TYPES OF RESPONSIBILITY CENTERS

Revenue

centers Expense centers Engineered centers Discretionary centers

expense expense

Revenue centers

Revenue centers are those organizational units in which outputs are measured in monetary terms. These centers are marketing organizations and they are not directly responsible for profits. Revenue centers are also called expense centers, as the revenue center managers are held responsible for expenses incurred by the unit. The main objective of revenue centers is to maximize revenues.

Expense centers

In expense centers, inputs or expenses are measured in monetary terms whereas the outputs are not measured in monetary terms

TYPES OF EXPENSE CENTERS

Engineered expense centers and Discretionary expense centers. Engineered costs are costs that can be estimated to a reasonable extent by the management. Examples are direct labor and direct material. Discretionary costs, on the other hand, are costs that cannot be estimated by the management.

Engineered expense centers

In these centers, inputs or expenses are measured in monetary terms and outputs are measured in physical terms. These centers are usually found in the manufacturing units that use a standard cost system. There are certain responsibility centers within administrative and support departments that actually are engineered expense centers. In these centers, the cost of the product is determined by multiplying the output of each unit with its standard cost. Its efficiency is measured by comparing the actual cost with the standard cost.

Discretionary expense centers

In discretionary expense centers, the output cannot be measured in monetary terms. Discretionary expense centers include administrative and support units like legal, accounting, industrial and public relations units. Here, the efficiency is not the difference between budgeted and actual expense, but the difference between the budgeted input and actual input. In discretionary expense centers the management decides on certain policies that should govern the company's operation. These relate to the amount of money that should be spent on R&D, financial planning, public relations, etc.

RESEARCH AND DEVELOPMENT CENTERS

Control problems in research and development The problems in research and development are : Difficulty in measuring quality :
The inputs for an R&D activity can be measured whereas the outputs are difficult to measure. For R&D activities, the time taken for a particular research cannot be estimated as it may take months or sometimes years for a particular activity. Also the output is difficult to measure because of its technical nature.

Lack of goal congruence :

As in administrative centers, goal congruency is lacking in R&D centers, too. Conflict may arise between the research manager and the business unit manager. The research manager may want to build the best research and development center, no matter what the expense be, while it may not be possible for the company to afford it. Also, the researchers may not have sufficient knowledge about the business, in some cases. The research and development costs cannot be controlled on a year-to-year basis because a research project may take years to show results and the organization would have to bear the cost of the project for that period of time, mainly the cost on labor.

Marketing centers
There are two types of marketing activities in every organization:

Order filling (logistics) : Order filling activities include transferring goods from the company to the customer, and receiving the appropriate pay from the customer. These are mostly engineered expense centers. Order getting : Order getting activities include test marketing, training sales force, advertising, sales promotion, etc. Though the output of a marketing organization can be measured, it is difficult to evaluate the marketing effort, as the marketing department has no control over economic conditions or competitors actions. These actions may be different from what was expected when the sales budgets were established.

Profit centers
When financial performance of a responsibility center is measured in terms of the organizations profit, then it is called a profit center. In a profit center, performance is measured in terms of the numerical difference between revenues (outputs) and expenditure (inputs). A profit center is given the responsibility of earning profits. It is involved in the manufacture and sale of outputs, and it measures how well the center is doing economically. The profit center also determines the efficiency of the manager in charge of the center. A profit center helps in motivating managers to perform well in areas they control and also encourages managers to take initiatives. The profit center helps the organization to make the best use of specialized market knowledge of the divisional managers, and entrusts the local managers the responsibility of tradeoffs. Profit centers have been used as a major management control tool.

The major advantages of profit centers are:

These help in increasing the speed of making operating decisions as they do not have to be referred to corporate headquarters.
As the decision-making authority lies with the managers they can make better decisions related to the task they are performing, because they can understand the nature of the work better. Since profit centers make their day-to-day decisions themselves headquarters can concentrate on broader issues of the organization. Managers are motivated to perform more effectively, as they are responsible for increasing the profit of their unit. Managers use their imagination, take initiatives to perform more effectively, to increase the profit of their unit.

TYPES OF PROFITABILITY MEASURES:

The parameters that can be used for measuring the profitability of a profit center are contribution margin, direct profit, controllable profit, income before taxes and net income.

Investment centers Cost centers