Management Control Systems

1. MCS
ResponsibilityCenters
Anjay Raj

2. What is a
Responsibility
Center?
• The Responsibility is the unit in the organization that has control over
costs, revenues, or investment funds.
• Responsibility center is an entity, held accountable for an activity/function
under consideration, that becomes its objective/goal
• Organization can be looked upon as collection of responsibility centers.
• Each RC consumes certain amount of resources “INPUTS” and produces
certain results “OUTPUT”
• Best option to assess the performance of RC starts with establishing
relationship among INPUT and OUTPUT and then applying it scrupulously

3. Basic definition of RC
 Lowest organizational level at which
funds control functions are carried out.
Generally the same as divisions in an
operating component

4. Classifications
For accounting purposes, responsibility centers have four classifications:
 Revenue Centers
 Cost Centers
 Profit Centers
 Investment Centers

5. Revenue
Center
Example:
MarketingManagerof
ProductLine
Prime concern of the REVENUE CENTER – “TOPLINE”
Inputs
(Money directly
spent on achieving
sales i.e. Mktg. Exp.)
Output
(Sales Generated
in money terms)
RC’s
TASK
Generate Sales
• RC has no authority to decide price.
• RC is charged with cost of Marketing and not with cost of goods
produced
• No formal relationship possible between I & O
• Performance Measure for the RC can be Revenue Budgets.

6. Cost / Expense
Center
Example:
ProductionDepartmentin
ManufacturingUnit
ServiceDepartment
SingleSalesPerson
• Responsibility centers whose employees control costs, but
• Do not control their revenues or investment level.
• 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).

7. Engineered
Expenses
V/s
Discretionary
Expenses
Engineered Expenses Discretionary Expenses
Example: Manufacturing a product Example: R&D Project
Can be established scientifically Can not be established scientifically
Cost varies with even small
fluctuations in volume
Costs varies with bigger volume
changes
Control is easier. Control starts with
planning & ends with finished task.
Review of task is the only control
measure for cost control. Control is
exercised during planning stage itself,
by way of establishment of budget
Financial Performance measure
suffice the purpose of evaluation
Financial as well as non financial
Performance measure need to be
considered

8. Expense
Center
Example:
ProductionDepartment
Engineered Expense Center
• Performance Measure for the RC is Standard Cost
• Std Cost of doing actual activity = Std. cost of unit activity *
Quantum of Actual activity
• One can establish relationship between I & O , hence performance
measurement is relatively easy
Inputs
(Money spent on
production)
Output
(Physical units
Produced)
RC’s
TASK

9. Expense
Center
Example:
Legal
Planning
IT
Audit
R&D
Discretionary Expenses Center
• Difficult to estimate Input (hence called MANAGED costs)
• Output can not be measured in monetary terms.
• Difficult to establish optimal relationship between I and O
• Performance Measure for the RC is Budgeted Input and Actual Input.
Inputs
(Money spent on
R & D)
Output
(Product
Development)
RC’s
TASK

10. ProfitCenter
Example:
BusinessUnitinDe-
CentralizedUnit
MarketingFunctionhaving
highestinfluenceon
BottomLine
--CocaCola
--Wipro
• Profit is most comprehensive measure of performance
• Function/Activity having highest influence on Bottom Line suits best
for Profit Center.
• Can be a Business Division or any of the functional unit
• Demands highest freedom/autonomy than any other RCs’

11. Investment
Center
Example:
ASubsidiaryCompany
ADivisionWithinCompany
• Objective – Make sound investment decision
• It compares Business units profits with assets employed toearn that
profit i.e. efficiency of assets employed.
• It satisfies both the goals of business organizations i.e. to earn
the profit and  to achieve optimal relationship in profits earned
and assets employed
Inputs
(Money spent for
Starting & running
the business)
Output
(Money/net profit
Earned on account
of investment)
RC’s
TASK

12. A simple summary of the responsibility centers
Revenue Center
Output measured in
monetary terms
Input measured in
monetary terms
Output measured in
monetary terms
Expense/Cost Centers
Profit Centers
Investment Centers Output measured in
monetary terms