Question

There are four types of responsibility centers. Given a choice, which responsibility center would you choose to manage and why? What is an operational performance measure? Provide an example.

Answer 1

Four types of responsibility centers:

1. Cost Center - A cost center is a segment of the organisation in which managers are assigned responsibity of cost incurred but not for revenue. For planning purpose, budgets are made for cost estimation of the segment, for control and performance evaluation purpose, cost variance are dervied by taking actual and budgeted cost for the given period. Managers have control over some or all the cost in their segment but not the revenue.

2. Revenue Center- A revenue center is a segment of the organisation where manager is primarily responsible for generating revenue. The ,manager does not have control over cost, investment in assets but have control over some of the expenses of the marketing department. For performance evaluation, actual revenue and marketing expenses are compared with budgeted revenue and budgeted marketing expenses.

3. Profit Center - A Profit center is a asegment of the organisation in which managers are held responsible for both the cost and the revenue. The manager of the profit center have the authority to take the decision which can affect both the cost and revenue. A division or department which produce and market the product is usually a profit centre. For performance evaluation, it is seen whether the division achieved its budgeted profit or not.

4. Investment center - An investment center is responsible for both the profit and investment. The manager of the investment centre have control over revenue, expenses and the amount invested in center's assets. The manager make the credit policy that determine the debt collection, inventory policy that determine the investment in inventory.

Given a choice, I would like to choose Investment center to manage as the manager of the investment center have more authority and responsibility than the managers of cost center or profit center. The manager of the Investment center not only control cost and profit but also responsible for the investment. He is responsible for buying, selling and use of the divisional assets.

Operational Performance measure - Operational performance measure are the key metrics used to evaluate the performance of the company. Every company have their different key metrics to evaluate their own performance, but some of the common key metrics across the business environment are:

1. Customer satisfaction

2. Employee satisfaction

3. Revenue generation

4. Productivity

5. Gross profit

For example- If a company score 70% in customer satisfaction, 50% in employee satisfaction, 80% in revenue generation, 80% in productivity and 70% in gross profit, then the overall operational performance of the company is 70% [(70%+50%+80%+80%+70%)/5]