MANAGEMENT

CONTROL SYSTEM
3rd SESSION

RESPONSIBILITY
CENTERS
REVENUE and EXPENSE
CENTERS

RESPONSIBILITY CENTERS

Nature of Responsibility Center

Responsibility Center is an organization unit that is headed by
a manager who is responsible for its activities.
The core operation of every responsibility center :

Inputs
Resources used,
Measured by cost

Work

Outputs
Good or

Services

Capital

RESPONSIBILITY CENTERS
Staf

Board of Director
Manager
Finance

Line
Manager
Division A

Manager
Dept 1

Manager
Division B

Manager
Dept 2

Manager
Division C

Manager
Dept 3

Manager
Dept 4

Manager
Accountin
g

Manager
Personnel

Manager
etc

RESPONSIBILITY CENTERS

Relation between Inputs and Outputs

Management is responsible for ensuring the optimum

relationship between inputs and outputs.
The
relationship is causal and direct, in many
situations, input are not directly related to outputs.

Measuring Inputs and Outputs

The input can be stated as physical measurements,

and these quantitative amounts are translated into
monetary terms.
Many organizations do not even attempt to measure
the outputs of such responsibility centers, others use
an approximation. In nonprofit organizations, there may
be no quantitative measure of output.

RESPONSIBILITY CENTERS

Efficiency and Efectiveness

Efficiency is the ratio of outputs to inputs, or the

amount of output per unit of input.
Efectiveness is determined by the relationship
between a responsibility centers output and its
objectives.
Efficiency and efectiveness are not mutually
exclusive; every responsibility center ought to be
both efficient and efective.
A responsibility center is efficient if it does things
right, and it is efective if it does the right things.
Profit measures both efectiveness and efficiency.

RESPONSIBILITY CENTERS
Revenue
centers

Responsibility
Centers

Expense
centers

Profit
centers

Investme
nt
centers

Engineered
Expense
centers
Discretionary
Expense
centers
Controllable
cost

Non
controllable
cost

RESPONSIBILITY CENTERS

Type of Responsibility Centers

For control purposes, there are four types of

responsibility centers i.e revenue centers, expense
centers, profit centers and investment centers.
In revenue centers, output is measured in
monetary terms; in expense centers, inputs are so
measured; in profit centers, both revenue (output)
and expense (input) are measured and in
investment centers, the relationship between
profit and investment is measured.
Each responsibility center requires a diferent
planning and control.

RESPONSIBILITY CENTERS

Revenue Centers
Inputs not related
to outputs

Inputs

Outputs
Work

(dollar only
revenue)
for cost directly
incurred)

(dollar

Marketing
Function

RESPONSIBILITY CENTERS

Revenue Centers
Output is measured in monetary terms,
No formal attempt is made to relate input to
output
Revenue centers are marketing/sales units
Actual sales or order booked are measured
against budget or quotas.
Manager responsible for the expense incurred
directly within the unit,
The primary measurement is revenue.

RESPONSIBILITY CENTERS

Expense Centers

Engineered Expense
Optimal relationship
can be established

Inputs
(Dollar)

Outputs
Work

Manufacturin
g function

( Physical)

RESPONSIBILITY CENTER

Expense Centers

Discretionary Expense
Optimal relationship
can not be established

Inputs

Work

(Dollar)

Outputs
( Physical)

R&D
Function

RESPONSIBILITY CENTERS

Expense Centers

Two general types of Expense Center (relate to two types of cost )

Engineered Expense Center

Input can be measured in monetary terms
Output can be measured in physical term
The optimum dollar amount can be determined

Discretionary Expense Center

Output cannot be measured in monetary terms.

Engineered Cost are those for which the right or proper amount can
be estimated with reasonable reliability.
Discretionary Cost ( managed cost ) are cost incurred depend on
management s judgment.
Controllable cost is an item of cost if the amount assigned to a
responsibility center is significantly influenced by actions of the
manager of the responsibility center. Otherwise , it is non
controllable cost

RESPONSIBILITY CENTERS

Engineered Expense Centers

Engineered expense centers are usually found
in manufacturing operations.
In
engineered expense center, output
multiplied by the standard cost of unit
produced,
Their supervisors are responsible for the
quality, volume of production as well as for
efficiency.
Managers of engineered expense centers may
be responsible for activities such as training
and employee development.

RESPONSIBILITY CENTERS

Discretionary Expense Centers

The output of discretionary expense centers cannot
be measured in monetary terms ( accounting, legal ,
public relation, human resources, industrial relation).
The diference between budget and actual expense is
not a measure of efficiency.

General control characteristic for discretionary

expense centers.

Budget preparation

Management formulate the budget for a discretionary

expense center by determining the magnitude of the job

that needs to be done.

RESPONSIBILITY CENTERS

The work done by discretionary expense centers falls into two

categories : continuing and special.
A technique often used in preparing a discretionary expense centers
budget is management by objective.
The planning function for discretionary expense center is usually
carried out in one of two ways , incremental budgeting or zero base
review.

Cost Variability
Cost in discretionary expense center are comparatively insulated from
such short-term fluctuation.

Type of Financial Control

To control cost by allowing the manager to participate in the planning.

Measurement of Performance
The financial performance report is not a mean of evaluating

efficiency,
Total control over discretionary expense center is achieved primarily
through non financial measure.

RESPONSIBILITY CENTERS

Profit Centers
Inputs are related
to outputs

Inputs
Outputs

Work
(dollar cost)

(dollar profit)
Business
Unit

RESPONSIBILITY CENTERS

Investment Centers
Profits are related
to capital employed

Inputs
Outputs

Capital
employed

(dollar cost)
profit)

(dollar

Business
Unit

RESPONSIBILITY CENTERS

Administrative and Support Centers

Control

Problems

Difficulty in measuring output

Output is advice and service,
Impossible to set cost standards against which to
measure financial performance.
Lack of Goal Congruence
Manager of administrative staf offices strive for
functional excellence.
In fact much depends on how managers define
excellence.

RESPONSIBILITY CENTERS
Budget

Preparation

The proposed budget usually consists of

a list of expense items compared the

current years actual expense

Research and Development Centers

Control

Problems

Difficulty in relating results to inputs

The complete product of R&D may involve
several years.

RESPONSIBILITY CENTERS

Lack of congruence
The research manager typically wants to build the best research

organization even though that may be more expensive.

The research people often do not have sufficient knowledge of the
business .

The R&D Continuum

The activities conducted by R&D organization lie along a
continuum, with basic research at one extreme and product testing
at the other.
Basic research has two characteristic :

unplanned, with management at best specifying the general area to be

explored,
a significant time lapse between the initiation of research and the
introduction of successful new product.

In some companies basic research is included as a lump sum in the

research program and its budget. In others no specific allowance is
made for basic research.

RESPONSIBILITY CENTERS

R&D Program
The R&D program consists of a list of programs plus a blanket

allowance for unplanned work.

The review is often conducted by a research committee
consisting of the CEO, the research director, and the
production and marketing managers.
The committee makes broad decisions as to which projects to
undertake, to expand, to cutback on, and to discontinue.

Annual Budget

The preparation of the annual budget is fairly simple and if the

budget is in line with the strategic plan, approval is routine.
Actual costs will not exceed budgeted amount
without
managements knowledge
Significant variances from the budget should be approved by
management before they are incurred.

RESPONSIBILITY CENTERS

Measurement of Performance
At regular intervals, usually monthly or quarterly,

compare actual expense with budgeted expense.

Management receives two types of financial reports
on R&D activities.
The first type compares the latest forecast of total
cost with the approved amount for each active project ,
The second type of financial report consist of
comparison between budgeted expenses and actual
expenses.

Financial report informs management as to the

efectiveness of the research and the efectiveness

of a given project.

RESPONSIBILTY CENTERS

Marketing Centers

Two types of activities of marketing with diferent

controls being appropriate for each : order filling
or logistics activities and order getting or
marketing activities.
Logistic Activities
Logistics activities are those involved in moving

goods from the company to its customers and

collecting the amounts due from customers in return.
These
activities
include
transportation
to
distribution, warehousing, shipping and delivery,
billing and credit function, and the collection period.

RESPONSIBILITY CENTERS

Many are engineered expenses centers that can be

controlled through imposing standard cost and
adjusting budgets at diferent levels of volume.

Marketing Activities

Marketing activities are those undertaken to obtain

orders for company products, include test
marketing, the establishment, training and
supervision of the sales force, advertising and sales
promotion.
The efectiveness of the marketing efort is much
more difficult because changes beyond the
marketing departments control ( economic
condition, competitors action ).

RESPONSIBILITY CENTERS
The sales target not the expense target.
Budget marketing expenses as a percentage
of budgeted sales.
Three types of marketing organization and
three types of activity measures :

order filling, many of whose costs are engineered

expenses,
generation of revenue is usually evaluated by
comparing
actual
revenue
and
physical
quantities sold with budget.
order getting cost which are discretionary.

RESPONSIBILITY ACCOUNTING

Responsibility center managers need information about

what has taken place in their respective areas of
responsibility.
Responsibility accounting involves both planned and
actual accounting information about the inputs and
outputs of responsibility centers.
Responsibility accounting focuses on responsibility
centers, contrast with full cost accounting which focuses
on goods and services (products).
Full cost accounting information is used in the
management control process as an aid in making
program decision.
Responsibility accounting is used in preparing budgets
and in measuring performance .

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