Responsibilities Centers:

Revenue and Expense Centers

Faculty of Economics and Business - Accounting Undergraduate Program

Part I Responsibility Centers
 Responsibility Center: Understanding

• A responsibility center is an organization unit that is headed

by manager who is responsible for its activities

• A company is collection of responsibility centers

• From the standpoint of senior management and the board of

directors, the entire company is a responsibility centers

Faculty of Economics and Business - Accounting Undergraduate Program

 Nature of Responsibility

• A responsibility center exist to accomplish one or more

purposes

• The objective of various responsibilities are to help

implement strategies in order to achieve organization’s goals

• If each responsibility center meets its objectives, the goals of

the organization will have been achieved

Faculty of Economics and Business - Accounting Undergraduate Program

 Relation between Inputs and Output

• Management is responsible for ensuring the optimum

relationship between inputs and outputs

• The relationship between input and output can be causal and

direct or not directly
• Direct: Raw material >> Finished Goods
• Indirect: Marketing expense >> Sales Revenue ( Sales
Revenue is affected by many factors)

Faculty of Economics and Business - Accounting Undergraduate Program

 Measuring Inputs and Output

• Cost is a monetary measure of the amount of resources used

by a responsibility center

• It is much easier to measure the cost of inputs than to

calculate the value of outputs

• Inputs such as R&D activity, human resources training, and

advertising and sales promotion may not affect output of the
year in which they occur

Faculty of Economics and Business - Accounting Undergraduate Program


• Efficiency is the ratio of outputs to inputs (
doing things right)
• In many responsibilities centers, efficiency is
measured by comparing actual costs with some
standard, weaknesses using this method are:
• Recorded cost are not precise measures of
the resources actually consumed
• The standard is merely approximation of
what ideally should have happened
Efficiency and Effectiveness
• Effectiveness is determined by the
relationship between a responsibility
center’s output and its objectives ( doing the
right things)
• The more outputs contribute to the
objectives, the more effective the unit
Faculty of Economics and Business - Accounting Undergraduate Program
 Types of responsibility centers

• Manufacturing function ( Engineered Expense)

Expense centers • Research and Development ( Discretionary Expense)

Revenue centers • Marketing Function

Profit centers • Business Unit ( No Authority to capital investment)

Investment • Business Unit ( having authority to capital

investment)
Center
Part II Revenue Centers

Faculty of Economics and Business - Accounting Undergraduate Program

 Revenue Center: Understanding

• Revenue center is responsibility center whose managers have

responsibility to generate revenue

• In a revenue center, output is measured in monetary terms, but no

formal attempt is made to relate input to output

• Typically revenue centers are marketing/sales unit

Faculty of Economics and Business - Accounting Undergraduate Program

 Expense Center: Understanding

• Expense center is responsibility center whose managers have

responsibility to element of expenses

• In a expense center, input is measured in monetary terms, but not for

outputs

• Typically expense centers are manufacturing functions, warehousing,

distribution, administrative and support units ( accounting, legal, Public
relations, human resources) and R&D

Faculty of Economics and Business - Accounting Undergraduate Program

 Expense Center Classification

Engineered expense centers

• Their input can be measured in monetary terms
• Their output can be measured in physical terms
• The optimum dollar amount of input required to produce one unit
of output can be determined

Discretionary expense centers

• The difference between budget and actual expense ( Input) is not
a measure of efficiency
• Input (expense) does not incorporate the value of the output
• Most common types of discretionary expense center:
Administrative & Support Centers, R&D centers, Marketing Center

Faculty of Economics and Business - Accounting Undergraduate Program

 Discretionary expense centers: Control

Incremental Budgeting
• The discretionary expense center’s current level of expense is taken as starting point
• The amount is adjusted for inflation, anticipated changes in the workload of continuing
job and special job
• Drawbacks: (1) current level of expenditure is accepted and not reexamined during
budget preparation process (2) managers typically want to increase the level of
services, thus tend to request additional resources

Zero Base Review

• Making a through analysis of each discretionary expense center on a rolling schedule
• The analysis simply attempts to keep costs reasonably in line with this base until next
review takes place
• Drawbacks: (1) through analysis is a complex job (2) time consuming

Faculty of Economics and Business - Accounting Undergraduate Program

 Discretionary expense centers: Measurement of Performance

• The primary job of discretionary expense center’s manager is to obtain desired output

• Spending an amount that is “ on budget” is considered satisfactory, more than that is cause
for concern, and spending less may indicate that the planned work is not being done

• The financial performance report is not a means of evaluating the efficiency of the manager

• The best indication of the quality of service my be the opinion of their users

Faculty of Economics and Business - Accounting Undergraduate Program

Part III Administrative and Support Centers

Faculty of Economics and Business - Accounting Undergraduate Program

 Administrative and Support Centers : Control Problems

Difficulty in measuring Output

• Output cannot be measured, not possible to set cost standards against
which to measure financial performance
• Budget variance cannot be interpreted as representing either efficient
or inefficient performance

Lack of goal congruence

• The frequent lack of goal congruence between the goals of
departmental staff and of the company as whole

Faculty of Economics and Business - Accounting Undergraduate Program

Part IV Research and Development Centers

Faculty of Economics and Business - Accounting Undergraduate Program

 Research and Development Centers : Control Problems

Difficulty in relating Results to Input

• The results of R&D activities are difficult to measure quantitatively
• Difficult to appraise on annual basis ( R&D is mostly multiyear effort)
• Inputs as stated in an annual budget may be unrelated to outputs

Lack of goal congruence

• R&D manager typically wants to build the best research organization
money can buy, even though that may be more expensive than the
company can afford
• Research people often do not have sufficient knowledge of the business
( Thinking bout efficient and effectivity)

Faculty of Economics and Business - Accounting Undergraduate Program

Part V Marketing Centers

Faculty of Economics and Business - Accounting Undergraduate Program

 Marketing Activities
• It is possible to measure a marketing organization’s output, evaluating the
effectiveness of the marketing effort is much more difficult, because of
changes in factors beyond the marketing department control

• Meeting the budgetary commitment for marketing expenses is not a major

criterion in the evaluation process, the impact of sales volume on profits
tends to overshadow cost performance

• Types of marketing organization activities:

1. Order filling ( Engineered expenses)
2. Generating revenue ( Engineered expenses)
3. Order getting ( Discretionary expenses)

Faculty of Economics and Business - Accounting Undergraduate Program