responsibility centers .doc

7/30/2019 Responsibility Centers .Doc

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Responsibility Centers

Any organization can be decentralizedinto responsibility centers .

What is Responsibility Center ?

It is not an accounting concept only

but a generalized management

conceptHigher the managerial level then

Broader the responsibility center


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Responsibility Center

Regardless of Level ; it is a part of

segment or sub unit of an organization ,

whose manager is accountable for a

specific set of activities.

Every responsibility center has a target or goals of

physical activities and financial constraints .

Therefore , the dimension of accountability and

responsibility shall vary from department to

department and shall depend on which are focus

activities of the center .


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( I ) Cost Center / Expense Center Manager is expected to perform a specified task

within a specified cost / expense. The expensecan be a lump sum for a specified period or forspecified unit of activity

e.g. Painting the factory building

When there are restrictions or set rules forincurring costs then it is called as

Engineered Cost Center

When the manager is given the authority forincurring the cost for choosing his own standardsthen it is called as

Discretionary Cost Center


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( II ) Revenue Center

Manager is expected to garner a specified gross

revenue within a specified period or specified

units

e.g Sales Department of a company

( III ) Profit Center

Manager is accountable for the revenue as well

as costs of the center independently with

highest possible authority of decisions

e.g. Sales Territory or Production Unit with a

specialised kind of a product.


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( IV ) Investment Center

( A specialized type of a Profit Center ) Manager is accountable for

1. Investment

2. Costs

3. Expenses or Costs


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Recognize which type of Responsibility

centers are these ?

The factory manager is expected to produce in

March 2011, 3000 good units of good quality

of product X all ready for dispatch to

customers by 31.03.2011, with no extrapayment to workers. The production manager

costs include proportionate expenses of

maintenance department as well canteenexpenses etc.


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Recognize Responsibility center

2.The maintenance manager is expected to keep

machines in working conditions for 80% of

single shift operations at a cost of Rs.5,00,000

in March , 2011

3. The personnel manager is expected to ensure

that labour cost be kept maximum to the level

of Rs. 100/- per man shift. He will ensure that

there will be no strike or go slow for which heis granted a budget of Rs. 2,00,000


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Which type of Responsibility center ?

4. The purchase manager is expected to

procure good quality of raw material at a

maximum price of Rs.12/- per unit and shall

divert the procurement according to given

schedule. For this he can spend up to 2 % ofraw material cost for the running of his

department .


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Which type R.C. is this ?

5. The sales manager is expected to sell 3000

units in March 2011, earning a minimum

revenue of Rs. 22,00,000 and expected to

collect the cash from customers by 30.04.2011

6. The Research Department manager isexpected to reduce the cost of production by

fifty paise per unit for which they will get a

monthly budget of Rs. 1,00,000 . A review ofprogress would be made after every two

months


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Which type of R.C is this ?

The CEO of the organization would beexpected to make a profit of Rs. 5,00,000 after

charging selling expenses from sales to be

made for the month of March 2011. He is

permitted to invest Rs. 50,000 in promotion

campaign . He shall be entitled to get 1 %

commission for additional sales above the

level of profit of Rs.5,00,000. He is allowed tonegotiate discount and selling price for

generation of additional revenue .

responsibility centers .doc

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