Responsibility centre is a unit or function of an organization headed by a manager who is directly responsible for its performance.

Responsibility centers help managers implement strategies of the organization. Every responsibility centre uses inputs (material, labour) and needs working capital and other assets to function effectively. The responsibility centre produces output in the form of goods and services

Expense centres Revenue centres Profit Centres Investment Centres

Responsibility centre Engineered Expense Centre Discretionary Expense Centre Revenue Centres Profit Centres

Inputs Monetary terms

Outputs Physical terms

Remarks Optimal relationship can be established Optimal relationship cannot be established Input not related to outputs Inputs are related to outputs Profits are related to capital employed

Monetary terms

Physical terms

Monetary terms Monetary terms

Monetary terms ( revenue) Monetary terms (profit) Monetary terms (profit)

Investment Centres Monetary terms

Engineered expense centres: Input can be measured in monetary terms. Input can be measured in physical terms. Usually found in manufacturing operations. Output multiplied by standard cost of each unit measures what the finished product should have cost. Difference between the theoretical cost and the actual cost represents the efficiency of the expense centre

Some tasks of engineered expense centres are not measured by cost alone such as quality of the goods, training etc. Not all cost items in a responsibility centre can be engineered. Amount of indirect labour and other services can vary with management discretion.

Output cannot be measured in monetary terms. Includes administrative and support units like legal and accounting, Research and development and most marketing activities Efficiency is between the budgeted input and actual input. It does not measure the value of output.

Engineered expense centres

Costs are determined by the management taking into view the operating budget required to perform the task effectively in the future

Discretionary expense centres

Principal task is to determine the magnitude of the task . These tasks are continuing and special

Volume is not a major concern MBO is a technique used for preparing budgets Incremental and zero based budgeting

Engineered expense centres

Strongly affected by short run volume changes

Discretionary expense centres

Tend to vary from year to year but are not influenced by short run fluctuations within a year.

Engineered expense centres

Operating costs are minimized by setting a standard for the costs and comparing the actual costs with the standard . Control is exercised at the execution stage after the costs are incurred.

Discretionary expense centres

Costs are controlled by determining the tasks that have to be undertaken and the amount of effort that is required for each task. Control is exercised at the planning stage, before the costs are incurred.

Engineered expense centres

Primary task of the manager is to control costs.

Discretionary expense centres

Primary task of the manager is to obtain the desired output. Spending on budget satisfactory; Spending more than budget- cause for concern; Spending less than the budgetplanned work is not being done