Page 102 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Unit 4: Responsibility Centers

The corporate management is concerned about the increase in the short-term marketable Notes
securities. A recent article in a financial publications suggested that the use of ROI was
over emphasized by some companies, with results similar to those experienced by Nataraj.
Questions
1. Describe the specific actions divisions managers might have taken to cause the ROI
to grow in each division but decline for the company. Illustrate your explanation
with appropriate examples.

2. Explain using the concepts of goal congruence and motivation of division executives,
how Nataraj’s over emphasis on the use of the ROI measure might result in the
recent decline in the company’s return on investment and the increase in cash and
short-term marketable securities.
3. What changes could be made in Nataraj Company’s Corporation policy to avoid
this problem? Explain your answer.

4.11 Summary

 Responsibility accounting involves accumulating and reporting costs (and revenues) on
the basis of the manager who has the authority to make the day today decisions about the
items.

 Under responsibility accounting, a manager’s performance is evaluated on matters directly
under that manager’s control.
 A responsibility centre is an organization unit which is headed by a manager who is
responsible for its activities. There are four types of responsibility centres-revenue centres,
expense centres, profit centres and investment centres Performance in second centre is
judged by the criteria of efficiency and effectiveness. In revenue centres, revenues are
measured and controlled separately from expenses.

 A profit centre is an organization unit in which both revenues and expenses are measured
in monetary terms. In setting up a profit centre a company devolves decision-making
power to those lower levels that possess relevant information for making expense/revenue
trade-offs.
 In an investment centre profit is compared with the assets employed in earning it.

 There are two types of expense centres: engineered and discretionary. In engineered expense
centres, it is possible to estimate the ‘right’ amount of cots that should be incurred to
produce a given level of output.

 In the discretionary expense centres, on the other hand, budgets describe the amounts that
can be spent, but it is not possible to determine with exactitude the optimum levels of
these expenses. Therefore financial controls are not intended to measure efficiency and
effectiveness.

 Measuring profit in a profit centre involves judgments regarding how revenues and
expenses should be measured also. In terms of revenue, choice of a revenue recognition
method is important.

 In terms of expenses measurement can range from variable costs incurred in the profit
centre to fully allocated corporate overhead , including income taxes. Judgments regarding
the measurement of revenues and costs should be guided not just by technical accounting
considerations, but more importantly by behavioural considerations.

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