Management control environment(Responsibility centers)

Prof. Nilima das

An important component of Management Controls Assigning responsibility for executing strategy.

Implementing strategies is not adequate if individuals who must execute them fall short.

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Therefore, management controls must include

How responsibility is assigned and measured. How tasks are measured (not necessarily tasks done by humans but also by machines; e.g. units produced) Task controls such as when to order inventory, why the actual differ from budgeted (the causes).

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Responsibility Centers

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What is a responsibility center?

In simple words: an organizational unit for which a manager is made responsible. Examples: 1. A specific store in a chain of grocery stores. 2. The payroll data processing center within a firm.

Responsibility centers have four classifications:

Cost Centers Revenue Centers Profit Centers Investment Centers

Cost Centers
Part of a business to which a cost is allocated for the purposes of strategic planning. Cost centers can be large divisions of a business, departments, small teams, or even individuals. A segment whose manager has control over costs, but not over revenues or investment funds.

Revenue Center
A Revenue Center is responsible for selling an agreed amount of products or services. It's manager is usually responsible to maximize revenue given the selling price (or quantity) and given the budget for personnel and expenses.

Profit Center
Profit Centers directly add to its profit. Managers are held accountable for both revenues, and costs or expenses. (Total revenues- total costs). Therefore, profits usually the different profit centers are separated for accounting purposes so that the management can follow how much profit each center makes and compare their relative efficiency and profit. control over both costs and revenues, but no control over investment funds.

Investment Centers It accounts for all uses of capital. The essential element of an investment center is that it is treated as a unit which is measured against its use of capital, as opposed to a cost or profit center, which are measured against raw costs or profits.

manager has control over costs, revenues, and investments in operating assets.

Performance report or responsibility reports

preparing responsibility report of each centre. Reports should contain information in comparative form as to show plans budget & the actual performance & should give details of variances which are related to that centre. The variances which are not controllable at a particular responsibility centre should also be mentioned in the separate report.

Responsibility Reports

Prepare budgets for

each responsibility center.

Measure performance of
each responsibility center.

Prepare timely performance reports

comparing actual amounts with budgeted amounts.

Performance Reports
Shows the budgeted and actual amounts, and the variances between these amounts, of key financial results appropriate for the type of responsibility center.

Specimen of performance report

PERFRMANCE Department ACTUAL (Rs.)
CONTROLLABLE COSTS

REPORT Month ending BUDGET (Rs.) VARIANCE (Rs.)

D. Mat D. Lab D. Exp . Allocated & uncontrollable costs Depreciation Rent Insurance

TOTAL COST

Incremental Analysis in the Responsibility Center

Incremental analysis is used to find the impact of changes in costs or revenues, given a specific potential scenario. Decisions involving incremental analysis include the following: Make or buy (Profit Center) Sell or process further (Revenue Center) Special order (Cost Center) Changes in production and/or technology (Investment Center)