Responsibility Dipak

8/4/2019 Responsibility Dipak

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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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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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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

Responsibility Dipak

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