Responsibilty Centers.pptx

Cost

1. Responsibility centers Introduction

2. Nature of Responsibility centers A responsibility center exists to accomplish its purpose termed as objectives. The company has goals and senior management decide on set of strategies to accomplish these goals. The objectives of various responsibility center are to help implement these strategies .

3. Responsibility centers Sum of all responsibility centers = Organization Objectives achieved Goals achieved

4. Management Control Systems It is concerned with achievement of goals and objectives with ease and at least cost. Purpose of MCS is being in control, not controlling. It is concept based on decentralization. The key feature is strategy implementation.

5. Responsibility Center refers to a particular segment or unit of an organization for which a particular manager, employee, or department is held responsible and accountable for its business goals and objectives. It refers to the part of the company where a manager has authority and responsibility. A responsibility center is a functional entity within a business that tends to have its own goals and objectives, policies, and procedures, thereby giving managers specific responsibility for revenues, expenses incurred, funds invested, etc.

6. Responsibilty centers Responsibility centers are the feature of responsibilty accounting. It is a segment of a larger organization and is placed under the control of the manager. A segment could take the form of: Department Division Function Unit Product Item of equipment

7. Responsibilty centers The manager of responsibilty center is directly responsible for its performance. Cost, revenue and profits associated with the centers are recorded. Responsibilty centers are the important feature of cost accounting and budgeting

8. Responsibilty Accounting FEATURES : Segments: Business organizations is broken into several identifiable units or segments known as responsibilty centers. Boundaries: The boundaries of each segment are clearly established. Control: The manager is placed in charge of each segment. The manger is expected to take charge of cost / revenue / profits associated with the center. He is expected to plan and control those centers

9. Responsibilty Accounting FEATURES: Authorization: Segmental managers are given the authority to operate segments as autonomously as possible

10. 4 types of responsibility center Cost center Manager responsible for costs incurred Revenue center Manager responsible for revenue raised Profit center Manager responsible for both costs and revenue Investment center Manager responsible for profit, capital investment and financing

11. Examples of the Responsibility Center. Revenue Center: A good example would be the sales department or the salesperson. Cost: A good example, in this case, would be the purchase department. Profit Center: This would be a product line for which the product manager will be responsible. Investment Center: Example would be that of a subsidiary entity for which the subsidiary’s president is held responsible/HQ.

12. Relationship b/w Inputs & Output Work Capital Inputs Output Resources used (measured by cost) Goods or Services

13. The unit managers responsibility Costs Revenue Profit Investment Cost center Y Revenue center Y Profit center Y Y Y Investment Y Y Y Y

14. Example: A level business studies Within a school or college A level business studies can be treated as a cost center It is possible to calculate the cost of offering this A level subject – salary of teaching staff, cost of materials used plus an allocated share of the fixed overhead costs If the college finance manager calculated the revenue generated by the A level business studies then the course could be treated as a profit center The examination awarding bodies do treat A level business studies (and every other subject) as a profit center. Data is collected on the cost of offering the subject and the revenue received from the examination fees.

15. Why organize in terms of centers? 1. Improved accountability – costs/revenues can be monitored 2. Facilitate delegation by allowing autonomy for managers in the center 3. autonomy and empowerment of managers improves motivation 4. Greater autonomy aids decision making

16. Why organize in terms of centers? 5. The performance of an individual unit can be measured 6. Analysis of performance of individual units means that there is no hiding place for weak performing units 7. Senior management is able to trace problems 8. centers are an aspect of budgetary control. By dividing up the business in terms of centers a named post holder is identified as being responsible.

17. Cost / Expense centers A responsibility center in which the manager is accountable for direct costs only It is a specific and discrete department, area or person within a business form which costs can be ascertained and to which costs can be allocated An individual part of a business where costs are incurred and can be easily recorded The manager responsible for the center has control over the costs but not revenue A significant fraction of the costs are directly attributable costs but there is no directly attributable revenue.

18. Cost / Expense centers Here inputs are measured in monetary terms but outputs are not. Two types of Expense centers: Engineered Cost: Those for which the right or proper amount can be estimated with reasonable reliability. Ex: Direct material, Direct labour cost, Supplies etc. Discretionary Cost: Those for which no such engineered estimate is feasible.

19. Engineered Cost centers Their inputs can be measured in monetary terms. Their output can be measured in physical terms. The optimum Re amount of input required to produce one unit of output can be determined. Work Inputs Output Rs. Physical Optimum relationship can be established Manufacturing Function

20. Discretionary Cost centers Discretionary centers include administrative and support units. Ex: accounting, legal, industrial relation, public relation, HR, R&D & marketing services. Their output can not be measured in monetary terms. Work Inputs Output Rs. Physical Optimum relationship can not be established R & D Function

21. Examples of cost centers Personnel / HR department Finance department R&D department Transport department Warehouse and stock control department Buying department In all the above cases the department incurs costs but does not earn revenue An item of equipment (such as a photocopier) can also be regarded as a cost center

22. Revenue center A responsibility center in which the manager is responsible for revenue only Example: sales department Most costs will be fixed and will be very small in relation to the revenue earned Work Inputs Output Rs. Only .for cost incurred Rs. Revenue Inputs not related to outputs Marketing Function

23. Profit center A business unit to which costs and revenues are allocated and recorded A responsibility center in which the manager is responsible for costs and revenue and therefore the profits of the unit A profit center is allowed to control itself as a separate part from the larger organization As costs and revenue can be attributable it makes sense to see the center as a business within a business Example: product department or division with a reasonable degree of autonomy

24. Profit centers can make a loss It is entirely wrong to see a profit center as the part of the business that makes a profit whereas all the other parts are presumably loss centers Profit centers are simply a part of the business for which data on costs, revenue and profit/loss are recorded It is quite possible for a profit center to produce a negative profit i.e. a loss

25. Profit center Work Inputs Output Rs. Cost Rs. Profits Inputs are related to outputs Business Unit

26. Examples of profit centers An individual product within the product portfolio A range of products A brand A geographical region within the company A branch office A product division of the company In each case it is possible to identify and calculate the costs incurred and the revenue received

27. Investment center This takes responsibility to a greater depth A responsibility center in which the manager is responsible for all aspects of finance – costs, revenue, profit and investment Example: a division of a large MNC The division is assessed in terms of its contribution to overall profits Capital Employed Inputs Output Rs. Cost Rs. Profits Inputs are related to Capital Employed Business Unit

28. Advantages of organizing in terms of responsibility centers Decentralized decision making: faster and more responsive to local conditions Responsibility centers facilitate delegation Motivation is improved Improved monitoring of budgets, targets and performance Greater accountability Facilitates budgetary control Prevents the performance of weak elements being hidden within the larger organization

29. Advantages of Responsibility Center Assignment of Role and Responsibility: . Improves Performance: Delegation and Control: Helps in Decision Making: Helps in Cost Control:

30. Problems and disadvantages There is a danger that the individual centers become too narrowly focused Managers of responsibility centers tend to be more concerned with the unit objectives than the corporate objectives Rivalry between centers breaks out Creates problems of coordination Creates communication problems Allocation of costs is complex; any unfairness in the way costs are allocated can lead to demotivation

31. Disadvantages of Responsibility Center Presence of Conflict of Interest The requirement of Time and Effort: Ignores Personal Reaction and Feedback Too much Process-Oriented Limitations of Responsibility Center A major limitation of such a system is attributed to too much focus on process-oriented methods, which tends to consume too much time and effort and effort on the part of the management in having to assign certain responsibilities.

32. Conclusion The method of assigning responsibility centers within an organization to help achieve the organizational goals through segregation and tagging to each manager undoubtedly helps achieve delegation and control apart from tracking the performance that tends to act as a motivational booster. However, it becomes important for management to realize that one should not be too focused or process-oriented, which would cripple the initial objects set. A company is most likely to sabotage itself by doing so when it focuses on the hierarchical scheme of things. As a result, outcomes may not be achieved, and targets may just become numbers to frown upon. Hence to solve such problems, it becomes imperative that the responsibility centers are not process-oriented and that they tend to miss out on the initial objectives set forth. When done efficiently, it helps in tracking and measuring the performance of each of the segments as listed out.