Post on 07-Apr-2018
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Responsibility Center
Presented By:
Dipak Kumar Bhagat (1064)Jitesh Shrivas (1069)
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Responsibility Center (continued)
A responsibility centre is a segment of a largerorganisation and is placed under the control of amanager
A segment could take the form of a department or adivision or function or unit or product or even anindividual item of equipment
Examples: A specific store in a chain of grocery stores.
A work-station in a production line manufacturingautomobile batteries.
HR department, administrative department, R&D,marketing, production line etc.
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Nature of Responsibility Center
A responsibility center exists to accomplish one
or more purpose, termed its objectives.
The company as a whole has goals and senior
management decides on a set ofstrategies to
accomplish these goals. The objective of
companys various responsibility centers are to
help implement these strategies. Because if eachresponsibility center meet its objective, the goal
of the organization will have been achieved.
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Attributes of Responsibility Center
It is like a small business, and its manager is
Asked to run that small business and preserve
the interests of the larger organization. Goals for the center should be specific and
measurable, and
Should promote the long terms interests ofthe organization and should be compatible
with other responsibility center activities.
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In an Organization
Responsibility center receive inputs, in the form ofmaterials, labor and services.
Using working capital (e.g., inventory, receivables),
equipment and other assets, the responsibility centerperforms its particular function with the ultimateobjective oftransforming its input into output.
The products produced by a responsibility center maybe furnished either to another responsibility center,where they are inputs, or to the outside market place,where they are outputs of the organization as a whole.
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Example: A Courier Service (DHL)
Courier operations dispatch trucks to pick up or deliver
shipments from local terminals.
It could be sent to one or more central terminals and then
sorted and redirected. Success of this service would depend on:
Service commitment to customers (on time, without damage) and
Controlling costs
Let us suppose that each terminal is treated as a responsibility
center.
How should the company measure the performance of each
terminal, its mangers, and its employees?
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Why organise in terms of centres?
Improved accountability - costs/revenue can be monitored
They facilitates delegation by allowing autonomy formanagers in the centre
Greater autonomy and empowerment of managers improves
motivation Greater autonomy aids decision making
The performance of the individual unit can be evaluated
By analysing the performance of individual units it meansthere is no hiding place for weak performing units
Senior management is able to trace problems Centres are an aspect of budgetary control. By dividing the
business up in terms of centres a named post holder isidentified as being responsible
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Measuring the performance of the
courier-terminal responsibility center
To focus on efficiency: we could measure no. of parcelspicked up, sorted or delivered, per route, peremployee, per vehicle, per hour or per shift.
To focus on customer service, we could measure each
groups contribution to customers: proportion of thetime the terminal met its deadlines, when terminalsare required to sort shipments, what the sorting errorrate was.
We could also measure customer service by: no. ofcomplaints operations group receives, average timetaken by the operation group to respond to complaints,and no. of complaints of poor, or impolite service.
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Measuring inputs and outputs
In the courier example, the inputs are causal and
direct: e.g. no. of packets received to time taken
to deliver them.
But, such causal and direct relationships are not
always possible. For example, how does
advertising contribute to increase in revenues?
Or, how would you measure the contribution of R& D to product innovation, revenue generation,
or cost reduction?
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Converting the inputs into monetary
units
Most organizations would convert the physical
inputs into monetary units when evaluating a
responsibility center.
No. of units x cost of production, labor hours x
per hour rate, etc.
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Measuring outputs
Measuring outputs is more difficult. This isbecause:
Input may be extended this year but outputs(benefits) may be received over several years(e.g. employee training).
It would be difficult to make the causal
relationship e.g. marketing expenses, ITinvestments, accountants and generation ofrevenue and profits.
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Why does an organization
relate input to outputs?
Because they inherently measure efficiency andeffectiveness.
Efficiency: ratio of output to inputs;
Caution: Do not use ratio of output to input in anabsolute sense; but, only in a comparative sense.
If Dept. A is more efficient than Dept. B, do not rush toconclusions; examine why Dept. B is less efficient and
what can be done about it. Also, comparisons are possible only if Dept. B and
Dept. A use comparable outputs and comparableinputs. You cannot compare advertising to accounting.
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Efficiency
Efficiency is generally measured by comparingactual costs to standard costs.
Ratio of outputs to inputs, or the amount of
output per unit of input. Issues:
Standard costs do not remain stationery.
Recorded costs are often different from actualresources (costs) consumption.
Lesson: Establishing a responsibility center iseasy;Measuring its efficiency in a reasonablemanner is difficult.
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Effectiveness
Relationship between a responsibility centersoutput and its objectives (what it wasintended to do or perform or deliver).
If the output contributes to satisfying theobjectives, the more effective it is.
The new advertising and marketing efforts has
increased awareness and recognition of ourproduct. Advertising and marketing has beeneffective.
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Efficiency-Effectiveness
Not a compromise
A responsibility center must both be efficient andeffective.
It must use the least amount of inputs to get the
maximum amount of output and yet deliver onthe goals.
A sales department was efficient in growing thesales by 10% without adding additional sales
people or marketing expenses (efficient);however, many of the credit sales could not becollected (bad debts). It is ineffective.
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Role of Profit
The goal of every for-profit organization is earn profits(effectiveness).
If the organization could use the least input to get themaximum earnings, profits will be high (efficiency).
Therefore, profit is an indicator of both efficiency andeffectiveness.
However, not every unit within an organization earns profitand therefore, this measure cannot be used for all
responsibility centers. Therefore, an organization must establish various types of
responsibility centers.
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4 types of responsibility centre
Cost centre - manager responsible for costs
incurred
Revenue centre- manager responsible forrevenue raised
Profit centre - manager responsible for both
costs and revenue
Investment centre - manager responsible for
profit, capital investment and financing
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The unit managers responsibility
Costs Revenue Profits Investment
Cost
centre
Y
Revenue
centre
Y
Profit
centre
Y Y Y
Investment Y Y Y Y
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Example - A level Business Studies
Within a school or college A level Business Studies can betreated as a cost centre
It is possible to calculate the cost of offering this A levelsubject - salary of teaching staff concerned, cost of materials
used plus an allocated share of the fixed overhead costs If the college finance manager calculated the revenue
generated by A level Business Studies then the course couldbe treated as a profit centre
The examination awarding bodies do treat A level BusinessStudies (and every other subject) as a profit centre. Data iscollected on the cost of offering the subject and the revenuereceived from examination fees.
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Revenue Centers
Responsibility Centers whose members
control revenues but,
Not the manufacturing or acquisition cost ofthe products or service they sell, or the level
of investment in the responsibility center.
In other words, you cannot link the input to
the output.
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Revenue Centers (continued)
Output (i.e., revenue) is measured inmonetary terms, but no formal attempt ismade to relate input (i.e., expense or cost).
If expense is matched with revenue, the unitwould be profit center.
Typically revenue centers are marketing/sales
units that do not have authority to set sellingprices and are not charged for the cost of thegoods they market.
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Revenue Centers (continued)
Most revenue centers may not set selling prices They definitely have no control over the costs of
input acquired (service manager of anautomobile workshop does not control gasoline
costs) These centers are generally not allocated costs of
the goods that they market (there areexceptions).Manager is responsible only for costsdirectly incurred by his/her unit.
They are evaluated on the basis of actual sales ororders booked against budgets or quotas and
Example: a unit of a chain store in a mall.
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Expense/Cost Centers
Responsibility centers whose employees control costs, but
Do not control their revenues or investment level.
Input are measured in monetary terms, but whose output are not
Examples: Production department in a manufacturing unit, a drycleaning business
Two types of costs:
Engineered: those costs that can be reasonably associated with a cost
center direct labor, direct materials, telephone/electricity consumed,
office supplies. Discretionary: where a direct relationship between a cost unit and
expenses cannot be reasonably made; Management allocates them on a
discretionary basis (e.g. depreciation expenses for machines utilized).
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Examples of cost centres
Personnel/HRM department
Finance department
R and D department
Transport department
Warehouse & stock control department
Buying department
In all the above cases the department incurs costs
but does not earn revenue A item of equipment (such as an office photocopier)
can also be regarded as a cost centre
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Engineered costs
Should be measurable in monetary terms,outputs in physical quantities.
Works well in units such as production,
distribution, accounting receivables, payableswhere repetitive tasks are performed.
Developing standard costs for such activities ismore reliable than in other cases.
Multiply standard cost per unit x no. of unitsproduced or processed = this is the ideal cost.
Compare it to actual costs and the difference isindicative of efficiency or lack thereof.
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Engineered costs
Important to remember
The fundamental purpose of all responsibility
centers is accountability; evaluating
performance. And a engineered cost center,
Does not merely compare costs but also
Holds the managers accountable for
obtaining/producing right quality of product
Volume of production, speed of processing.
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Discretionary costs
Mostly administrative and support service costs
More difficult to measure in physical quantities or precisely onmonetary terms (e.g. customer relations or even R & D).
Discretionary means, management allocates them based on
established polices (not arbitrarily). More caution is required while using discretion cost numbers.
Difference between budgeted expenses and actual expensesdoes not indicate efficiency.
Suppose if the actual cost is less than budget, does it mean
good or bad? Suppose if the actual cost is higher than budget, does it mean
good or bad?
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Profit Centers
When a responsibility centers financialperformance is measured in terms of profit (i.e.,by the difference between the revenues andexpenses), the center is called as profit center.
A functional organization is one in which eachprincipal manufacturing or marketing function isperformed by a separate organization unit.
When such an organization is converted to one in
which each major unit is responsible for both themanufacture and the marketing, the process istermed divisionalization.
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Profit Centers (continued)
Managers of profit centers control both the
revenues and costs of the product or service they
deliver.
It is like an independent business except it is part
of a larger organization (e.g. departmental stores
of larger chains WalMart, restaurants,
corporate hotels such as Hilton, Holiday Inn). The store manager would have responsibility for
pricing, product selection, and promotion.
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Profit Centers (continued)
Cost for these units vary depending on ability tocontrol labor, waste, and hours.
Revenues also will vary depending on the units
service level, location, etc. In other words, local discretion would affect
revenues and costs.
Investments and some costs (e.g. centralizedpurchasing).
Therefore, profits represent a broader index ofboth corporate and local decisions.
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Profit Centers (continued)
If performance is poor, it may reflect poorconditions that no one in the organizationcould control as well as poor local conditions.
For this reason, organizations should notevaluate performance only based on costs andprofits, but
Perform detailed evaluations that includequality, material use, labor use, and servicemeasures that the local unit can control.
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Difficulties with Profit Center
Decentralized decision-making will force topmanagement to rely more on managementcontrol reports than on personal knowledge of anoperation.
Quality of decisions made at unit level may bereduced.
Friction may increase
Divisionalization may impose additional cost
There may be too much emphasis on short-runprofitability
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Investment Centers
Responsibility centers whose managers and
employees control revenues, costs, and the
level of investment.
It is also like an independent business
(common when an organization acquires
another organization).
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Investment Centre (continued)
This takes responsibility to a greater depth
An investment centre is a responsibility centrein which the manager responsible for all
aspects of finance - costs, revenue, profit andinvestment
Example: division of a large multinational
company The division is assessed in terms of its
contribution to overall profits
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Administrative Centers (support centers)
One of the most difficult to evaluate becauseneither the input nor the output is easy tomeasure (e.g. accounting services, marketing),and
Linking units input and output to organizationalobjectives.But, with a little careful approach, the costs ofsuch centers can be reasonably computed.
Since most of these centers are treatedsomewhat like cost centers, an approach basedon costs would be helpful.
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Advantages of organising in terms of
responsibility centres
Decentralised decision making: faster and moreresponsive to local conditions
Responsibility centres facilitate delegation
Motivation is improved Results in improved monitoring of budgets, targets
and performance
Leads to greater accountability
Facilitates budgetary control
Prevents the performance of weak elements beinghidden within the larger organisation
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Problems and disadvantages
There is a danger that individual centres become toonarrowly focussed
Managers of responsibility centres tend to be moreconcerned with unit objectives than corporate
objectives Rivalry between centres breaks out
Creates problems of co-ordination
Creates communications problems
The allocation of costs is complex. Any unfairness inthe way costs are allocated can lead to bedemotivating
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Types of ProfitabilityMeasures
Contribution margin
Direct profit
Controllable profit Income before taxes
Net income
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A simple summary of the
responsibility centers
Revenue CenterOutput measured in
monetary terms
Input measured in
monetary terms
Output measured in
monetary terms
Output measured in
monetary terms
Expense/Cost Centers
Profit Centers
Investment Centers
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What did we learn from these
control system illustrations?
All responsibility centers evolve from the concept ofcontrollability.
Controllability principle states a manager should be assignedresponsibility for the revenue, costs, or investment that
he/she could control. Revenues, costs, or investments that do not fall under a
managers control must be excluded when evaluating themanager or his/her center.
Problem with this concept: In most organizations, manyrevenues and costs are jointly earned or incurred anddifferentiation the controllable from the uncontrollable isdifficult.
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An alternative to Controllability
Some argue that performance measures should
be chosen to influence decision-making behavior.
For example, if market prices for raw material is
increasing, what can a manager do?
Perhaps, enter into long term contract for fixed
prices for raw materials.
If electricity consumption cost is going up, findout how consumption can be economized (better
machines, lighting, reduce waste).
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Division President
Investment center
Vice President - Restaurants
Profit center
Vice President Food Products
Cost center
Vice President - Administration
Discretionary Cost center
TRENTON
RESTAURANT
Profit center
OTHER
RESTAURANT
Profit center
DELIVERY
SALES CENTER
REVENUE
center
CENTRAL
KITCHEN
Cost Center
HUMAN
RESOURCE
Discretionary
Cost Center
PHYSICAL
RESOURCE
Discretionary
Cost Center
FINANCIAL
RESOURCE
Discretionary
Cost Center
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THANK
YOU