Slide 2

The vast majority of organizations control the behaviors of many of their employees,
particularly their managers, through financial results control systems. In financial
results control systems, results are defined in monetary terms, most commonly in terms
of accounting measures such as revenues, costs, profits, and returns (e.g. return on
equity). Financial results control systems are powerful systems with wide applicability,
particularly at higher organization levels.

Financial results control systems have three core elements: (1) financial responsibility
centers, which define the apportioning of accountability for financial results within the
organization, (2) planning and budgeting systems (3) incentive contracts

In a simple words: an organizational unit for which a manager is made responsible.

Examples: a specific store in a chain of grocery stores.
A work-station in a production line manufacturing automobile batteries.
The payroll data processing center within a firm
It denotes the apportioning of responsibility for a particular set of inputs and/or outputs to
an organization units

Slide 3
First, financial objectives are paramount in for-profit firms. Profit and cash flows
provide returns to investors and are among the primary measures outsiders use to evaluate
for-profit firm perfomances. Thus, it is natural that managers of for-profit firms monitor their
success in financial terms and use the financial measures to direct their employees’ actions
toward important organizational ends. Managers of not-for-profit organizations, also, must
monitor finances closely because cash flows usually create significant constraints for their
organizations.
Second, financial provide a “summary” measure of performance by aggregating the
effects of a broad range of operating initiatives across a possibly broad range of markets,
products/services, or activities into a single (or a few) measure(s), thus enhancing the
comparability of the effects of initiatives and reducing the possibility of conflicting signals
about their importance. The financial measures remind employees that the various
operating initiatives they take on, such as initiatives to improve response times, defect
rates, delivery reliability, or customer satisfaction ratings, benefit the organization only if
they result in improved financial performance.
Third, most financial measures are relatively precise and objective. They generally
provide significant measurement advantages over soft qualitative or subjective information
and over many other quantifiable alternatives (e.g. quality or customer satisfaction
measures). Cash flows (the financial measure primitive) are easy to observe and measure.
And accounting rules, on which most financial measures are built, limit the managers’
measurement discretion, improve measurement objectivity, and facilitate the verification of
the resulting measures.

Slide 4
Investment Center; Accounting returns can be defined in many ways, but they typically
involve a ratio of the profits earned to the investment dollars used. The varying definitions
cause many different labels to be put on the investment centers’ bottom line, such as return
on investment (ROI), return on equity (ROE), return on capital employed (ROCE), return on
net assets (RONA), return on total capital (ROTC), risk adjusted return on capital (RAROC),
and many other variations.
Profit Center; Accounting Profit
Types: -Self-focused: Charge standard cost of Product sold -> Account Gross Margin
-Cost-focused: Based on a simple function of cost
Revenue Center; Accounting Generating Revenue(output, Profit)
Cost Center; Accounting Cost
Standard cost center: Simple calculation [Input -> Output]
Easy to measure
ex) Manufacturing department (factory)
Discretionary cost center: Hard to know [Input Output] Relation
Difficult to value
Personnel, Purchasing, Accounting, Facilities

Slide 5
One important point to keep in mind is that the lines between the financial responsibility
center types are not always easy to discern, so responsibility center labels may not be
particularly informative. In actual practice, financial responsibility centers can be.
One possible subtle distinction between profit centers and investment centers is illustrated
in Table 7.3. The manager of the entity described in column C is held accountable for profit
and, perhaps, through a formal management-by-objectives system, indicators of
performance in three significant balance sheet areas: receivables, inventories, and fixed
assets. Thus, even though this manager is held accountable for performance in exactly the
same areas as is the investment center manager (column B), the manager of the column C
entity would rightly be called a profit center manager, not an investment center manager.

Slide 6
In a typical functional organization (see Figure 7.1), none of the managers has significant
decision-making authority over both the generation of revenues and consumption of costs,
so revenues and costs (including the costs of investments) are brought together in a return
measure only at the corporate level. The manufacturing, engineering, and administrative
functions are typically cost centers, and the sales and marketing function is a revenue center
Slide 7
In a typical divisionalized organization (Figure 7.2), division managers are given authorities
to make decisions in all, or at least many, of the functions that affect the success of their
division. Consistent with this broad authority, each division is a profit center (or investment
center) comprised of multiple cost and revenue centers.