An important component of
Management Controls – Assigning
responsibility for executing strategy
Implementing strategies is not
adequate if individuals who must
execute them fall short.
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
The payroll data processing center within a firm.
Attributes of a responsibility center
It is like a small business, and its manager is
Asked to run that small business and preserve the
interests of the larger organization.
Goals for the center should be specific and measurable,
Should promote the long terms interests of the
organization and should be compatible with other
responsibility center activities.
Most organizations use financial controls – cost,
revenue, and profits, etc.
However, such measures are not applicable to all units
within an organization.
For example, how would you measure the contribution
of a production department? It can only be done on a
cost measurement basis.
How would you measure the contribution of a sales
department – only by revenue generated.
Effectiveness: It means how well the responsibility
center does its job- that is, the extent to which it
produces the intended or expected results.
Efficiency: It is used in its engineering sense – that is,
the amount of output per unit of input.
A responsibility center must both be efficient and
Output can be measured and specify the amount of
Managers are held responsible for cost incurred in
Efficiency is measured by the amount of input
Managers are not responsible for volume variances.
Centers that produce outputs that are not
measurable in financial terms.
No strong relation exits between resources
Performance evaluation on the basis of the
inter and intra firm comparison of
Generally a revenue centre acquires finished
goods and is responsible for selling and
If pricing is not within its control, then the
manager is held responsible for the volume
and mix variances.
If pricing is within its control, then it can be
made responsible for gross revenue.
They are not profit centres because the
expenses are incomplete.
In this case managers have almost
complete operational decision-making.
They are evaluated on the basis of profit
Principal functions manufacturing and
marketing are performed.
It sells majority of its output to the outside