Question

Does knowing the different responsibility centers give you a different perspective on responsibility accounting?

Answer 1

Responsibilty Accounting as a method of accounting in which costs are identified with persons assigned to their control rather than with products or functions

Responsibility Accounting is a system of control where responsibility is assigned for the control of costs. The persons are made responsible for the control of costs. Proper authority is given to the persons so that they are able to keep up their performance

A responsibility center is a part or subunit of a company for which a manager has authority and responsibility. The company's detailed organization chart is a logical source for determining responsibility centers. The most common responsibility centers are the departments within a company.

The following are the four common types of responsibility centers:

• Cost Center: A cost or expense center is a segment of an organisation in which the managers are held responsible for the cost incurred in that segment but not for revenues
• Revenue Center
• Profit Center
• Investment Center

Cost Center:

Cost center is a location, function or items of equipment in respect of which costs may be assigned to related cost units to control purpose

• Production cost center
• Service cost center
• Manufacturing center

Revenue Center:

Revenue center is a center devoted to raising revenues with no responsibility for production

it is a responsibility center in which a manager is only held responsible for the level of outputs or revenues as measured in monetary terms but nort responsible for the costs of goods or services that are center cells

Profit Center:

A profit center is any sub unit of an organisation to which both revenues and costs are assigned, so that profitability of the subunit can be measured

Necessary to have units of organisation to which revenues and costs are seperately attributed

Managers of profit centers should alsop responsible for revenues as well as costs, which implies that there should be sufficient decentralisation of authority within the company to permit cost centers

Investment center:

Where the divisional manager of a company is allowed some discretion about the amount of investment and profits relating to that. The profits earned must be related to the investments known as investment center

This can be measured by formulas Return on capital employed and Return on investment and Residual Income

Advantages: Motivates managers to perform well, Encourages initiative, Helps in training future managers