Responsibility Centres Management accountants report on the performance of various business units to the manager of the unit and

possibly to higher level management as well. Each manager is accountable for the activities carried on by a specific sub-unit of the organisation. These sub-units are called Responsibility Centres and are categorised into: 1 Cost Centres ! Revenue Centres " #rofit Centres $ %nvestment Centres managers are only accountable for controlling costs. managers are only accountable for generating revenue. managers are accountable for generating revenue and controlling costs. managers are accountable for generating revenue& controlling costs and creating investment returns.

The first two centres are common at the operational level of large organisations. 'or e(ample if the performance of a sales manager is measured& by the revenue generated by his sales team& then the sales department is a Revenue Centre. )imilarly& a purchasing officer cannot be held accountable for the sales of the organisation but only the costs of operating the purchasing department and the costs of purchases. Thus the purchasing department is a Cost Centre. The divisional manager responsible for the operations of the business unit in which the sales manager and purchasing officer are employed is responsible for both revenue generation and cost control and& therefore& oversees a #rofit Centre. The *ueensland manager of a number of divisions needs to ma+e decisions regarding the best use of resources in order to ma(imise the company,s return on invested capital. This manager is accountable for the activities within an %nvestment Centre. %n this e(ample the company has each type of responsibility centre illustrated as follows:

Figure 3 Responsibility Centres -lthough responsibility centres within a different type of responsibility centre is common in large organisations& other models& such as only profit centres& can be utilised especially in small to medium si.e enterprises. -ccounting for responsibility centres /Responsibility -ccounting compares the actual results to budgeted /planned e(pectations of each responsibility centre.

http:00managementcont rolsystemoverview.blogspot.in0!11!01!01-nature-of-management-control-systems.html Responsibility Centres - responsibility center is an organi.ation unit that is headed by a manager who is responsible for its activities and results. %n Responsibility -ccounting& revenues and costs information are collected and reported by responsibility centers. - decentrali.ed environment results in highly dispersed decision ma+ing. -s a result& it is imperative to monitor and 2udge the effectiveness of each manager. Objectives of Responsibility Accounting: Responsibility accounting is a method of dividing the organi.ational structure into various responsibility centres to measure their performance. %n other words responsibility accounting is a device to measure divisional performance measurement may be stated as under: 1. !. To determine the contribution that a division as a sub-unit ma+es to the total organi.ation. To provide a basis for evaluating the 3uality of the divisional managers performance. Responsibility accounting is used to measure the performance of managers and it therefore& influence the way the managers behave. ". To motivate the divisional manager to operate his division in a manner consistent with the basic goals of the organi.ation as a whole.

There are four types of responsibility centres& according to the nature of the control over the inputs and outputs: 1. Cost Center: - cost center is an organi.ational sub-unit such as department or division& whose manager is held accountable for the costs incurred in that division. 'or e(ample& a #ower and -irco 4epartment can can be defined as a cost center within the 5peration and Maintenance 4epartment in 6nited Telecommunication Company. Manager of a cost center is responsible for controllable costs incurred in the department& but is not responsible for revenue& profit or investment in that center. - cost center is a responsibility center in which inputs& but not outputs are measured in monetary value. 2. Revenue Center: - manager of a revenue center is held accountable for the revenue attributed to the subunit. Revenue centers are responsibility centers where managers are accountable only for financial outputs in the form of generating sales revenue. - revenue center,s manger may also be held accountable for selling e(penses such as sales persons, salaries& commissions& and order receiving costs. 3. Profit Center: #rofits are the e(cess of revenue over the total e(penses. Therefore& the manager of a profit center is held accountable for the revenues& costs& and profits of the centre. - profit center is a responsibility center in which inputs are measured in terms of e(penses and outputs are measured in terms of revenues. 4. Invest ent Center: The manger of investment centre is held accountable for the division,s profit and the invested capital used by the centre to generate its profits. %nvestment centres consider not only costs and revenues but also the assets used in the division. #erformance of an investment centre are measured in terms of assets turnover and return on the capital employed. Proble s in Responsibility Accounting 7hile implementing the system of responsibility accounting& the following difficulties are li+ely to be faced by the management: 1. Classification of costs: 'or responsibility accounting system to be effective a proper classification between controllable and non controllable costs is a prime re3uisite. 8ut practical difficulties arise while doing so on account of the comple( nature and variety of costs.

!. %nter-departmental Conflicts: )eparate departmental persuits may lead to inter-departmental rivalry and it may be pre2udicial to the interest of the enterprise as a whole. Managers may act in the best interests of their own& but not in the best interests of the enterprise. ". 4elay in Reporting: Responsibility reports may be delayed. Each responsibility centre can ta+e its own time in preparing reports. $. 5verloading of %nformation: Responsibility accounting reports may be overloading with all available information. This danger is inherent in the system but with clear instructions by management as to the functioning of the system and preparation of reports& etc.& only relevant information flow in. 9. Complete Reliance will be deceptive: Responsibility accounting can:t be relied upon completely as a tool of management control. %t is a system 2ust to direct the attention of management to those areas of performance which re3uired further investigation. Profit Centres #rofit centers ta+e the basic idea of cost centers somewhat further. %n this case& a profit centre is run as a separate business within a business. The profit centre will buy services from other divisions and profit centres within the parent organisation& and then selling their output on to the final customer or to another part of the parent organisation. The profit Centre will have its own profit and loss account and bid for investment capital from the parent company. %n recent years there has been a huge growth in the development of cost centres and profit centres within large 5rgani.ations. There are several reasons for the growth and most of these can be lin+ed to personal motivation and more effective control. #rofit centres ta+e the idea of overhead allocating further; in this case each division of large business is run as an independent business& with it,s own profit and loss account. -n e(ample of an organisation operating profit centres is Corus. 7ithin Corus T%n #<ate division operates as a profit centre. Corus Tin #late buys service and goods from within the organisation and sells output to toher divisions and to e(ternal customers. #rofit centers are often evaluated on the basis of different measures of profitability li+e 1 Contribution Margin ! 4irect #rofit " Controllable #rofit $ E8%T Margin 9 =et %ncome Each type of profitability measure is used by some companies and their relative importance varies from organi.ation to organi.ation. A!v"nt"ges of Profit Centres: -llows decision-ma+ing and power to be delegated effectively. %mproves speed and efficiency of decision ma+ing. %ncreased motivation- now wor+ing for a smaller& more local business. -llows more effective use of bonuses and other forms of financial motivation - all lin+ed to profitability of profit centre. #is"!v"nt"ges of profit Centres: <oss of overall central control of the company #rofit centre could be wor+ing towards different and non-company agendas %ncreased opportunity for empire building by management.

$r"nsfer Pricing -n essential feature of decentrali.ed firms is responsibility centres /e.g.& cost& profit& revenue& or investment centres . The performance of these responsibility centres is evaluated on the basis of various accounting numbers& such as standard cost& divisional profit& or return on investment /as well as on the basis of other nonaccounting measures& li+e mar+et share . 5ne function of the management accounting system therefore is to attach a dollar figure to transactions between different responsibility centres. The transfer price is the price that one division of a company charges another division of the same company for a product transferred between the two divisions. The basic purpose of transfer pricing is to induce optimal decision ma+ing in a decentrali.ed organi.ation /i.e.& in most cases& to ma(imi.e the profit of the organi.ation as a whole . Purposes of $r"nsfer Pricing: The main reasons for instituting a transfer pricing scheme are as follows: > ?enerate separate profit figures for each division and thereby evaluate the performance of each division separately. > @elp coordinate production& sales and pricing decisions of the different divisions /via an appropriate choice of transfer prices . Transfer prices ma+e managers aware of the value that goods and services have for other segments of the farm. > Transfer pricing allows the company to generate profit /or cost figures for each division separately. > The transfer price will affect not only the reported profit of each centre& but will also affect the allocation of an organi.ation:s resources. %ec&"nics of $r"nsfer Pricing > =o money need change hands between the two divisions. The transfer price might only be used for internal record +eeping. > /Transfer #rice A 3uantity of goods e(changed is an e(pense for the purchasing centre and revenue for the selling centre. Accounting for $r"nsfer Pricing: %f intra-company transactions are accounted for at prices in e(cess of cost& appropriate elimination entries should be made for e(ternal reporting purposes. E(amples of items to be eliminated for consolidated financial statements include: > %ntracompany receivables and payables. > %ntracompany sales and costs of goods sold. > %ntracompany profits in inventories. %"r'et(b"se! $r"nsfer Pricing: 7hen the outside mar+et for the good is well-defined& competitive& and stable& firms often use the mar+et price as an upper bound for the transfer price. )egoti"te! $r"nsfer Pricing: @ere& the firm does not specify rules for the determination of transfer prices. 4ivisional managers are encouraged to negotiate a mutually agreeable transfer price. =egotiated transfer pricing is typically combined with free sourcing. %n some companies& though& head3uarters reserves the right to mediate the negotiation process and impose an BarbitratedC solution. Cost(b"se! $r"nsfer Pricing: %n the absence of an established mar+et price many companies base the transfer price on the production cost of the supplying division. The most common methods are: > 'ull Cost > Cost-plus > Dariable Cost plus <ump )um charge > Dariable Cost plus 5pportunity cost > 4ual Transfer #rices