1. Responsibility Centers : Revenue and Expense Centers
Management Control Systems
Chapter 4
July 2014
Iwan Pudjanegara SE., MM.

2. Nature of Responsibility Centers
A Responsibility Center (RC) is an organization unit that is headed by a manager who is responsible for its activities.
Objectives: to help implement organization’s strategies to accomplish its goals  ex. Transforming its input into outputs.
July 2014
Iwan Pudjanegara SE., MM.

3. EXHIBIT 4.1 Responsibility Center
INPUTS
Resources used, measured by Cost
(Materials, Labor, Services, etc)
OUTPUTS
Goods or Services
CAPITALS
(Inventory, Receivables,
Equipment & Other Assets)
WORK
July 2014
Iwan Pudjanegara SE., MM.

4. Relation between Inputs and Outputs
Control focuses on using the minimum input necessary to produce the required output according to the correct specifications and quality standards, at the time requested, and in the quantities desired.
July 2014
Iwan Pudjanegara SE., MM.

5. Relation between Inputs and Outputs
In many situations, input are not directly related to outputs.
Example:
Advertising Expense (input) intended to increase sales revenue (output), but revenue is also affected by other factors  management’s decision to increase advertising expenditures is based on judgement rather than data.
July 2014
Iwan Pudjanegara SE., MM.

6. Measuring Inputs INPUT x MONETARY VALUE = COST
===============================
Input = physical measurements/quantitative amounts/resources used by RC
Monetary Value = IDR, USD, etc.
Cost = a monetary measure of the amount of resources used by a RC.
July 2014
Iwan Pudjanegara SE., MM.

7. Measuring Outputs
It is harder to calculate the value of outputs than the cost of inputs.
Revenue is the value of outputs of a profit-oriented organization.
But Revenue will not express all that organization did during that year. (Ex. The work done by PR Dept./Legal Dept./QC Dept., R&D Activity, HR Training, etc.)
July 2014
Iwan Pudjanegara SE., MM.

8. Efficiency and Effectiveness
Efficiency : the ratio of outputs to inputs, or the amount of output per unit of input.
RC-A is more efficient than RC-B if :
If it uses fewer resources than RC-B but produces the same output.
If it uses the same amount of resources but produces a greater output.
July 2014
Iwan Pudjanegara SE., MM.

9. Efficiency and Effectiveness
Effectiveness : the relationship between a RC’s output and its objectives. Both objectives and outputs are difficult to quantify, so effectiveness tends to be expressed in subjective, nonanalytical terms. The more outputs contributes to the objectives, the more effective the unit.
July 2014
Iwan Pudjanegara SE., MM.

10. Efficiency and Effectiveness
Summary:
Efficiency and Effectiveness are not mutually exclusive  every RC ought to be (=seharusnya) both efficient & effective.
A RC is efficient if it does things right, and it is effective if it does the right things.
Profit measures both effectiveness and efficiency.
July 2014
Iwan Pudjanegara SE., MM.

11. Types of Responsibility Centers
Revenue Centers
Expense Centers
Engineered Expense Centers
Discretionary Expense Centers
Profit Centers
Investment Centers
July 2014
Iwan Pudjanegara SE., MM.

12. Revenue Centers
Output (Revenue) is measured in monetery terms, but no formal attempt is made to relate input (expense/cost).
Example of Revenue Centers are Sales/Marketing units that do not have authority to set selling prices and are not charged for the cost of the goods they market
July 2014
Iwan Pudjanegara SE., MM.

13. EXHIBIT 4.2 TYPE OF RESPONSIBILITY CENTERS Revenue Centers
INPUTS NOT RELATED TO OUTPUTS Examples INPUTS OUTPUTS Marketing (dollar only (dollar revenue) Function for costs directly incured)
WORK
July 2014
Iwan Pudjanegara SE., MM.

14. Expense Centers
RC whose inputs are measured in monetary terms, but outputs are not.
Two types of Cost :
Engineered Costs
Discretionary Costs (Managed Costs)
July 2014
Iwan Pudjanegara SE., MM.

15. Engineered Expense Centers
Engineered Cost: the right amount can be estimated with reasonable reliability (ex. Factory’s cost for direct labor, direct material, etc.).
Usually found in manufacturing operations, warehousing, distribution, trucking, etc.
July 2014
Iwan Pudjanegara SE., MM.

16. Engineered Expense Centers
Characteristics:
Input can be measured in monetary terms.
Output can be measured in physical terms.
The optimum of input (dollar amount) required to produce one unit of output can be determined.
July 2014
Iwan Pudjanegara SE., MM.

17. EXHIBIT 4.2 TYPE OF RESPONSIBILITY CENTERS Engineered Expense Centers
OPTIMAL RELATIONSHIP CAN BE ESTABLISHED Examples INPUTS OUTPUTS Manufacturing (dollar) (physical) Function
WORK
July 2014
Iwan Pudjanegara SE., MM.

18. Discretionary Expense Centers
Discretionary Cost = Managed Cost
No such engineered estimate is feasible  the costs incurred depend on management’s judgment as to appropriate amount under the circumstances.
July 2014
Iwan Pudjanegara SE., MM.

19. Discretionary Expense Centers
Incl. Administrative and supports unit (accounting, legal, PR, HR), R&D operations, and most marketing activities.
The output can be measured in monetery terms.
Management by Objectives (MBO) is a technique often used in preparing a discretionary expense center’s budget.
July 2014
Iwan Pudjanegara SE., MM.

20. EXHIBIT 4.2 TYPE OF RESPONSIBILITY CENTERS Discretionery Expense Centers
OPTIMAL RELATIONSHIP CAN NOT BE ESTABLISHED Examples INPUTS OUTPUTS Research & (dollar) (physical) Development Function
WORK
July 2014
Iwan Pudjanegara SE., MM.

21. General Control Characteristics
Budget Preparation
Incremental Budgeting
Zero-Base Review
Cost Variability
Type of Financial Control
Measurement of Performance
July 2014
Iwan Pudjanegara SE., MM.

22. General Control Characteristics
Budget Preparation
Management formulates the budget for a discretionary expense center by determining the magnitude of the job that needs to be done (The Work Done)
2 categories of The Work Done :
Continuing Work
Special Work
July 2014
Iwan Pudjanegara SE., MM.

23. General Control Characteristics
Continuing work: done consistently from year to year, such as the preparation of financial statements.
Special work: a “one-shot” project, for example developing and installing a profit-budgeting system in a newly acquired division.
July 2014
Iwan Pudjanegara SE., MM.

24. General Control Characteristics
Management by Objectives (MBO)
Is a technique often used in preparing a discretionary expense center’s budget.
A formal process in which a budgetee propose to accomplish specific jobs and suggests the measurement to be used in performance evaluation.
July 2014
Iwan Pudjanegara SE., MM.

25. General Control Characteristics
The planning function for dicretionary expense center is Incremental Budgeting or Zero-base Review.
Incremental Budgeting
The discretionary expense center’s current level of expenses is used as a starting point.
This amount is adjusted for inflation, anticipated changes in the workload of continuing job, and the cost of comparable jobs in similar units.
July 2014
Iwan Pudjanegara SE., MM.

26. General Control Characteristics
Parkinson’s Second Law : Overhead costs tend to increase, period.
Zero-base Review
An alternative budgeting approach to make a thorough analysis of each discretionary expense center on a rolling schedule, so that all are reviewed at least once every five years or so.
July 2014
Iwan Pudjanegara SE., MM.

27. General Control Characteristics
Zero-base reviews are time-consuming.
In the later ‘80s and 90s, many companies conducted zero-base reviews, as a reaction to a downturn in profitability  downsizing, rightsizing, euphemistically, restructuring, or proses reengineering.
July 2014
Iwan Pudjanegara SE., MM.

28. General Control Characteristics
Cost Variability
Costs in engineered expense centers are strongly affected by short-run volume changes.
Costs in discretionary expense centers are comparatively insulated from such short-term fluctuations.
July 2014
Iwan Pudjanegara SE., MM.

29. General Control Characteristics
Type of Financial Control
Financial in an engineered expense center is to become cost competitive by setting a standard and measuring actual costs against this standard.
Financial in a discretionary expense budget is to control costs by allowing the manager to participate in the planning, sharing in the discussion of what tasks should be undertaken, etc.
July 2014
Iwan Pudjanegara SE., MM.

30. Administrative and Support Centers
Administrative Centers include Sr. Corporate Management and Business Unit Management, along with the managers of supporting staff units.
Support Centers are units that provide services to other RCs.
July 2014
Iwan Pudjanegara SE., MM.

31. Administrative and Support Centers
Control Problems
Difficulty in Measuring Output
Lack of Goal Congruence
Budget Preparation
Consits of a list of expense items, with the proposed budget being compared with the current year’s actual expenses.
July 2014
Iwan Pudjanegara SE., MM.

32. R & D Centers Control Problems The R&D Continuum R&D Program
Difficulty in Relating Results to Inputs
Lack of Goal Congruence
The R&D Continuum
R&D Program
Annual Budgets
Measurement of Performance
July 2014
Iwan Pudjanegara SE., MM.

33. Marketing Centers Logistic Activities
Are those involved in moving goods from the company to its customers and collecting the amounts due from customers in return.
These activities incl. transportation to distribution centers, warehousing, shipping and delivery, billing and the related credit function, and the collection of A/R.
July 2014
Iwan Pudjanegara SE., MM.

34. Marketing Centers Marketing Activities
Are those undertaken to obtain orders for company products.
These activities incl. test marketing, the establishment-training-and supervision of the sales force, advertising, and sales promotion.
July 2014
Iwan Pudjanegara SE., MM.