04 - Responsibility Centers Revenue and Expense Centers.ppt

Chapter 4 RESPONSIBILITY CENTERS: REVENUE AND EXPENSE CENTERS

Responsibility Centers A responsibility center is an organization unit that is headed by a manager who is responsible for its activities

Nature of Responsibility Centers Inputs

Outputs Work

Resources used, measured by cost

Goods or services

Capital Another responsibility centers Outputs Outside marketplace

Relation between Inputs and Outputs Management is responsible for ensuring the optimum relationship between inputs and outputs. Relationships

Causal & Direct

Not Direct

Ex: Production department

Ex: Advertising expense, R&D

Measuring Inputs & Outputs In a MCS, inputs in quantitative amounts are translated into monetary terms. Physical quantity x price per unit Cost It is much easier to measure the cost of inputs than to calculate the value of outputs

Efficiency and Effectiveness Efficiency is the ratio of outputs to inputs, or the amount of output per unit of input. Effectiveness is determined by the relationship between a responsibility center’s output and its objectives. Efficient

does things right

Effective

does the right things

Types of Responsibility Centers Classification the nature of the monetary inputs and/ or outputs that are measured for control purpose. Types of responsibility centers: • Revenue centers • Expense centers • Profit centers • Investment centers

Revenue Centers In revenue centers, output (i.e., revenue) is measured in monetary terms, but no formal attempt is made to relate input (i.e., expense or cost) to output. Ex: marketing/sales unit that do not have authority to set selling prices and are not charged for the cost of gods they market.

Expense Centers Expense centers are responsibility centers whose inputs are measured in monetary terms, but whose output are not. Types of expense center: • Engineered costs are those for which the ”right” or “proper” amount can be estimated with reasonable reliability. • Discretionary costs (managed cost) are those for which no such engineered estimate is feasible.

Engineered Expense Centers 

Characteristic:   

Their input can be measured in monetary terms. Their output can be measured in physical terms. The optimum dollar amount of output required to produce one unit of output can be determined.

Discretionary Expense Centers  

Include administrative & support units, R & D operation, most marketing activities. The difference between budget & actual expense is not a measure of efficiency.

General Control Characteristics 

Budget Preparation  



 

Engineered expense center: efficiency Discretionary expense: management by objectives

Cost Variability Type of Financial Control Measurement of Performance

Administrative & Support Centers Administrative centers include senior corporate management and business unit management, along with the managers of supporting staff units. Support centers are units that provide services to other responsibility centers. Control problems: • Difficulty in measuring output • Lack of goal congruence

Research & Development Centers 

Control problems:  



Difficulty in relating results to inputs. Lack of goal congruence.

The R&D Continuum

Basic Research

Applied research

Development

Product Engineering

Product Testing

Marketing Centers 

Two types of marketing activities: 



Logistic activities (order filling) Fundamentally similar to expense centers in manufacturing plants. Marketing activities (order getting) It is difficult to evaluating effectiveness of marketing efforts because changes in factors beyond