Module III
Responsibility Centers: Revenue
and Expense centre
Responsibility Centers
• A responsibility centre in an organization unit that is headed by a
manager who is responsible for its activities.
• In a sense company is a collection of responsibility centers, each of
which is represented by a box on the organization chart.
• A responsibility center exists to accomplish the objectives of the
organization as the organization got its own goals and objectives.
• As each organization is sum of the responsibility centers and if all the
centers achieve their goals and objectives the overall organizational
goals and objectives will be achieved.
Types of Responsibility Centers
• There are four types of responsibility centers, classified according to
the nature of the monetary inputs and /or output.
• They are; Revenue center, expense center, profit center and investment
center.
• In revenue center output is measured in monetary terms, in expense
center input is measured in monetary terms, in profit center both
revenue (output) and expense (input) are measured and in investment
center the relationship between profit and investment is measured.
• Each and every responsibility centers required different type of
planning and control system.
Revenue Center
• In a revenue center output is measured in monetary terms,
but no formal attempt is made to relate input to output.
• Generally, revenue centers are marketing/sales units that
do not have authority to set selling prices and do not
charged for the cost of the goods they sell.
• Actual sales or orders booked are measured against the
budgets and quotas, and the manager is held responsible
for the expenses incurred directly within the unit.
• The primary measurement is revenue in this center.
Expense Center
• Expense centers are responsibility centers whose inputs are
measured in monetary terms, but whose outputs are not.
• There are two general types of expense centers; engineered
and discretionary.
• Engineered costs are those for which the right and proper
amount can be estimated with reasonable reliability –
direct costs.
• Discretionary costs are those for which no engineered
estimate is feasible – support activities
Engineered Costs
• Here, the inputs can be measured in monetary terms,
because the engineered cost centre is basically found in
manufacturing operations.
• In engineered cost center output multiplied by the standard
cost of each unit gives the finished product cost, means the
output can be measured in the physical terms.
• The optimum amount of input required to produce one unit
of output can also be measured in this center.
• The engineered cost center not only measure the cost but it
is also responsible for the quality of the products, volume
of the production as well as efficiency.
Discretionary Expense Center
• This center include administrative and support units –
accounting, legal, human resources – research and
development and most marketing activities.
• This center shows the top management policies and
decisions for different departments to improve overall
efficiency and profitability of the organization and
appropriate amount to be spent on financial planning,
R&D, public relations etc.
• In discretionary cost center the budgets are given to
improve the working of different departments but there are
no variance analysis for this budgets, only control systems
are implemented.
MCS for Discretionary Cost Center
• Budget Preparation: management formulates the budget
here by determining the magnitude of the job that needs to
be done, and not the volumes of the output.
• The work done here falls into two general categories:
continuing and special.
• Continuing work is done consistently from year to year,
such as preparation of financial statements.
• While, special work is a one shot project – developing and
installing a system in new acquired division.
• The technique used in this budgeting is management by
objectives and a formal process in the department ask for
the budget on the basis to accomplish the specific jobs and
activities.
Contd.
• The planning function of this center is carried out in one
of the two ways: incremental budgeting and zero-base.
• In the Incremental budgeting, the discretionary expense
center’s current level of expenditure is taken as a starting
point. This amount is adjusted for inflation, changes in the
workload of job.
• Incremental budgeting has two drawbacks: first,
discretionary expense center’s current expenses are taken
as it is and not reexamined during the budget preparation
process.
• From the current level the managers always want to
increase the services so they will demand extra budget
every time.
Contd.
• Zero-base review: an alternative budgeting approach is to
make a thorough analysis of each discretionary expense
center on a rolling basis, so that all are reviewed once and
then the budgets are finalized.
• In contrast with incremental budgeting this review starts
from scratch so the resources actually required are only
given to the activity.
• Cost Variability: unlike the engineered cost which are
strongly affected by short run volume changes, cost in
discretionary centers, it reacts to short term fluctuations in
jobs and other activities.
Contd.
• Type of financial control: in case of engineered cost center
the objective is to become cost competitive by setting a
standard and measuring actual cost against the standard.
• While, in discretionary cost center the controlling of cost
in the planning phase itself before incurring the cost.
• Measurement of Performance: the engineered cost center is
having the output and the volume as a measurement but in
case of discretionary cost center the manager has to obtain
the desired output in terms of planning.
• Now, we will be studying different centers and the MCS to
implemented in that.
Administrative & Support Centers
• Administrative centers include senior management and
business unit management, along with the managers of
supporting staff units.
• Support center units that provide services to other
responsibility centers.
 Control Problems:
• Difficulty in measuring output
• Lack of goal congruence
 Budget Preparation
Research and Development Center
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Control Problems:
Difficulty in relating results to inputs
Lack of goal congruence
The R&D Range: the activities conducted by R&D has
long range, as it starts from basic research on one extreme
and product testing at the other range.
 The R&D Program: there is no scientific way to determine
the optimum size of an R&D budget.
 Program list budget plus the blanket allowance for
unplanned work.
 Measurement of Performance
Marketing Center
• Generally, in all the companies two different types of
activities are grouped under the heading of marketing that
is logistics activities and marketing activities.
 Logistics activities: logistics activities are those involved
in moving goods from the company to its customers and
collecting the the amounts due form customers in return.
 Marketing activities are those undertaken to obtain orders
for company products. These activities include test
marketing, training, supervision of sales force, advertising,
sales promotion.