A responsibility center is an organizational unit within a company headed by a manager who is accountable for its activities and results. Responsibility accounting involves collecting and reporting revenue and cost data by responsibility centers.
Key Facts
- Definition: A responsibility center is an organizational unit headed by a manager who is responsible for its activities and results.
- Types of Responsibility Centers: There are three types of responsibility centers:
- Expense (or Cost) Centers: These centers incur only expense items and do not generate direct revenue from the sale of goods or services. Managers of expense centers are held responsible for specified expense items.
- Profit Centers: These centers have both revenues and expenses. Managers of profit centers have authority over selling price, sales volume, and all reported expense items. Controllable profits of a segment result from deducting the expenses under a manager’s control from revenues under that manager’s control.
- Investment Centers: These centers have revenues, expenses, and an appropriate investment base. Managers of investment centers are responsible for investment decisions, costs, and revenues. The performance of an investment center is evaluated based on the rate of return it can earn on its investment base.
- Authority and Responsibility: Responsibility centers are defined based on the degree of authority and responsibility given to the manager. Cost centers are responsible only for costs, profit centers are responsible for costs and revenues, and investment centers are responsible for investment decisions, costs, and revenues.
Types of Responsibility Centers
There are three primary types of responsibility centers:
Expense (or Cost) Centers
Expense centers solely incur expenses and do not generate revenue from sales. Examples include service departments (e.g., maintenance or accounting) or intermediate production facilities that produce components for finished products. Managers of expense centers are responsible for specific expense items. The primary goal of an expense center is long-term expense minimization.
Profit Centers
Profit centers have both revenues and expenses. Managers of profit centers must control both categories. They should have the authority to set selling prices, manage sales volume, and control all reported expenses. Controllable profits are calculated by deducting expenses under a manager’s control from revenues under their control.
Investment Centers
Investment centers have revenues, expenses, and an appropriate investment base. When evaluating an investment center, the focus is on the rate of return it generates on its investment base. Investment centers are often large, autonomous segments of larger companies, with managers having control over revenues, expenses, and assets.
Authority and Responsibility
Responsibility centers are defined based on the level of authority and responsibility assigned to the manager. Cost centers are responsible for costs, profit centers for costs and revenues, and investment centers for investment decisions, costs, and revenues.
In conclusion, responsibility centers are crucial in management accounting for evaluating and controlling the performance of different organizational units. The type of responsibility center (expense, profit, or investment) is determined by the degree of authority and responsibility granted to the manager. Each type has specific goals and performance evaluation criteria aligned with its responsibilities.
FAQs
What is a responsibility center in management accounting?
A responsibility center is an organizational unit within a company headed by a manager who is accountable for its activities and results.
What are the three types of responsibility centers?
The three types of responsibility centers are expense (or cost) centers, profit centers, and investment centers.
What is the primary goal of an expense center?
The primary goal of an expense center is long-term expense minimization.
What authority do managers of profit centers have?
Managers of profit centers have the authority to set selling prices, manage sales volume, and control all reported expenses.
How is the performance of an investment center evaluated?
The performance of an investment center is evaluated based on the rate of return it generates on its investment base.
What is the difference between a cost center and a profit center?
Cost centers are responsible only for costs, while profit centers are responsible for both costs and revenues.
What is the highest level of delegated autonomy among the three types of responsibility centers?
Investment centers have the highest level of delegated autonomy.
What is the purpose of responsibility accounting?
Responsibility accounting aims to collect and report revenue and cost data by responsibility centers to evaluate and control the performance of different organizational units.