Survey of Accounting: The Maze of Numbers

Accounting 220

Responsibility Centers

What is a Responsibility Center?The Responsibility is the unit in the

organization that has control over costs, revenues, or investment funds.

Responsibility Centers further defined

It is an organization unit for which a manager is made responsible.

The center’s manager and supervisor establish specific and measurable goals for the responsibility center.

The goals should promote the long-term interest of the organization.

The basic definition of a responsibility center

Lowest organizational level at which funds control functions are carried out. Generally the same as divisions in an operating component.

For accounting purposes, responsibility centers have four classifications:

Cost Centers

Revenue Centers

Profit Centers

Investment Centers

Cost CentersPart of a business to which a cost is allocated for the purposes of strategic planning. Cost centers can be large divisions of a business, departments, small teams, or even individuals

Revenue CenterA Revenue Center is responsible for selling

an agreed amount of products or services. It's manager is usually responsible to

maximize revenue given the selling price (or quantity) and given the budget for personnel and expenses.

Profit CenterProfit Centers are parts of a corporation that

directly add to its profit. Managers are held accountable for both

revenues, and costs (expenses), and therefore, profits.

Usually the different profit centers are separated for accounting purposes so that the management can follow how much profit each center makes and compare their relative efficiency and profit.

Investment CentersAn investment center is a classification

used for business units within an enterprise.

The essential element of an investment center is that it is treated as a unit which is measured against its use of capital, as opposed to a cost or profit center, which are measured against raw costs or profits.

Investment Centers, continued

The advantage of this form of measurement is that it tends to be more encompassing, since it accounts for all uses of capital.

Incremental Analysis in the Responsibility Center

Incremental analysis is used to find the impact of changes in costs or revenues, given a specific potential scenario. Decisions involving incremental analysis include the following:

Make or buy (Profit Center)Sell or process further (Revenue Center)Special order (Cost Center)Changes in production and/or technology

(Investment Center)