Responsibility center
Responsibility center is a unit in the organization that has control over costs, revenues, or investment funds. Responsibility centers are classified as cost centers, revenue centers, profit centers, and investment centers.
A responsibility center is a functional entity within a business with its own goals and objectives, dedicated staff, policies and procedures, and financial reports. It gives managers specific responsibility for revenues generated, expenses incurred, and funds invested. This allows the senior managers of a company to trace all financial activities and results of a business back to specific employees. Doing so preserves accountability and may also be used to calculate employee bonus payments [AccountingTools].
A responsibility center is a segment of a company in which controls are used to appraise the manager’s performance. These controls include costs, revenues, and investment funds, and a center may be responsible for all three or one. Responsibility accounting is the system for collecting and reporting revenue and cost information by responsibility centers. It operates on the premise that managers should be held responsible for their performances, those of their subordinates, and all activities within their centers. It is both a planning and a control technique. Responsibility centers can be found in both centralized and decentralized organizations.
A revenue center is responsible for obtaining a target level of sales revenue.
A cost center is a department whose head has responsibility and accountability for costs incurred and for the quantity and quality of products or services.
A profit center is a responsibility unit that measures the performance of a division, product line, or geographic area. Net income and contribution margin can be computed for a center, which typically does not have significant amounts of invested capital .
An investment center is a responsibility center that has control over revenue, cost, and investment funds. It is a profit center whose performance is evaluated on the basis of the return earned on invested capital.
There are usually 4 types of responsibility centers:
Cost Center – Under the cost center, the manager is held responsible only for the costs, including a production department, maintenance department, human resource department, etc.
Profit Centers – Under the profit center the manager is responsible for all costs and revenues. Here the manager would have all of the responsibility to make decisions that would affect both the price and the revenue.
Revenue Center – This segment is primarily responsible for attaining sales revenue. The performance would be evaluated by comparing the actual revenue attained with the budgeted revenue.
Investment Center – Apart from looking into the profits, this center looks into returns on the funds invested in the group’s operations during its time[WallStreetMojo].
⠀ Shim, J. K., Siegel, J. G. (2005). Budgeting Basics and Beyond (2nd ed.). Hoboken, New Jersey: John Wiley & Sons, Inc. (p. 341-350)
Responsibility Center definition. AccountingTools. Retrieved from: https://www.accountingtools.com/articles/what-is-a-responsibility-center.html
Ashish Kumar Srivastav. (n. d.). Responsibility Center. WallStreetMojo. Retrieved from: https://www.wallstreetmojo.com/responsibility-center/