RESPONSIBILITY CENTER ;

REVENUE & EXPENSE CENTER

(Safira Annisa, 1710532066)

A. Responsibility Center

A responsibility center is an organization unit that is headed by a manager

who is responsible for its activities. In a sense, a company is a collection of
responsibility centers, each of which is represented by a box on the organization
chart. Responsibility centers create a hierarchy. At the lowest level are the centers
for sections, workshift, and other small organization unit.

B. Nature of Responsibility Centers

A responsibility center exists to accomplish one or more purposes, termed its

objectives. The company as a whole has goals, and senior management decides ona
set of strategies to accomplish these goals. The objectives of the company’s various
responsibility centers are to help implement these strategies. Because every
organizations are a group of responsibility center, so if every responsibility center
has fullfill its objectives so do the organization has fullfill its objectives.
 This picture showing how every responsibility center work. Responsibility
centers receive inputs (in the form of materials, labor, and services). With using
working capital (e.g., inventory, receivables), equipment, and other assets, the
responsibility center performs its particular function. With the final objective is
transforming its inputs into outputs, either tangible(i.e., goods) or intangible (i.e.,
services). In a production plant, the outputs are goods. In staff units, such as human
resources, transportation, engineering,accounting, and administration, the outputs
are services.

The products (i.e., goods and services) produced by a responsibility center

may be furnished either to another responsibility center, where they are become
inputs,or to the outside marketplace as the outputs of the organizationas a whole.
Revenues are the amounts earned from providing these outputs.

C. The relationship between Inputs and Outputs

Management is responsible for ensuring the optimum relationship between

inputs and outputs. In some centers, the relationship is causal and direct, for instance
in production department, where the inputs of raw material become a physical part
of the finished goods.

The control focuses on using the minimum input necessary to produce the
required output according to the correct specifications and quality standards, at the
time requested, and in thequantities desired.

In many situations, inputs are not directly related to outputs. For example in
advertising expense as an input that is intended to increase sales revenue; but
sincerevenue is affected by many factors other than advertising, the
relationshipbetween increased advertising and any subsequent increase in revenue is
rarelydemonstrable.

D. Measuring Inputs and Outputs

Much of the input that responsibility centers use can be stated as physical
measurements ( lk. hours of labor, quarts of oil, reams of paper, and kilowat hours
of electricity). In a management control system these quantitative amounts are
translated into monetary terms. The monetary value of a given input is ordinarily
calculated by multiplying a physical quantity by a price per unit (e.g., hours of labor
times a rate per hour). The resulting monetary sum is called “cost”; this is the way a
responsibility center’s input is commonly expressed. So, we can conclude that cost
is a monetary measure of the amount ofresources used by a responsibility center.

It is much easier to measure the cost of inputs than to calculate the value of
outputs. For example, annual revenue may be an important measure of a profit-
oriented organization’s output, but that figure will not express all that the
organization did during that year. Inputs such as R&D activity, human resources
training, and advertising and sales promotion may not affect outputof the year in
which they occur; Nor is it possible to measure accurately. In nonprofit
organizations, there may be no quantitative measure of output.

E. Efficiency & Effectiveness

Efficiency is the ratio o f outputs to inputs, or the amount of output per unit
ofinput. Responsibility Center A is more efficient than Responsibility Center B : (1)
if it uses fewer resources than Responsibility Center B but produces the same output
or ; (2) if it uses the same amount of resources but produces a greater output. In many
responsibility centers, efficiency is measured by comparing actual costs with some
standard of what those costs should have been at the measured output.

In contrast to efficiency, which is determined by the relationship between

input and output, effectiveness is determined by the relationship between a
responsibility center’s output and its objectives. The more this output contributes to
the objectives, the more effective the unit. Both objectives and outputs are difficult
to quantify, so effectiveness tends to be expressed in subjective,non-analytical terms.

Efficiency and effectiveness are not mutually exclusive; every responsibility

center ought to be both efficient and effective in which case, the organization ought
to be meeting its goals in an optimum manner. A responsibility center is efficient if
it does things right, and it is effective if it does the right things.

F. The Role of Profit

A major objective of any profit-oriented organization is to earn a satisfactory

profit. Thus, profit is an important measure of effectiveness. Since profit is the
difference between revenue (a measure of output) and expense( a measure of input),
it is also a measure of efficiency (profit measures both effectiveness and efficiency).
When such an overall measure exists, It is unnecessary to determine the relative
importance of effectiveness versus efficiency. When such a measure does not exist,
however, it is feasible and useful to classify performance measures as relating either
to effectiveness or to efficiency

G. Types of responsibility centers

This type is classified according to the nature of the monetary inputs and/or outputs
that are measured for control purposes:

1. Revenue centers ;

Outputs (i.e., revenue ) measured in monetary terms, but noformal attempt is

made to relate input (i.e., expense or cost) to output. (If expense was matched
with revenue, the unit would be a profit center.) Typically revenue centers are
marketing/sales units that :

 do not have authority to setselling prices

 and are not charged for the cost of the goods they market

2. Expense centers ; inputs are so measured in monetary terms, but whose

outputs are not. There are two general types of expense centers:

 Engineered costs are those for which the “right” or “proper” amount
can be estimatedwith reasonable reliability for example, a factory’s
costs for directlabor, direct material, components, supplies, and
Utilities.

 Discretionary costs (also called managed costs) are those for which no
such engineered estimate is feasible the costs incurred depend on
management’s judgment as to the appropriate amount under the
circumstances.

3. Profit centers ; - both revenues (output) and expenses (input) are measured.

4. Investment centers ; - the relationship between profit and investmentis

measured

Each type of responsibility center requires a different planning and control system.
H. General Control Characteristics

1) Budget Preparation

Management makes budgetary decisions for discretionary expense centers that differ
from those for engineered expense centers. It decides whether the proposed
operating budget represents the unit cost of performing its task efficiently. Its volum
eis not a major concern; this is largely determined by the actions of other
responsibility centers. For instance the marketing department’s ability to generate
sales.

2) Cost Variability

Unlike costs in engineered expense centers, which are strongly affected by short run
volume changes, costs in discretionary expense centers are comparatively insulated
from such short-term fluctuations.

This difference stems from the fact that in preparing the budgets for discretionary
expense centers, Management tends to approve changes that correspond to
anticipated changes in sales volume. For example, allowing for additional personnel
when volume isexpected to increase, and for layoffs or attrition when volume is
expected to decrease.

3) Type of Financial Control

Financial control in a discretionary expense center is quite different from that in an

engineered expense center. In the latter, the objective is to become cost competitive
by setting a standard and measuring actual costs agains tthis standard. The main
purposeof a discretionary expense budgetis to control costs by allowing the manager
to participate in the planning, sharing in the discussion of what task sshould be
undertaken, and what level of effort is appropriate for each. Thus, in a discretionary
expense center, financial control is primarily exercised at the planning stage before
the costs are incurred.

4) Measurement of Performance

The primary job of a discretionary expense center’s manager is to obtain the desired
output. Spending an amount that is “on budget” to do this is considered satisfactory;
spendingmorethan that is cause for concern; and spending less may indicate that the
planned work is not being done.
In discretionary centers, as opposed to engineered expense centers, the financial
performance report is not a means of evaluating the efficiency of the manager.

If these two types of responsibility centers are not carefully distinguished,

management may erroneously treat a discretionary expense center’s performance
report as an indication of the unit’s efficiency, thus motivating those making
spending decisions to expend less than the budgeted amount, which in turn will
lower output. For this reason, it is unwise to reward executives who spend less than
the budgeted amount.

I. Administrative and 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. The controlof
administrative expense is especially difficult because of :

(1) the problems inherent in measuring output and

(2) the frequent lack of congruence between the goals of departmental staff and of
the companyas a whole.

J. Research and Development Centers

The controlof research and development centers presents its own

characteristic difficulties, in particular difficulty in relating results to inputs and lack
of goal congruence. The results of research and development activities are difficult
to measure quantitatively.In contrast to administrative activities, R&D usually has
at least a semitangible output in the form of patents, newproducts, or newprocesses;
but the relationship of output to inputis difficult to appraise on an annual basis
because the completed “product” of an R&D group may involve several years of
effort inputs as stated in an annual budget may be unrelated to outputs.

K. Marketing Centers

In many companies, two very different types of activities are grouped Under
the heading of marketing, with different controls being appropriatefor each. One
group of activities relates to the filling of orders. filling or logistics activities and,
by definition, take place after an order has been received. The other group of
activities relates to efforts to obtain orders, and, obviously, take place before an order
 has been received. These are the true marketing activities, and are sometimes labeled
as such; they may also be called order-getting

1. Logistics activities are those involved in moving goods from the company to its
customers and collecting the amounts due from customers in return. These activities
include transportation to distribution centers, warehousing, shipping and delivery,
billing and the related credit function, the collection of accounts receivable. The
responsibility centers that perform these functions are fundamentally similar to the
expense centers in manufacturing plant.

2. Marketing activities are those undertaken to obtain orders for company products.
These activities include test marketing; the establishment, training, and supervision
of the sales force; advertising; and sales promotion all of which have characteristics
that present management control problems.