Creating the great business leaders

Control Management System

Topic #6

RESPONSIBILITY CENTRES: REVENUE AND EXPENSE CENTERS

Lecture : Team Teaching

Fakultas Ekonomi dan Bisnis
School Economics and Business

Revenue Centers

2 Creating the great business leaders

 Fakultas Ekonomi dan Bisnis
School of Economic and Business Revenue Center: Understanding
Telkom University
❑ Revenue center is responsibility center whose managers have
responsibility to generate revenue

❑ In a revenue center, output is measured in monetary terms, but no

formal attempt is made to relate input to output

❑ Typically revenue centers are marketing/sales unit

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Expense Center: Understanding
Telkom University
❑ Expense center is responsibility center whose managers have
responsibility to element of expenses

❑ In a expense center, input is measured in monetary terms, but not

for outputs

❑ Typically expense centers are manufacturing functions,

warehousing, distribution, administrative and support units (
accounting, legal, Public relations, human resources) and R&D

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Expense Center Classification
Telkom University

Engineered Expense Centers

• Their input can be measured in monetary terms
• Their output can be measured in physical terms
• The optimum dollar amount of input required to produce one unit of
output can be determined

Discretionary Expense Centers

• The difference between budget and actual expense ( Input) is not a
measure of efficiency
• Input (expense) does not incorporate the value of the output
• Most common types of discretionary expense center: Administrative &
Support Centers, R&D centers, Marketing Center
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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Discretionary Expense Centers: Control
Telkom University

Incremental Budgeting
• The discretionary expense center’s current level of expense is taken as starting point
• The amount is adjusted for inflation, anticipated changes in the workload of continuing
job and special job
• Drawbacks: (1) current level of expenditure is accepted and not reexamined during
budget preparation process (2) managers typically want to increase the level of
services, thus tend to request additional resources

Zero Base Review

• Making a through analysis of each discretionary expense center on a rolling schedule
• The analysis simply attempts to keep costs reasonably in line with this base until next
review takes place
• Drawbacks: (1) through analysis is a complex job (2) time consuming

6 Creating the great business leaders

 Fakultas Ekonomi dan Bisnis
School of Economic and Business Discretionary Expense Centers: Measurement of Performance
Telkom University
❑ The primary job of discretionary expense center’s manager is to
obtain desired output

❑ Spending an amount that is “ on budget” is considered satisfactory,

more than that is cause for concern, and spending less may indicate
that the planned work is not being done

❑ The financial performance report is not a means of evaluating the

efficiency of the manager

❑ The best indication of the quality of service my be the opinion of

their users
7 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School Economics and Business

Administrative and
Support Centers
8 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School of Economic and Business Administrative and Support Centers: Control Problems
Telkom University

Difficulty in Measuring Output

• Output cannot be measured, not possible to set cost
standards against which to measure financial performance
• Budget variance cannot be interpreted as representing
either efficient or inefficient performance

Lack of Goal Congruence

• The frequent lack of goal congruence between the goals of
departmental staff and of the company as whole

9 Creating the great business leaders

 Fakultas Ekonomi dan Bisnis
School Economics and Business

Research and
Development Centers
10 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School of Economic and Business Research and Development Centers: Control Problems
Telkom University

• The results of R&D activities are difficult to measure

Difficulty in quantitatively
• Difficult to appraise on annual basis ( R&D is mostly
relating Results multiyear effort)
to Input • Inputs as stated in an annual budget may be unrelated to
outputs

• R&D manager typically wants to build the best research

Lack of Goal organization money can buy, even though that may be
more expensive than the company can afford
Congruence • Research people often do not have sufficient knowledge
of the business ( Thinking bout efficient and effectivity

11 Creating the great business leaders

Fakultas Ekonomi dan Bisnis
School Economics and Business

Marketing Centers

12 Creating the great business leaders

 Fakultas Ekonomi dan Bisnis
School of Economic and Business Marketing Activities
Telkom University
❑ It is possible to measure a marketing organization’s output, evaluating the
effectiveness of the marketing effort is much more difficult, because of changes
in factors beyond the marketing department control

❑ Meeting the budgetary commitment for marketing expenses is not a major

criterion in the evaluation process, the impact of sales volume on profits tends
to overshadow cost performance

❑ Types of marketing organization activities:

❑ Order filling ( Engineered expenses)
❑ Generating revenue ( Engineered expenses)
❑ Order getting ( Discretionary expenses)

13 Creating the great business leaders