RESPONSIBILIT

Y CENTRES
 Responsibility centres
 Responsibility centres
represent the sphere of
authority of decision points in
an organisation. For effective
control, a large firm usually
divided into meaningful
segments, departments or
divisions. These sub-units or
divisions of an organisation
unit are called responsibility
centres and managers of these
units are responsible for its
operations and resources.
Illustration 7-20
 Cost Center
 A business segment
that incurs cost but
does not generate
revenue
 Profit Center

 A part of the
business that has
control over both
revenues and
expenses, but no
control over
investment funds.
 Investment Center

 A profit center
where
management
also makes
capital investment
decisions

Corporate Headquarters
 Measuring Managerial
Performance
Evaluation Measures
Cost control
Cost
Quantity and quality
Center
of services

Profit
Profitability
Center

Investment Return on investment (ROI)

Center Residual income (RI)
 Return on Investment
Return on investment is the ratio of income
to the investment used to generate the
income.

Net Income
ROI = Investment
 Return on Investment
Net Income
ROI = Investment

ROI = Net Income Sales

×
Sales Investment

Margin
Margin Turnover
Turnover
 Return on Investment

Cola Company reports the following:

Net Income $ 30,000

Sales $ 500,000
Investment $ 200,000

Let’s calculate ROI.

 Return on Investment

ROI = Net Income Sales

×
Sales Investment

ROI = $30,000 $500,000

×
$500,000 $200,000

ROI = 6% × 2.5 = 15%

 Improving R0I
 Reduce
Expenses
 Increase  Reduce
Sales Investment

Three ways to improve ROI

 Improving R0I

 Cola Company’s manager was able to

increase sales to $600,000 which
increased net income to $42,000.
 There was no change in investment.

Let’s calculate the new ROI.

 Improving R0I

ROI = Net Income Sales

×
Sales Investment

ROI = $42,000 $600,000

×
$600,000 $200,000

ROI = 7% × 3 = 21%
Cola Company increased ROI from 15% to 21%.
THANK YOU