Responsibility Centers: Revenue and Expense centre Module III Responsibility Centers: Revenue and Expense centre

Responsibility Centers A responsibility centre in an organization unit that is headed by a manager who is responsible for its activities. In a sense company is a collection of responsibility centers, each of which is represented by a box on the organization chart. A responsibility center exists to accomplish the objectives of the organization as the organization got its own goals and objectives. As each organization is sum of the responsibility centers and if all the centers achieve their goals and objectives the overall organizational goals and objectives will be achieved.

Types of Responsibility Centers There are four types of responsibility centers, classified according to the nature of the monetary inputs and /or output. They are; Revenue center, expense center, profit center and investment center. In revenue center output is measured in monetary terms, in expense center input is measured in monetary terms, in profit center both revenue (output) and expense (input) are measured and in investment center the relationship between profit and investment is measured. Each and every responsibility centers required different type of planning and control system.

Revenue Center In a revenue center output is measured in monetary terms, but no formal attempt is made to relate input to output. Generally, revenue centers are marketing/sales units that do not have authority to set selling prices and do not charged for the cost of the goods they sell. Actual sales or orders booked are measured against the budgets and quotas, and the manager is held responsible for the expenses incurred directly within the unit. The primary measurement is revenue in this center.

Expense Center Expense centers are responsibility centers whose inputs are measured in monetary terms, but whose outputs are not. There are two general types of expense centers; engineered and discretionary. Engineered costs are those for which the right and proper amount can be estimated with reasonable reliability – direct costs. Discretionary costs are those for which no engineered estimate is feasible – support activities

Engineered Costs Here, the inputs can be measured in monetary terms, because the engineered cost centre is basically found in manufacturing operations. In engineered cost center output multiplied by the standard cost of each unit gives the finished product cost, means the output can be measured in the physical terms. The optimum amount of input required to produce one unit of output can also be measured in this center. The engineered cost center not only measure the cost but it is also responsible for the quality of the products, volume of the production as well as efficiency.

Discretionary Expense Center This center include administrative and support units – accounting, legal, human resources – research and development and most marketing activities. This center shows the top management policies and decisions for different departments to improve overall efficiency and profitability of the organization and appropriate amount to be spent on financial planning, R&D, public relations etc. In discretionary cost center the budgets are given to improve the working of different departments but there are no variance analysis for this budgets, only control systems are implemented.

MCS for Discretionary Cost Center Budget Preparation: management formulates the budget here by determining the magnitude of the job that needs to be done, and not the volumes of the output. The work done here falls into two general categories: continuing and special. Continuing work is done consistently from year to year, such as preparation of financial statements. While, special work is a one shot project – developing and installing a system in new acquired division. The technique used in this budgeting is management by objectives and a formal process in the department ask for the budget on the basis to accomplish the specific jobs and activities.

Contd. The planning function of this center is carried out in one of the two ways: incremental budgeting and zero-base. In the Incremental budgeting, the discretionary expense center’s current level of expenditure is taken as a starting point. This amount is adjusted for inflation, changes in the workload of job. Incremental budgeting has two drawbacks: first, discretionary expense center’s current expenses are taken as it is and not reexamined during the budget preparation process. From the current level the managers always want to increase the services so they will demand extra budget every time.

Contd. Zero-base review: an alternative budgeting approach is to make a thorough analysis of each discretionary expense center on a rolling basis, so that all are reviewed once and then the budgets are finalized. In contrast with incremental budgeting this review starts from scratch so the resources actually required are only given to the activity. Cost Variability: unlike the engineered cost which are strongly affected by short run volume changes, cost in discretionary centers, it reacts to short term fluctuations in jobs and other activities.

Contd. Type of financial control: in case of engineered cost center the objective is to become cost competitive by setting a standard and measuring actual cost against the standard. While, in discretionary cost center the controlling of cost in the planning phase itself before incurring the cost. Measurement of Performance: the engineered cost center is having the output and the volume as a measurement but in case of discretionary cost center the manager has to obtain the desired output in terms of planning. Now, we will be studying different centers and the MCS to implemented in that.

Administrative & Support Centers Administrative centers include senior management and business unit management, along with the managers of supporting staff units. Support center units that provide services to other responsibility centers. Control Problems: Difficulty in measuring output Lack of goal congruence Budget Preparation

Research and Development Center Control Problems: Difficulty in relating results to inputs Lack of goal congruence The R&D Range: the activities conducted by R&D has long range, as it starts from basic research on one extreme and product testing at the other range. The R&D Program: there is no scientific way to determine the optimum size of an R&D budget. Program list budget plus the blanket allowance for unplanned work. Measurement of Performance

Marketing Center Generally, in all the companies two different types of activities are grouped under the heading of marketing that is logistics activities and marketing activities. Logistics activities: logistics activities are those involved in moving goods from the company to its customers and collecting the the amounts due form customers in return. Marketing activities are those undertaken to obtain orders for company products. These activities include test marketing, training, supervision of sales force, advertising, sales promotion.