The top-management of large scale organizations often find it difficult to control and manage the operational activities of their entire company. Thus, to have efficient control of such organizations, their whole system is divided into small units or departments which are known as responsibility centres.
Each of these responsibility centres has separate managers who are accountable for the operation of their individual department. Together with other responsibility centres of a company, they are liable for the entire operational activity of this company.
Richard D. Irwin has defined responsibility centre as a division of a business organization which is supervised by a manger who is responsible for the activities of his responsibility centre.
Types of Responsibility Centres
These responsibility centres are classified as per the responsibility assigned to them and the decision making authority allocated to their managers.
These types are-
- Cost Centre
Also known as Expense Centre, it is a unit of a company where the manager is accountable for the entire costs incurred in his division. In such responsibility centres, a manager is held liable only for the costs suffered in his unit.
- Revenue Centre
This division is responsible for the sales revenue only. A manager of the revenue centre has control over the expenses of marketing department only. Performance of this unit is assessed by comparing the actual revenue with that of the budget and actual marketing expenses with budgeted marketing expenses.
- Profit Centre
It is that segment in a large scale organization where the manager is accountable for both revenues and costs. His decisions affect both the revenues and costs of his department.
The performance of this department is assessed in terms of profits that this unit has earned. The input and output values earned by this centre is measured in monetary terms.
- Investment Centre
Investment centre of an organization is accountable for both profits and investments. Its manger can control the revenues, expenses and amounts invested in his division’s assets. As compared to other centres, this investment centre manager has more responsibility and authority. This centre’s inputs are judged through costs incurred whereas the outputs are evaluated in terms of revenue.
Links of Previous Main Topic:-
- Activity based costing introduction concept and classification
- Introduction inventory pricing and valuation
- Standard costing introduction
- Management accounting
- Marginal costing
- Relevant cost for decision making
- Budget and budgetary control
- Limitations of historical accounting
- Introduction to responsibility accounting
Links of Next Finance Topics:-
- Transfer price
- Test questions responsibility accounting
- Concept of cost of capital
- Capitalization meaning
- Concepts of working capital
- Concept of capital expenditure
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- Limitations of operations research
- Linear programming learning objectives and outline of chapter