Question

Managers are motivated to accomplish objectives if they feel that their efforts will be fairly evaluated. Explain why an organization may use different bases for evaluating the performance of managers of different types of responsibility centers.

Answer 1

Organizations always prefer to use different bases for evaluating the performance of managers of different types of responsibility centers because the characterstics of each segment including the purpose, function and even the authority of the segement's manager is quite different.

Broadly there are 3 types of responsibility centers: a) Expense center b) Profit Center c) Investment Center

An expense center as the name suggests only incurs expenditure and is not involved in the sale of goods/services. Examples include accounting/finance departmenr or the maintenance department. Since this responsibility center is only responsible for keeping its costs under control, it is obvious that in this case the bases for evaluating the performance of segment manager would be the costs.

A profit center does not only incur expenses but is also responsible for generating revenue. Here the manager's authority is much higher as they have the authority to not only control costs but also set sales price, sales volume etc. Here again the basis for evaluating the performance not only includes costs but the revenue and overall profits as well.

An investment center are closely related to a revenue center however they are quite large and autonomous. They are primairly responsible for handling the asset base of the company however they will also have certain revenues and expenses. Here the basis for evaluation of performance is set quite high since these centers are usually run by the people in top management of the company.