Responsibility centers concepts

1. Responsibility Centers
Introduction

2.  Who are responsibility centers ?
 Need of responsibility centers.

3. “A responsibility center is an organization unit that is headed by a manager
who is responsible for its activities.”
Basic features:-
1. Small business
2. Measurable
3. Compatible with other responsible centers

4. Objectives:-
Implement the strategies.
Transforming inputs into Outputs.(Tangible/intangible)
Use of optimum relationship between input and output.

5. Types of relation between Input and Output
1. Causal
2. Direct
Measuring Input and Output
Physical measurement-
Labor- Hours
Oil- quarts
Papers- reams
Electric- KW hours
How to compare these resources in one single term?

6. Efficiency and effectiveness
Types of responsibility Centers

7. Efficiency= Output/Input
Efficiency: compare actual cost with the standard.
But having flaws:
1. Inputs can not guess for standard outputs.
2. It is an approximation.
Effectiveness:
comparing output with objective.
The responsibility center ought to be both efficient and effecitve.

8. Profit measures both – efficiency and
effectiveness.
When such measure does not exist?

9. 1. Revenue Centers
2. Expense centers
3. Profit centers
4. Investment Centers

10. Inputs Outputs
Rupees as i/p cost Rupees O/P
Example: Marketing Function
Work

11. Inputs Outputs
Rupees Physical
Example: Manufacturing Function
Work

12. Inputs Outputs
Rupees Physical
Example: R& D functions
Work

13. Inputs Outputs
Rupees Costs Rupees profits
Example: Business Unit
Work

14. Inputs Outputs
Rupees cost Rupees profit
Example: Business Unit
Capital
employed

15.  Output is measured in monetary terms but does not
relate to input.
Who are the revenue centers?
1. Marketing dept.
2. Sales dep.
How to compare the efficiency and effectiveness?

16.  Inputs are measured in monetary terms but not
output.
 Responsibility centers whose employees control costs, but
Do not control their revenues or investment level.
 Examples: Production department in a manufacturing unit.
 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).

17.  Managers of profit centers control both the
revenues and costs of the product or service
they deliver.
 It is like an independent business except it is
part of a larger organization (e.g. departmental
stores of larger chains-Big Bazaar, Reliance
mart , Mc Donald etc.).
 The store manager would have responsibility
for pricing, product selection, and promotion.

18.  Cost for these units vary depending on ability
to control labor, waste, and hours.
 Revenues also will vary depending on the
unit’s service level, location, etc.
 Investments and some costs (e.g. centralized
purchasing).
 Therefore, profits represent a broader index of
both corporate and local decisions.

19.  If performance is poor, it may reflect poor
conditions that no one in the organization
could control as well as poor local conditions.
 For this reason, organizations should not
evaluate performance only based on costs and
profits, but
 Perform detailed evaluations that include
quality, material use, labor use, and service
measures that the local unit can control.