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 Capital Another responsibility centers Outputs Outside marketplace Outputs Work Goods or services

Relation between Inputs and Outputs

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

Causal & Direct

Ex: Production department

Not Direct
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 Effective does things right 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.

Applied research Development Product Engineering Product Testing

The R&D Continuum

Basic Research

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