RESPONSIBILITY CENTERS

• A responsibility centre,
▫ is an organization unit that is headed by a
manager who is responsible for its activities.
• The nature:
1. A responsibility centre is established to support in
achieving corporate goals by reaching its objectives.
2. A responsibility centre must comply to the determined
corporate strategies.
3. A responsibility centre is not identical to the corporate
differentiation.
4. A responsibility centre is measured for its efficiency
and effectiveness.
 Efficiency and Effectiveness
• Efficiency is the ratio of outputs to inputs, or the
amount of output per unit input.
• A responsibility centre is more efficient than
another when:
▫ it uses fewer resources than another but produces the
same output, or
▫ it uses the same resources but produces a greater
outputs.
• Effectiveness is the relationship between a
responsibility centre and its objectives.
▫ the more this outputs contributes to the objectives, the
more effective the unit.
▫ Efficiency and effectiveness is not mutually exclusive.
 Types of Responsibility centres
1. Revenue centre
2. Expense centre
3. Profit centre
4. Investment centre
Revenue Centre:
▫ when a responsibility centre is measured for its
outputs (revenues) but not for the inputs (expenses).
▫ when the outputs (revenues) are under control but
not for the inputs.
▫ the more outputs resulted the better performance
▫ Marketing, Selling Department.
 Revenue Centre (cont.)

Inputs not related to

outputs

Inputs Outputs
Work
(dollar only for costs (dollar revenues)
directly incurred)
 Expense Centre
▫ when a responsibility centre is measured for its
inputs (expenses) but not for the outputs (revenues).
▫ when the inputs (expenses) are under control but
not for the outputs (revenues).
▫ outputs are not measured in monetary unit but the
input.
▫ the focus of performance measurement is based on
the efficiency of expenses consumed.
▫ manufacturing department, human resources
department, R&D.
2. Engineered Expense Centre
3. Discretionary Expense Centre
 Engineered Expense Centre
• the input can be measured in monetary units.
• the output can be measured in physical units but
not in monetary units.
• the optimum dollar amount of input required to
produce one unit output can be determined.
Optimum relationship
can be determined

Inputs Outputs
Work
(dollar) (physical)
 Discretionary Expense Centre
• the input can be measured in monetary units.
• the output cannot be measured in physical units
nor in monetary units.
• the optimum dollar amount of input required to
produce one unit output cannot be determined
exactly.
• the inputs (expense) is in the discretion of
management
• efficiency is measured in the long-run term, and
is not the difference between budget and actual
expense.
Discretionary Expense Centre (cont.)

Optimal relationship
cannot be established

Inputs Outputs
Work
(dollar) (physical)
 Discretionary Expense Centre (cont.)
• General Control Characteristics
▫ Budget Preparation
1. budget is based on the magnitude of the job that needs to be
done.
2. the job could be continuing work (work that is done
consistently from year to year, such as the preparation of
financial statements by the controller’s office); or special
work (work that is a “one-shot” project, such as developing
and installing a profit-budgeting system in newly acquired
division).
3. a technique often use in preparing the budget is
management by objectives (a formal process in which a
budgetee proposes to accomplish specific jobs and suggests
the measurement to be used in performance evaluation).
 Budget Preparation (cont.)

• The planning function for discretionary expense centres

is usually carried out in one of two ways: incremental
budgeting or zero-base review.
• Incremental budgeting:
▫ the discretionary expense centre’s current level of
expenditure is accepted and not re-examined during
the budget preparation process.
▫ managers of this centres typically want to increase the
level of services, and thus tend to request additional
resources, which if they make sufficiently strong
case-are usually provided.
 Budget Preparation (cont.)

• Zero-Base Review
▫ a thorough analysis of each discretionary expense
centre is conducted on a rolling schedule, so that all
are reviewed at least once every five years.
▫ addition budget will be approved if they met the
analysis:
1. Should the function under review be performed at
all? Does it add value from the standpoint of end
use customers?
2. What should the quality level be? Are we doing too
much?
3. Should the function be performed in this way?
4. How much should it cost?
 Administrative and Support Centres
• Administrative centres include senior corporate
management and business unit management,
along with the managers of supporting staff
units.
• Support centres are units that provide services
to other responsibility centres.
Control Problems:
1. Difficulty in Measuring Output,
2. Lack of Goal Congruence.
 Research and Development Centres
• Control Problems:
1. Difficulty in Relating Results to Inputs
2. Lack of Goal Congruence