Page 56 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Unit 4: Responsibility Centers

The terms are sometimes used in a comparative rather than in an absolute sense e.g. Notes
Responsibility Centre A is more efficient than Responsibility Centre B, either (a) if it uses
less resource than Responsibility Centre B, but has the same output or (b) if it uses the
same amount of resources as Responsibility Centre B or has a greater output than
Responsibility Centre B. In many responsibility centres, a measure of efficiency can be
developed that relates actual costs to same standard not a very accurate measurement but
only an approximation.
4. Process measurement of performance: Here, the emphasis is the production process in the
measure.

Example: The quality of production during a production process to infer something
about the quality of the final output before it is delivered or produced.
5. Effectiveness as measure of performance: Effectiveness is determined by the relationship
between the output of responsibility centre and its objectives. The more this output
contributes to the objectives, the more effective the unit.
6. The Role of Profit: The major objectives of any profit oriented organization are to earn a
satisfactory profit. Thus, profit is an important measure of effectiveness. Again, since
profit is the difference between revenue (a measure of output) and expense (a measure of
input), it is also a measure of efficiency. Thus, profit measures both effectiveness and
efficiency.

Example: Services rendered by accounting department to the organization

4.1.1 Purpose of Responsibility Centre

The idea behind the hierarchy of responsibility centres and the responsibility accounting system
is to distribute to the decentralized organizational submits responsibility for various elements
of ROI - each responsibility centre has assigned to it measures of performance that are appropriate
to the elements of cost, quality, revenue and investment that are assigned to that responsibility
center. Rewards are made in accordance with performance. The combination of responsibility
centres, measures of performance and rewards, knits together decentralized centres of decision
making so as to pursue effective achievement of overall organizational goal that includes profit
and ROI.

= Net profit as
a percentage of sales revenue x turnover of investment in relation to sales revenue

4.1.2 Types of Responsibility Centres

There are at least four different types of responsibility centres classified according to the nature
of the monetary inputs and/or outputs that are measured for control purposes: revenue centres,
expense centres, profit centres and investment centres. Their respective characteristics are shown
in Figure 4.2.

1. In revenue centres, output is measured in monetary terms.
2. In expense centres, inputs are measured in monetary terms.

LOVELY PROFESSIONAL UNIVERSITY 51