Types of Responsibility Centers
As the firm grows, top management typically creates areas of responsibility, which are known as responsibility centers, and assigns subordinate managers to those areas. A responsibility center is a segment of the business whose manager is accountable for specified sets of activities. Responsibility accounting is a system that measures the results of each responsibility center and compares those results with some measure of expected or budgeted outcome. The four major types of responsibility centers are as follows:
1. Cost center: A responsibility center in which a manager is responsible only for costs.
2. Revenue center: A responsibility center in which a manager is responsible only for revenues.
3. Profit center: A responsibility center in which a manager is responsible for both revenues and costs.
4. Investment center: A responsibility center in which a manager is responsible for revenues, costs, and investments.
As the firm grows, top management typically creates areas of responsibility, which are known as responsibility centers, and assigns subordinate managers to those areas. A responsibility center is a segment of the business whose manager is accountable for specified sets of activities. Responsibility accounting is a system that measures the results of each responsibility center and compares those results with some measure of expected or budgeted outcome. The four major types of responsibility centers are as follows:
1. Cost center: A responsibility center in which a manager is responsible only for costs.
2. Revenue center: A responsibility center in which a manager is responsible only for revenues.
3. Profit center: A responsibility center in which a manager is responsible for both revenues and costs.
4. Investment center: A responsibility center in which a manager is responsible for revenues, costs, and investments.
A production department within the factory, such as assembly or finishing, is an example of a cost center. The supervisor of a production department does not set price or make marketing decisions, but he or she can control manufacturing costs. Therefore, the production department supervisor is evaluated on the basis of how well costs are controlled. The marketing department manager sets price and projected sales. Therefore, the marketing department may be evaluated as a revenue center. Direct costs of the marketing department and overall sales are the responsibility of the sales manager. In some companies, plant managers are given the responsibility to price and market products they manufacture. These plant managers control both costs and revenues, putting them in control of a profit center. Operating income would be an important performance measure for profit center managers.
Finally, divisions are often cited as examples of investment centers. In addition to having control over cost and pricing decisions, divisional managers have the power to make investment decisions, such as plant closings and openings, and decisions to keep or drop a product line. As a result, both operating income and some type of return on investment are important performance measures for investment center managers. It is important to realize that while the responsibility center manager has responsibility for only the activities of that center, decisions made by that manager can affect other responsibility centers. For example, the sales force at a floor care products firm routinely offers customers price discounts at the end of the month. Sales increase dramatically, and the factory is forced to institute overtime shifts to keep up with demand.
Finally, divisions are often cited as examples of investment centers. In addition to having control over cost and pricing decisions, divisional managers have the power to make investment decisions, such as plant closings and openings, and decisions to keep or drop a product line. As a result, both operating income and some type of return on investment are important performance measures for investment center managers. It is important to realize that while the responsibility center manager has responsibility for only the activities of that center, decisions made by that manager can affect other responsibility centers. For example, the sales force at a floor care products firm routinely offers customers price discounts at the end of the month. Sales increase dramatically, and the factory is forced to institute overtime shifts to keep up with demand.
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