RESPONSIBILITY CENTRES

RESPONSIBILITY CENTRES

With the growth of an organisation, its functions, organisational structure and other related functions also grows in terms of volume and complexity. To have a better control over the organisation, management delegates its responsibility and authority to various departments or persons. These departments or persons are known as responsibility centres and are held responsible for performance in terms of expenditure, revenue, profitability and return on investment. Performance of these responsibility centres are measured against some set standards (input-output ratio, budgets etc.) and evaluated against organisational goal and performance targets. There are four types of responsibility centres:

(i) Cost Centres

(ii) Revenue Centres

(iii) Profit Centres

(iv) Investment Centres 

(i) Cost Centres:

The responsibility centre which is held accountable for incurrence of costs which are under its control. The performance of this responsibility centre is measured against pre-determined standards or budgets. The cost centres are of two types:

(a) Standard Cost Centre and

 (b) Discretionary Cost Centre

(a) Standards Cost Centres: Cost Centre where output is measurable and input required for the output can be specified. Based on a well-established study, an estimate of standard units of input to produce a unit of output is set. The actual cost for inputs is compared with the standard cost. Any deviation (variance) in cost is measured and analysed into controllable and uncontrollable cost. The manager of the cost centre is supposed to comply with the standard and held responsible for adverse cost variances. The input-output ratio for a standard cost centre is clearly identifiable.

(b) Discretionary Cost Centre: The cost centre whose output cannot be measured in financial terms, thus input-output ratio cannot be defined. The cost of input is compared with allocated budget for the activity. Example of discretionary cost centres are Research & Development department, Advertisement department where output of these department cannot be measured with certainty and co-related with cost incurred on inputs. 

(ii) Revenue Centres:

The responsibility centres which are accountable for generation of revenue for the entity. Sales Department for example, is responsible for achievement of sales target and revenue generation. Though, revenue centres does not have control on expenditures it incurs but some time expenditures related with selling activities like commission to sales person etc. are incurred by revenue centres. 

(iii) Profit Centres:

These are the responsibility centres which have both responsibility of generation of revenue and incurrence of expenditures. Since, managers of profit centres are accountable for both costs as well as revenue,profitability is the basis for measurement of performance of these responsibility centres. Examples of profit centres are decentralised branches of an organisation. 

(iv) Investment Centres:
These are the responsibility centres which are not only responsible for profitability but also has the authority to make capital investment decisions. The performance of these responsibility centres are measured on the basis of Return on Investment (ROI) besides profit. Examples of investment centres are Maharatna, Navratna and Miniratna companies of Public Sector Undertakings of Central Government.