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Unit 4: Responsibility Centers

2. Responsibility centres in which output is measured in monetary terms are termed as- Notes
(a) Profit Centre (b) Revenue Centres
(c) Investment centre (d) Expense centre

4.2 Revenue Centres

In a 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. Revenue centres are, therefore,
marketing organizations that do not have profit responsibility. Actual sales or orders booked
are measured against budgets or quotas.
Each revenue centre is also an expense centre so far as marketing expenses for that responsibility
centre. The primary measurement, however, is revenue. Revenue centres are not charged for the
cost of goods that they market. Consequently, they are not profit centres, because this important
expense item is omitted.
The manager of revenue centre does not have knowledge to make the cost/revenue trade off
required for optimum marketing decisions. Therefore, responsibility for this type of decision
cannot be delegated to a revenue center manager. For instance, revenue centres typically do not
have authority to set selling prices.

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Caution Critical issue under responsibility accounting
 Can control all costs and revenues at some level of responsibility within the company?

 All costs controllable by top management
 Fewer costs controllable as one moves down to lower levels of management
 Controllable costs – costs incurred directly by a level of responsibility that are
controllable at that level

 Non-controllable costs – costs incurred indirectly which are allocated to a
responsibility level.

Notes Revenue Centres typically do not have authority to set selling prices.

4.3 Expense Centres

Expense centres are responsibility centres whose inputs, or expenses are measured in monetary
terms, but in which outputs are not measured in monetary terms. Expense centres are of two
types: (based on two types of costs)
1. Engineered costs/Standard costs: These are those for which the ‘right’ or ‘proper’ amount
of costs can be estimated with a reasonable degree of reliability. Costs incurred in a
factory for direct labour, material, components, supplies and utilities are examples.
2. Discretionary costs: (also called managed costs) are those for which no such engineered
estimate is feasible, the amount of costs depends on management’s judgement about the
amount that is appropriate under the circumstances.

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