Responsibility Centers

Responsibility centres Responsibility centres are a feature of responsibility accounting Responsibility centres are a feature of responsibility accounting A responsibility centre is a segment of a larger organisation and is placed under the control of a manager A responsibility centre is a segment of a larger organisation and is placed under the control of a manager A segment could take the form of a department or a division or function or unit or product or even an individual item of equipment A segment could take the form of a department or a division or function or unit or product or even an individual item of equipment The manager of the responsibility centre is directly responsible for its performance The manager of the responsibility centre is directly responsible for its performance Costs, revenue and profit associated with the centre are identified and recorded Costs, revenue and profit associated with the centre are identified and recorded Responsibility centres are an essential feature of cost accounting and budgeting in all but the smallest business organisations Responsibility centres are an essential feature of cost accounting and budgeting in all but the smallest business organisations

Features of responsibility accounting Segments - the business organisation is broken down into separate identifiable units or segments known as responsibility centres Segments - the business organisation is broken down into separate identifiable units or segments known as responsibility centres Boundaries - the boundaries of each segment are clearly established Boundaries - the boundaries of each segment are clearly established Control - a manager is placed in charge of each segment. The manager is expected to take charge of the costs/revenues/profits associated with the centre and be expected to plan and control them Control - a manager is placed in charge of each segment. The manager is expected to take charge of the costs/revenues/profits associated with the centre and be expected to plan and control them Authorization - segmental managers are given the authority to operate segments as autonomously as possible Authorization - segmental managers are given the authority to operate segments as autonomously as possible

4 types of responsibility centre Cost centre - manager responsible for costs incurred Cost centre - manager responsible for costs incurred Revenue centre - manager responsible for revenue raised Revenue centre - manager responsible for revenue raised Profit centre - manager responsible for both costs and revenue Profit centre - manager responsible for both costs and revenue Investment centre - manager responsible for profit, capital investment and financing Investment centre - manager responsible for profit, capital investment and financing

The unit manager’s responsibility CostsRevenueProfits Investme nt Cost centre Y Revenue centre Y Profit centre YYY InvestmentYYYY

Example - A level Business Studies Within a school or college A level Business Studies can be treated as a cost centre Within a school or college A level Business Studies can be treated as a cost centre It is possible to calculate the cost of offering this A level subject - salary of teaching staff concerned, cost of materials used plus an allocated share of the fixed overhead costs It is possible to calculate the cost of offering this A level subject - salary of teaching staff concerned, cost of materials used plus an allocated share of the fixed overhead costs If the college finance manager calculated the revenue generated by A level Business Studies then the course could be treated as a profit centre If the college finance manager calculated the revenue generated by A level Business Studies then the course could be treated as a profit centre The examination awarding bodies do treat A level Business Studies (and every other subject) as a profit centre. Data is collected on the cost of offering the subject and the revenue received from examination fees. The examination awarding bodies do treat A level Business Studies (and every other subject) as a profit centre. Data is collected on the cost of offering the subject and the revenue received from examination fees.

Why organise in terms of centres? Improved accountability - costs/revenue can be monitored Improved accountability - costs/revenue can be monitored They facilitates delegation by allowing autonomy for managers in the centre They facilitates delegation by allowing autonomy for managers in the centre Greater autonomy and empowerment of managers improves motivation Greater autonomy and empowerment of managers improves motivation Greater autonomy aids decision making Greater autonomy aids decision making The performance of the individual unit can be evaluated The performance of the individual unit can be evaluated By analysing the performance of individual units it means there is “no hiding place” for weak performing units By analysing the performance of individual units it means there is “no hiding place” for weak performing units Senior management is able to trace problems Senior management is able to trace problems Centres are an aspect of budgetary control. By dividing the business up in terms of centres a named post holder is identified as being responsible Centres are an aspect of budgetary control. By dividing the business up in terms of centres a named post holder is identified as being responsible

Cost centres A cost centre is a responsibility centre in which the manager accountable for direct costs only A cost centre is a responsibility centre in which the manager accountable for direct costs only It is a specific and discrete department, area or person within a business from which costs can be ascertained and to which costs can be allocated It is a specific and discrete department, area or person within a business from which costs can be ascertained and to which costs can be allocated An individual part of the business where costs are incurred and can easily be recorded An individual part of the business where costs are incurred and can easily be recorded The manager responsible for the centre has control over costs but not revenue The manager responsible for the centre has control over costs but not revenue A significant % of costs will be are directly attributable costs but there is no directly attributable revenue A significant % of costs will be are directly attributable costs but there is no directly attributable revenue

Examples of cost centres Personnel/HRM department Personnel/HRM department Finance department Finance department R and D department R and D department Transport department Transport department Warehouse & stock control department Warehouse & stock control department Buying department Buying department In all the above cases the department incurs costs but does not earn revenue In all the above cases the department incurs costs but does not earn revenue A item of equipment (such as an office photocopier) can also be regarded as a cost centre A item of equipment (such as an office photocopier) can also be regarded as a cost centre

Revenue centre A responsibility centre in which the manager responsible for revenue only A responsibility centre in which the manager responsible for revenue only Example: sales department Example: sales department Most costs will be fixed and will be very small in relation to revenue earned Most costs will be fixed and will be very small in relation to revenue earned

Profit centre A profit centre is a business unit to which costs and revenues are allocated and recorded A profit centre is a business unit to which costs and revenues are allocated and recorded It is a responsibility centre in which the manager is responsible for costs and revenue and therefore the profits of the unit It is a responsibility centre in which the manager is responsible for costs and revenue and therefore the profits of the unit A profit centre is allowed to control itself as a separate part from the larger organisation A profit centre is allowed to control itself as a separate part from the larger organisation As costs and revenue can be attributable it makes sense to see the centre as a “business within a business” As costs and revenue can be attributable it makes sense to see the centre as a “business within a business” Example: product department or division with a reasonable degree of autonomy Example: product department or division with a reasonable degree of autonomy

Profit centres can make a loss! One common mistake is to see a profit centre as “the part of the business that makes a profit” whereas all other parts are presumably “loss centres” One common mistake is to see a profit centre as “the part of the business that makes a profit” whereas all other parts are presumably “loss centres” This is entirely wrong This is entirely wrong Profit centres are simply a part of the business for which data on costs, revenue and profit/loss are recorded Profit centres are simply a part of the business for which data on costs, revenue and profit/loss are recorded It is quite possible for a profit centre to produce a negative profit i.e. a loss It is quite possible for a profit centre to produce a negative profit i.e. a loss

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

Investment Centre This takes responsibility to a greater depth This takes responsibility to a greater depth An investment centre is a responsibility centre in which the manager responsible for all aspects of finance - costs, revenue, profit and investment An investment centre is a responsibility centre in which the manager responsible for all aspects of finance - costs, revenue, profit and investment Example: division of a large multinational company Example: division of a large multinational company The division is assessed in terms of its contribution to overall profits The division is assessed in terms of its contribution to overall profits

Advantages of organising in terms of responsibility centres Decentralised decision making: faster and more responsive to local conditions Decentralised decision making: faster and more responsive to local conditions Responsibility centres facilitate delegation Responsibility centres facilitate delegation Motivation is improved Motivation is improved Results in improved monitoring of budgets, targets and performance Results in improved monitoring of budgets, targets and performance Leads to greater accountability Leads to greater accountability Facilitates budgetary control Facilitates budgetary control Prevents the performance of weak elements being hidden within the larger organisation Prevents the performance of weak elements being hidden within the larger organisation

Problems and disadvantages There is a danger that individual centres become too narrowly focussed There is a danger that individual centres become too narrowly focussed Managers of responsibility centres tend to be more concerned with unit objectives than corporate objectives Managers of responsibility centres tend to be more concerned with unit objectives than corporate objectives Rivalry between centres breaks out Rivalry between centres breaks out Creates problems of co-ordination Creates problems of co-ordination Creates communications problems Creates communications problems The allocation of costs is complex. Any unfairness in the way costs are allocated can lead to be demotivating The allocation of costs is complex. Any unfairness in the way costs are allocated can lead to be demotivating