Responsibility centers divide an organization into segments or units for which a manager is responsible for goals and objectives. This allows for decentralized decision making, improved accountability, and motivation of managers. However, responsibility centers can also create conflicts of interest between units and make coordination and cost allocation complex. An effective system balances these benefits with the potential disadvantages.

1. Responsibility centers
Introduction

2. Nature of Responsibility centers
 A responsibility center exists to accomplish its p
urpose termed as objectives.
 The company has goals and senior management
decide on set of strategies to accomplish these go
als.
 The objectives of various responsibility center ar
e to help implement these strategies .

3. Responsibility centers
Sum of all responsibility centers = Organization
Objectives achieved Goals achieved

4. Management Control Systems
 It is concerned with achievement of goals and ob
jectives with ease and at least cost.
 Purpose of MCS is being in control, not controlli
ng.
 It is concept based on decentralization.
 The key feature is strategy implementation.

5. Responsibility Center refers to a particular segment
or unit of an organization for which a particular ma
nager, employee, or department is held responsible
and accountable for its business goals and objective
s. It refers to the part of the company where a mana
ger has authority and responsibility. A responsibilit
y center is a functional entity within a business that
tends to have its own goals and objectives, policies,
and procedures, thereby giving managers specific re
sponsibility for revenues, expenses incurred, funds i
nvested, etc.

6. Responsibilty centers
 Responsibility centers are the feature of responsibilty accounti
ng.
 It is a segment of a larger organization and is placed under the
control of the manager.
 A segment could take the form of:
 Department
 Division
 Function
 Unit
 Product
 Item of equipment

7. Responsibilty centers
 The manager of responsibilty center is directly responsible for
its performance.
 Cost, revenue and profits associated with the centers are recor
ded.
 Responsibilty centers are the important feature of cost account
ing and budgeting

8. Responsibilty Accounting
FEATURES:
 Segments:
Business organizations is broken into several identifiable
units or segments known as responsibilty centers.
 Boundaries:
The boundaries of each segment are clearly established.
 Control:
The manager is placed in charge of each segment.
The manger is expected to take charge of cost / revenue /
profits associated with the center.
He is expected to plan and control those centers

9. Responsibilty Accounting
FEATURES:
 Authorization:
Segmental managers are given the authority to operate seg
ments as autonomously as possible

10. 4 types of responsibility center
Cost center Manager responsible for costs incurred
Revenue center Manager responsible for revenue raised
Profit center Manager responsible for both costs and revenue
Investment center Manager responsible for profit, capital
investment and financing

11. Examples of the Responsibility Center.
1.Revenue Center: A good example would be the sales department
or the salesperson.
2.Cost: A good example, in this case, would be the purchase depart
ment.
3.Profit Center: This would be a product line for which the produc
t manager will be responsible.
4.Investment Center: Example would be that of a subsidiary entit
y for which the subsidiary’s president is held responsible/HQ.

12. Relationship b/w Inputs & Output
Work
Capital
Inputs Output
Resources used (measured by cost) Goods or Services

13. The unit managers responsibilit
y
Costs Revenue Profit Investment
Cost center Y
Revenue
center
Y
Profit center Y Y Y
Investment Y Y Y Y

14. Example: A level business studie
s
Within a school or college A level business studies can be treated as
a cost center
It is possible to calculate the cost of offering this A level subject – s
alary of teaching staff, cost of materials used plus an allocated share
of the fixed overhead costs
If the college finance manager calculated the revenue generated by t
he A level business studies then the course could be treated as a pro
fit center
The examination awarding bodies do treat A level business studies (
and every other subject) as a profit center. Data is collected on the c
ost of offering the subject and the revenue received from the examin
ation fees.

15. Why organize in terms of centers?
1. Improved accountability – costs/revenues can be monitored
2. Facilitate delegation by allowing autonomy for managers in the c
enter
3. autonomy and empowerment of managers improves motivation
4. Greater autonomy aids decision making

16. Why organize in terms of centers?
5. The performance of an individual unit can be measured
6. Analysis of performance of individual units means that there is n
o hiding place for weak performing units
7. Senior management is able to trace problems
8. centers are an aspect of budgetary control. By dividing up the bus
iness in terms of centers a named post holder is identified as being r
esponsible.

17. Cost / Expense centers
A responsibility center in which the manager is accountable for dire
ct costs only
It is a specific and discrete department, area or person within a busi
ness form which costs can be ascertained and to which costs can be
allocated
An individual part of a business where costs are incurred and can be
easily recorded
The manager responsible for the center has control over the costs bu
t not revenue
A significant fraction of the costs are directly attributable costs but t
here is no directly attributable revenue.

18. Cost / Expense centers
Here inputs are measured in monetary terms but outputs are not.
Two types of Expense centers:
Engineered Cost: Those for which the right or proper
amount can be estimated with reasonable reliability.
Ex: Direct material, Direct labour cost, Supplies etc.
Discretionary Cost: Those for which no such engineered
estimate is feasible.

19. Engineered Cost centers
Their inputs can be measured in monetary terms.
Their output can be measured in physical terms.
The optimum Re amount of input required to produce one unit of ou
tput can be determined.
Work
Inputs Output
Rs.
Physical
Optimum relationship can be established
Manufacturing Function

20. Discretionary Cost centers
Discretionary centers include administrative and support units.
Ex: accounting, legal, industrial relation, public relation, HR, R&D
& marketing services.
Their output can not be measured in monetary terms.
Work
Inputs Output
Rs.
Physical
Optimum relationship can not be established
R & D Function

21. Examples of cost centers
Personnel / HR department
Finance department
R&D department
Transport department
Warehouse and stock control department
Buying department
In all the above cases the department incurs costs but does not earn r
evenue
An item of equipment (such as a photocopier) can also be regarded
as a cost center

22. Revenue center
A responsibility center in which the manager is responsible for reve
nue only
Example: sales department
Most costs will be fixed and will be very small in relation to the rev
enue earned
Work
Inputs Output
Rs. Only .for cost incurred Rs. Revenue
Inputs not related to outputs
Marketing Function

23. Profit center
A business unit to which costs and revenues are allocated and recor
ded
A responsibility center in which the manager is responsible for costs
and revenue and therefore the profits of the unit
A profit center is allowed to control itself as a separate part from the
larger organization
As costs and revenue can be attributable it makes sense to see the ce
nter as a business within a business
Example: product department or division with a reasonable degree o
f autonomy

24. Profit centers can make a loss
It is entirely wrong to see a profit center as the part of the business t
hat makes a profit whereas all the other parts are presumably loss ce
nters
Profit centers are simply a part of the business for which data on cos
ts, revenue and profit/loss are recorded
It is quite possible for a profit center to produce a negative profit i.e.
a loss

25. Profit center
Work
Inputs Output
Rs. Cost Rs. Profits
Inputs are related to outputs
Business Unit

26. Examples of profit centers
An individual product within the product portfolio
A range of products
A brand
A geographical region within the company
A branch office
A product division of the company
In each case it is possible to identify and calculate the costs incurred
and the revenue received

27. Investment center
This takes responsibility to a greater depth
A responsibility center in which the manager is responsible for all a
spects of finance – costs, revenue, profit and investment
Example: a division of a large MNC
The division is assessed in terms of its contribution to overall profits
Capital Employed
Inputs Output
Rs. Cost Rs. Profits
Inputs are related to Capital Employed
Business Unit

28. Advantages of organizing in ter
ms of responsibility centers
Decentralized decision making: faster and more responsive to local
conditions
Responsibility centers facilitate delegation
Motivation is improved
Improved monitoring of budgets, targets and performance
Greater accountability
Facilitates budgetary control
Prevents the performance of weak elements being hidden within the
larger organization

29. Advantages of Responsibility Center
Assignment of Role and Responsibility:.
Improves Performance:
Delegation and Control:
Helps in Decision Making:
Helps in Cost Control:

30. Problems and disadvantages
There is a danger that the individual centers become too narrowly fo
cused
Managers of responsibility centers tend to be more concerned with t
he unit objectives than the corporate objectives
Rivalry between centers breaks out
Creates problems of coordination
Creates communication problems
Allocation of costs is complex; any unfairness in the way costs are a
llocated can lead to demotivation

31. Disadvantages of Responsibility Center
Presence of Conflict of Interest
The requirement of Time and Effort:
Ignores Personal Reaction and Feedback
Too much Process-Oriented
Limitations of Responsibility Center
A major limitation of such a system is attributed to too much foc
us on process-oriented methods, which tends to consume too mu
ch time and effort and effort on the part of the management in ha
ving to assign certain responsibilities.

32. Conclusion
The method of assigning responsibility centers within an orga
nization to help achieve the organizational goals through segre
gation and tagging to each manager undoubtedly helps achieve
delegation and control apart from tracking the performance tha
t tends to act as a motivational booster. However, it becomes i
mportant for management to realize that one should not be too
focused or process-oriented, which would cripple the initial ob
jects set. A company is most likely to sabotage itself by doing
so when it focuses on the hierarchical scheme of things. As a r
esult, outcomes may not be achieved, and targets may just bec
ome numbers to frown upon.
Hence to solve such problems, it becomes imperative that the r
esponsibility centers are not process-oriented and that they ten
d to miss out on the initial objectives set forth. When done effi
ciently, it helps in tracking and measuring the performance of
each of the segments as listed out.