Page 103 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes  The key is to include those expenses and revenues in profit centre managers’ reports that
the managers cab influence, even if they cannot totally control them.

 For the evaluation of profit centre and investment centre two parameters are being used-
ROI and EVA.
 ROI is the earning capability of the unit/company on the capital invested It can be viewed
as the product of two components namely, profit contribution margin and assets turnover.
 Economic Value Added (EVA) is the amount in Rupees that remains after deducting an
“implied” interest charge from operating income. The implied interest charge reflects an
opportunity cost, and is charged on the amount of assets in each investment centre.

4.12 Keywords

Cost Centre: Any responsibility centre that has control over the incurrence of cost
Economic Value Added (EVA): Amount in Rupees that remains after deducting an “implied”
interest charge from operating income
Expense Centre: Responsibility centres whose inputs, or expenses are measured in monetary
terms, but in which outputs are not measured in monetary terms.
Investment Centre: Inputs are measured in terms of cost/expenses and outputs are measured in
terms of revenues and in which assets employed are also measured.
Profit Centre: Financial performance is measured in terms of profit
Responsibility Accounting: System of control by delegating and locating the responsibility for
costs
Responsibility Structure: The responsibility structure of an organisation consists of responsibility
centres and related performance measurement systems.

Return on Investment (ROI): Earning capability of the unit/company on the capital invested
Revenue Centre: outputs (revenues) are measured in monetary terms, but no formal attempt is
made to relate inputs (i.e. expenses or costs) to outputs

4.13 Review Questions

1. Analyse the difference between reporting under responsibility accounting and budgeting.
2. List out the steps for introducing Control through Responsibility Accounting.
3. “If there are high points, then there also are loopholes in Responsibility Accounting”.
Substantiate.
4. Can control of all costs and revenues be done at some level of responsibility within the
company?

5. Elucidate the following:
(i) Responsibility Accounting for Cost Centres
(ii) Responsibility Accounting for Profit Centres
(iii) Responsibility Accounting for Investment Centres
6. Describe the basic types of responsibility centers. Correlate the measurement of inputs
and outputs with reference to different types of responsibility centers.

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