Chapter 4

RESPONSIBILITY
CENTERS: REVENUE
AND EXPENSE CENTERS

Responsibility Centers
A responsibility center is an organization unit
that is headed by a manager who is responsible
for its activities

Nature of
Responsibility Centers
Inputs
Resources used,
measured by cost

Work
Work

Outputs
Goods or services

Capital
Another responsibility centers
Outputs
Outside marketplace

Relation between
Inputs and Outputs
Management is responsible for ensuring the
optimum relationship between inputs and
outputs.
Relationships

Causal & Direct

Not Direct

Ex: Production department

Ex: Advertising expense,

R&D

Measuring Inputs & Outputs

In a MCS, inputs in quantitative amounts
are translated into monetary terms.
Physical quantity x price per unit
Cost
It is much easier to measure the cost of
inputs than to calculate the value of outputs

Efficiency and Effectiveness

Efficiency is the ratio of outputs to inputs, or
the amount of output per unit of input.
Effectiveness is determined by the relationship
between a responsibility centers output and its
objectives.
Efficient

does things right

Effective

does the right things

Types of Responsibility Centers

Classification
the nature of the monetary
inputs and/ or outputs that are measured for
control purpose.
Types of responsibility centers:
Revenue centers
Expense centers
Profit centers
Investment centers

Revenue Centers
In revenue centers, output (i.e., revenue) is
measured in monetary terms, but no formal
attempt is made to relate input (i.e., expense or
cost) to output.
Ex: marketing/sales unit that do not have
authority to set selling prices and are not
charged for the cost of gods they market.

Expense Centers
Expense centers are responsibility centers
whose inputs are measured in monetary terms,
but whose output are not.
Types of expense center:
Engineered costs are those for which the right or
proper amount can be estimated with reasonable
reliability.
Discretionary costs (managed cost) are those for
which no such engineered estimate is feasible.

Engineered Expense Centers

Characteristic:

Their input can be measured in monetary terms.

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

Discretionary Expense Centers

Include administrative & support units, R & D

operation, most marketing activities.
The difference between budget & actual expense
is not a measure of efficiency.

General Control Characteristics

Budget Preparation

Engineered expense center: efficiency

Discretionary expense: management by objectives

Cost Variability
Type of Financial Control
Measurement of Performance

Administrative
& Support Centers
Administrative centers include senior corporate
management and business unit management,
along with the managers of supporting staff units.
Support centers are units that provide services
to other responsibility centers.
Control problems:
Difficulty in measuring output
Lack of goal congruence

Research
& Development Centers

Control problems:

Difficulty in relating results to inputs.

Lack of goal congruence.

The R&D Continuum

Basic
Research

Applied
research

Development

Product
Engineering

Product
Testing

Marketing Centers

Two types of marketing activities:

Logistic activities (order filling)

Fundamentally similar to expense centers in
manufacturing plants.
Marketing activities (order getting)
It is difficult to evaluating effectiveness of
marketing efforts because changes in factors
beyond