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Unit 4: Responsibility Centers

 Explain the marketing centres Notes
 Describe the research and development centres
 Identify the profit centres
 Explain the investment centres

 Explain the Economic Value Added (EVA) (Residual Income)
 Discuss the measuring and controlling of assets employed
 Explain the multiple performance measures

Introduction

A Management Control System is a set of interrelated communication structures that facilitates
the processing of information for the purpose of assisting managers in coordinating the parts
and attaining the purpose of an organization on a continuous basis.

It is necessary to design the elements of the control system infrastructure, that is, the organisation
structure; responsibility centres performance measures and rewards, in a mutually supportive
and adoptive way so as to effectively implement the goals of the overall organisation. A properly
designed infrastructure is crucial to ensure that resources will be allocated effectively in
decentralized decision-making in pursuit of organizational goals.
Organization structure can vary from Entrepreneurial structure, Functional Structure, Business
Unit Organization Structure to Matrix Structure. In all the cases, the CEO is at the top, the
managers of the business units, functional heads, departments, sections and all other sub-units
below the CEO constitute the hierarchy of managers working together to achieve certain common
goals for an organization. Each level of the managers or sub-unit constitutes responsibility
centre.

4.1 A Responsibility Centre

The term responsibility centre is used to denote any organization unit that is headed by a
responsible manager. In fact, a company is a collection of responsibility centres, represented by
a box in the organization chart. These responsibility centres form a hierarchy. At the lowest
level in the organization are responsibility centres for sections, work shifts or other small
organization units. At the highest level are departments or business units (divisions). And from
the standpoint of senior management and the board of directors, the whole company is a
responsibility center, although the term is usually used to refer to units within the company.
A responsibility centre exists to accomplish one or more purposes known as objectives, within
the organization goals and set of strategies lay down to achieve these goals. The objectives of the
responsibility centres are to do their part in implementing these strategies. A responsibility
centre uses inputs, such as: physical quantities of material, hours of various types of labour and
variety of services. It requires working capital, equipment and other assets to do this work. As
a result of this work, the responsibility centre produces outputs such as goods or services (in case
of staff units such as: human resources, engineering, accounting, administration). The goods and
services produced by a responsibility centre may be given either to another responsibility
center as inputs or to the outside world, in which case, they become outputs of the whole
organization and revenues are earned by selling these outputs.

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