9. responsibility centers
TRANSCRIPT
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TYPES OF RESPONSIBILITY
CENTERS
Revenue centers
Expense centers
Engineered expensecenters
Discretionary expense
centers
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Revenue centers
Revenue centers are those organizational units inwhich outputs are measured in monetary terms.
These centers are marketing organizations and they
are not directly responsible for profits. Revenue
centers are also called expense centers, as therevenue center managers are held responsible for
expenses incurred by the unit. The main objective of
revenue centers is to maximize revenues.
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Expense centers
In expense centers, inputs or expenses are
measured in monetary terms whereas the outputs
are not measured in monetary terms
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TYPES OF EXPENSE CENTERS
Engineered expense centers and Discretionary expense centers.
Engineered costs are costs that can be estimated to
a reasonable extent by the management. Examples
are direct labor and direct material. Discretionarycosts, on the other hand, are costs that cannot be
estimated by the management.
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Engineered expense centers
In these centers, inputs or expenses are measuredin monetary terms and outputs are measured in
physical terms. These centers are usually found in
the manufacturing units that use a standard cost
system. There are certain responsibility centerswithin administrative and support departments that
actually are engineered expense centers. In these
centers, the cost of the product is determined by
multiplying the output of each unit with its standardcost. Its efficiency is measured by comparing the
actual cost with the standard cost.
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Discretionary expense centers
In discretionary expense centers, the output cannot
be measured in monetary terms. Discretionary
expense centers include administrative and support
units like legal, accounting, industrial and publicrelations units. Here, the efficiency is not the
difference between budgeted and actual expense,
but the difference between the budgeted input and
actual input. In discretionary expense centers the
management decides on certain policies that should
govern the company's operation. These relate to the
amount of money that should be spent on R&D,
financial planning, public relations, etc.
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RESEARCH AND DEVELOPMENT CENTERS
Control problems in research and
developmentThe problems in researchand development are :
Difficulty in measuring quality :The inputs for an R&D activity can be measured whereas the outputs are
difficult to measure. For R&D activities, the time taken for a particular
research cannot be estimated as it may take months or sometimes years
for a particular activity. Also the output is difficult to measure because of
its technical nature.
Lack of goal congruence :As in administrative centers, goal congruency is lacking in R&D centers,
too. Conflict may arise between the research manager and the business
unit manager. The research manager may want to build the best research
and development center, no matter what the expense be, while it may notbe possible for the company to afford it. Also, the researchers may not
have sufficient knowledge about the business, in some cases. The
research and development costs cannot be controlled on a year-to-year
basis because a research project may take years to show results and the
organization would have to bear the cost of the project for that period of
time, mainly the cost on labor.
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Marketing centers
There are two types of marketing activities in every organization:
Order filling (logistics) : Order filling activities includetransferring goods from the company to the customer, and
receiving the appropriate pay from the customer. Theseare mostly engineered expense centers.
Order getting : Order getting activities include
test marketing, training sales force, advertising,
sales promotion, etc. Though the output of a
marketing organization can be measured, it is
difficult to evaluate the marketing effort, as themarketing department has no control over
economic conditions or competitors actions.
These actions may be different from what was
expected when the sales budgets wereestablished.
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Profit centersWhen financial performance of a
responsibility center is measured in terms of the organizations
profit, then it is called a profit center. In a profit center,
performance is measured in terms of the numerical difference
between revenues (outputs) and expenditure (inputs). A profit
center is given the responsibility of earning profits. It is
involved in the manufacture and sale of outputs, and it
measures how well the center is doing economically. The profitcenter also determines the efficiency of the manager in charge
of the center.A profit center helps in motivating
managers to perform well in areas they control and also
encourages managers to take initiatives. The profit centerhelps the organization to make the best use of specialized
market knowledge of the divisional managers, and entrusts
the local managers the responsibility of tradeoffs. Profit
centers have been used as a major management control tool.
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The major advantages of profit centers are:
These help in increasing the speed of making operating decisions
as they do not have to be referred to corporate headquarters.
As the decision-making authority lies with the managers they
can make better decisions related to the task they are
performing, because they can understand the nature of the work
better. Since profit centers make their day-to-day decisions themselves
headquarters can concentrate on broader issues of the
organization.
Managers are motivated to perform more effectively, as they areresponsible for increasing the profit of their unit.
Managers use their imagination, take initiatives to perform
more effectively, to increase the profit of their unit.
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TYPES OF PROFITABILITY
MEASURES:
The parameters that can be used for measuring theprofitability of a profit center are
contribution margin,
direct profit,
controllable profit,
income before taxes and
net income.
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Investment centers Cost centers