>It is the plan for the allocation of financial resources to each organizational responsibility center for the budget period. </li></ul><ul><li>Incremental budgeting: </li></ul><ul><ul><li>Identify the current level of expenses as a starting point. And then adjust these amounts for expected growth i.e. workload, inflation, etc. </li></ul></ul><ul><ul><li>However no scope for evaluation with past performance and therefore the basis for setting standard for future may itself be wrong. </li></ul></ul><ul><ul><li>Managers go for demanding higher resources. </li></ul></ul><ul><ul><li>Current level of expenditure is not reexamined during the budget preparation process. </li></ul></ul><ul><ul><li>Sometimes new management reduces costs drastically without any adverse consequences </li></ul></ul>
  13. 13. CONTD.. <ul><li>Zero-Based Budgeting: </li></ul><ul><ul><li>Each responsibility center calculates its resource needs based on the coming year’s priorities rather than on the previous year's budget. </li></ul></ul><ul><ul><ul><li>Develop a decision package for their responsibility centers – start from scratch. </li></ul></ul></ul><ul><ul><ul><li>Top management reviews decision package and ranks them </li></ul></ul></ul><ul><ul><ul><li>Top management allocates resources based on rankings. </li></ul></ul></ul><ul><ul><ul><li>Comparison is done </li></ul></ul></ul><ul><ul><li>It is a time consuming process </li></ul></ul><ul><ul><li>Likely to be a traumatic experience of the managers whose operations are being reviewed. </li></ul></ul><ul><ul><li>Many companies due to recession, conducted zero base reviews – downsizing, restructuring </li></ul></ul>
  14. 14. SIGNS OF INADEQUATE BUDGET CONTROL SYSTEMS <ul><li>Deadlines missed frequently </li></ul><ul><li>Poor quality of goods and services </li></ul><ul><li>Declining or stagnant sales or profits </li></ul><ul><li>Loss of leadership position or market share </li></ul><ul><li>Inability to obtain data to evaluate employee or departmental performance </li></ul><ul><li>Low employee morale and high absenteeism </li></ul><ul><li>Insufficient employee involvement and management-employee communication </li></ul><ul><li>Excessive company debts, uncertain cash flow, unpredictable borrowing </li></ul><ul><li>Insufficient use of people, material, equipment, and facilities. </li></ul>