Responsibility Centres India

ANSWERS TO UNIV Qs ON RESPONSIBILITY CENTRES
May 2010
Q2, May 2010
(a) Briefly describe Engineered Expense Centres and Discretionary Expense
Centres.
(b) How is budget prepared in each and how performance evaluated in each.?
Suggested Answer:
Expense centres are those responsibility centres whose inputs are measured in
monetary terms, but whose outputs are not measured in monetary terms.
There are 2 types of expense centres:
A. Engineered Expense Centres
B. Discretionary Expense Centres
A. Engineered Expense Centres are those expense centres for which the right or
proper amount of input can be estimated, e.g., direct material cost, direct labour
cost, cost of components, cost of utilities, etc.
The main features of Engineered Expense Centres are:
1. Input can be measured in monetary terms
2. Output can be measured in physical terms
3. Optimum rupee amount of input required to produce a unit of output can be
determined
4. Usually found in manufacturing operations
Optimal relationship established
INPUTS
Work
(Rupees)
OUTPUTS
(Physical)
Schematic diagram of Engineered Expense Centre

Budget preparation and performance evaluation in engineered expense centres:
1. Obtain the output in physical terms
1
2. Multiply the output in physical terms by standard cost per unit of output, to give
the budgeted cost. This gives what the finished product should have cost.
(Standard costing involves the creation of estimated (i.e., standard) costs for
some or all activities within a company.
3. Find the difference between the budgeted cost and actual costs which are the
known actual input costs . This difference is called the variance This difference
gives the extent to which the company has performed favourably or adversely.
B. Discretionary Expense Centres (also called Managed Expense Centres) are
those expense centres for which it is not feasible to estimate the right or proper
amount of input.
Optimal relationship is not established
INPUTS
Work
(Rupees)
OUTPUTS
(Physical)
Schematic diagram of Discretionary Expense Centre

Discretionary Expense Centres mainly include:
(i)
(ii)
(iii)
Administrative and support services (such as accounting, legal, human

resources, industrial relations, public relations),
Research & Development Operations,
Marketing Activities.
The term discretionary refers to the managements discretion in judgement regarding

the policies such as:
(a)
Whether to match or exceed the marketing efforts of the competitiors
(b)
The level of service to customers
(c)
Appropriate amount of R&D spending
Discretionary does not mean adhoc.
On the basis of such discretion, a budget is prepared for discretionary expense centres.
Management formulates the discretionary budget usually in one of the following ways:
1. Incremental method for continuing expenses: in such a case, current level is
taken as starting point and incremental build-up is provided for inflation and
additions (e.g., preparing financial statements of the company)
2
2. One-shot method for special work (e.g., developing and installing a profitbudgeting system in a newly acquired division.
3. A technique often used is management by objectives to accomplish specific
jobs and performance evaluation.
4. Zero-Base Review: Thorough analysis of existing budget and make a fresh
budget to be reviewed every year. Time consuming but many advantages
(particularly for newly acquired companies). These efforts have led to down
sizing, right sizing, restructuring, process re-engineering.
The difference between budget and actual is not a measure of efficiency
(unlike, as in Engineered Expense Centres).
There is no budget to compute efficiency.
Additional info on Zero Base review:
Discretionary Expense Centre:
Some noteworthy outcomes of Zero-Base Review
1. In 2002, Nissan Motors Co., under its restructuring, disposed of non-core
businesses, changed supplier relationships, trimmed cross shareholdings in
partner firms, set tough performance targets and eliminated lifetime employment
and seniority based promotions. (#42 in Fortune 500, CEO: Carlos Ghosn)
2. IBM decided to sell its personal computing div to Lenovo Group(leading PC
brand in China and Asia) to exit from low margin business. IBM holds 18% stake
and has made Lenovo preferred supplier of personal computers to IBM.
(IBM#19, Lenovo #370 in Fortune 500)
3. ABB slashed corporate staff after every acquisition. (#19 in Fortune 500)
___________________________________________________________________
Q4, May 2010
(a) What is a Strategic Business Unit?
(b) What are the conditions required for creating an SBU?
(c) How is performance of SBU measured?
(d) What are the advantages and disadvantages of creating SBUs?
Suggested Answer:
(a) What is a Strategic Business Unit?
A business unit is a part of an organization that operates as a distinct function,
department, division, or stand-alone business. In managing and controlling
organizations, such business units are assigned responsibilities for performance and
control Thus, a responsibility center is a sub-unit of an organization whose manager is
responsible for a specified set of activities.
A responsibility center may be a
3
(a) Revenue center

(b) Expense or Cost center
(c) Profit center, or
(d) Investment center
Revenue Center: In a revenue center, output (i.e., revenue) is measured in monetary
terms, but no formal attempt is made to relate input.
A sales office is an example of a revenue center. The manager responsible for
managing the sales office is accountable for explaining variances in the revenue and
costs of operating the office. (Please note that the difference between the revenue and
the cost of operating the sales office is not the profit, since this does not include the
main cost of the goods sold).
Expense or Cost Center: Expense centers are responsibility centers whose inputs are
measured in monetary terms, but whose outputs are not measured in monetary terms.
A small manufacturing set-up is an example of a expense or cost center; the production
supervisor may be responsible for variation in actual costs as compared to budgeted or
standard costs.
Profit Center: A Business Unit, which is responsible for both revenues and expenses,
and thus profit, is a Profit Center. The focus is on profit as measured by the difference
between revenues and expenses The Profit center, is however, not responsible for
investment.
Investment Center: An investment center is an autonomous sub-unit of an organization
which is responsible for profit and investment. In such business units, the profit is
compared with the assets employed in earning it. Such business units are referred to
as strategic-business-units or SBUs. The head of the SBU is accountable for the
overall performance, usually measured by return on capital employed, which in turn
depends on the revenue, costs, and investment.
Thus, an investment center is a special type of profit center, rather than a separate
parallel category.
(b) What are the conditions required for creating an SBU?
The following conditions are required for creating an SBU:
1. There should be a manager or head responsible for achieving results in relation
to operations of the SBU.
2. The manager should have access to all the relevant information needed to make
the decision
3. The head of a SBU should have the authority to decide on the investment.
4. Both inputs and outputs should be amenable to clear measurement.
5. The SBU should be engaged in conversion of inputs into desired outputs for the
organization (i.e., there should be a value addition.)
4
6. The recipients of goods and services produced by the SBU should be clear and
distinct. These may be some other unit or units within the organization (in which
case suitable transfer price will be needed to work out the revenue) or external
markets or both.
7. There should be some way to measure the effectiveness of the trade-offs the
manager has made. These measures are variations in the overall
performance, usually return on capital employed, return on total assets.
( c ) How is performance of SBU measured?
There are two types of measurements used in evaluating a SBU:
1. Measure of management performance. This focuses on how well the manager
is doing. This measure is used for planning, co-ordinating and controlling the
day-to-day activities and for providing proper motivation to the manager.
2. Measure of economic performance. This focuses on how well the SBU is doing
as an economic activity.
(It can sometimes so happen that the SBU manager is doing an excellent job, but the
unit may be a losing proposition due to adverse economic conditions or intense
competition)
Measurement of economic performance in SBUs is made in two ways:
1. Return on Investment (ROI) , and
2. Economic Value Added (EVA) (i.e., Net Profit minus capital charge),
[Capital Charge is (Cost of capital) multiplied by (Capital Employed)]
( d ) What are the advantages and disadvantages of creating SBUs?
Advantages of creating a SBU:
1.
2.
3.
4.
5.
useful insights into where profits are earned within a complex business
supports budgetary control at a detailed level, including setting profit objectives
can improve the motivation of those responsible for the profit centre
comparisons can be made between similar profit centres (e.g., shops in a chain)
Improves quality and speed of decision-making at local level (likely to be closer
to customer needs, as compared to Head Office)
6. Finance can be allocated more efficiently where it makes the best return
7. HO relieved of day-to-day decision making
8. fewer corporate restraints
9. excellent training ground
10. profit consciousness enhanced
11. SBUs provide ready-made info (as compared with functional organization)
12. Particularly responsive to competitive performance
Disadvantages of creating SBUs:
1. loss of control at HO level decentralized decision-making forces top

management to rely more on MCS rather than on personal knowledge of an
operation
2. lowering of quality (of decision making) if HO is more capable or better informed
3. likely friction (sometimes demotivating) over transfer prices, common costs,
credit for revenues that were formerly generated jointly by two or more business
units
4. BU managers decisions may be in their interest, not of the organisation
5. may impose additional costs for record keeping, staff.
6. m ay be too much emphasis on short-run profitability
7. no system to optimize both unit profitability and that of the company as a whole
8. can be time-consuming to set-up and monitor
Q6, May 2010
How is an investment centre different from a profit centre? What are the different
methods of judging their performance? Which is a better method?
Suggested Answer:
Difference between Profit Center and Investment Center:
investment.
parallel category.
Performance measurement of a Profit Center:
Profit Center:
There are two types of measurements used in evaluating a Profit Center:
2. Measure of economic performance. This focuses on how well the Profit Center
is doing as an economic activity.
6
(It can sometimes so happen that the Profit Center manager is doing an excellent job,
but the unit may be a losing proposition due to adverse economic conditions or intense
competition)
The economic performance is always measured by net income (i.e., profit after tax).
However, the performance is evaluated by five different measures at different stages:
1. Contribution Margin i.e., Revenues minus Variable expenses
2. Direct Profit i.e., Contribution Margin (from 1 above) minus Fixed expenses of the
Profit Center
3. Controllable Profit i.e., Direct Profit (from 2 above) minus controllable corporate
charges
4. Profit before taxes i.e., Controllable Profit (from 3 above) minus corporate
allocations
5. Profit after taxes i.e., Profit before taxes (from 4 above) minus taxes
Investment Center:
competition)
Which is a better method?
ROI and EVA are more comprehensive than just profit (revenue minus expenses).
Between ROI and EVA, EVA is better since it goes a step beyond ROI. The capital
charge , [i.e.,( the cost of capital)multiplied by the (Capital Employed)] is deducted from
the Net Profit.
Q3, Nov 2010
What is a responsibility center? List and explain the different types of responsibility
centers with sketches.
Suggested Answer:
7

(a) Revenue center
Revenue Center: In a revenue center, output (i.e., revenue) is measured in monetary
costs of operating the office. (Please note that the difference between the revenue and
the cost of operating the sales office is not the profit, since this does not include the
main cost of the goods sold).
Inputs not related to outputs
INPUTS
Work
(Rs. for costs directly incurred)
OUTPUTS
(Rs. Revenue)
Schematic diagram of Revenue Centre (e.g., Marketing Function)

---------------------------------------------Expense or Cost Center: Expense centers are responsibility centers whose inputs are
standard costs.
8
Engineered Expense Centres are those expense centres for which the right or
proper amount of input can be estimated, e.g., direct material cost, direct labour
cost, cost of components, cost of utilities, etc.
Optimal relationship established
INPUTS
Work
(Rupees)
OUTPUTS
(Physical)
Schematic diagram of Engineered Expense Centre (e.g., Manufacturing Function)

-------------------------------------------------------Discretionary Expense Centres (also called Managed Expense Centres) are
those expense centres for which it is not feasible to estimate the right or proper
amount of input.
Optimal relationship is not established
INPUTS
(Rupees)
Work
OUTPUTS
(Physical)
Schematic diagram of Discretionary Expense Centre (e.g., R&D Function)

-----------------------------
9
investment.
Inputs related to Outputs
INPUTS
Work
(Rs. Costs)
OUTPUTS
(Rs. Profits)
Schematic diagram of Profit Centre (e.g., Business Unit)

Profits related to Capital Employed
INPUTS
Capital
Employed
(Rs. Costs)
OUTPUTS
(Rs. Profits)
Schematic diagram of Investment Centre (e.g., Strategic Business Unit)

________________________________
parallel category.
10
Q4, Nov 2010

Every SBU is a profit center, but every profit center is not a SBU. What are the
conditions that should be fulfilled for an organization unit to be converted into a Profit
Center? What are the different ways to measure the performance of Profit Centers?
Discuss their relative merits and demerits.
Suggested Answer:
(a) Every SBU is a profit center, but every profit center is not a SBU.Explain.
investment.
parallel category, and hence Every SBU is a profit center, but every profit center is not a
SBU.
(b) What are the conditions that should be fulfilled for an organization unit to be
converted into a Profit Center?
The following conditions are required for creating a Profit Center:
1. There should be a manager or head responsible for achieving results in relation
to operations of the profit Center.
2. The manager should have access to all the relevant information needed to make
the decision
3. Both inputs and outputs should be amenable to clear measurement.
4. The Profit Center should be engaged in conversion of inputs into desired outputs
for the organization (i.e., there should be a value addition.)
5. The recipients of goods and services produced by the Profit Center should be
clear and distinct. These may be some other unit or units within the organization
(in which case suitable transfer price will be needed to work out the revenue) or
external markets or both.
6. There should be some way to measure the effectiveness of the trade-offs the
manager has made. These measures are variations in the overall
performance, usually net income.
11
( c ) What are the different ways to measure the performance of Profit Centers? Discuss
their relative merits and demerits
Profit Center:
competition)
(merit: managers should focus on maximizing contribution since fixed costs are
beyond control
demerit:premise that fixed costs are beyond control is not right; many fixed costs
are partially controllable)
Profit Center
(merit: incorporates all expenses incurred by the profit center;
demerit:does not recognize the motivational benefit of charging headquarters
costs)
charges
(merit: cost includes the controllable corporate costs
demerits: difficulty in comparing with other companies data in trade journals)
allocations
(merits: corporate costs will be questioned
demerits:allocation of corporate costs may not be proper)
(merits: suitable for foreign subsidiaries since tax varies in different countries and
PAT is a true reflection of the profit
demerit: since tax rates are a constant percentage, no value added after knowing
the pretax profit; also since decisions affecting tax are taken at Headquarters, the
business unit should not be judged on this basis)
Q8, Nov 2010
Organizations with Business Divisions (Profit Centers) format have experienced that
Divisional Controllers experience divided loyalty in carrying out their functions, causing
12
a possible dysfunction. How could such a situation be resolved? Define the role of a
Controller which suits your suggestion.
Suggested Answer:
Corporate Controller:
Corporate Controller is the person who is responsible for designing and operating the
management control system. In many companies, the title of the Controller is Chief
Finance Officer (CFO).
The Controller performs the following functions:
1. Designing and operating information and control systems.
2. Preparing financial statements and financial reports for shareholders and other
external parties. He also files tax returns.
3. Preparing and analyzing performance reports, interpreting these reports for
managers, and analyzing program and budget proposals from various segments
of the company and consolidating them into an overall annual budget.
4. Supervising internal audit and accounting control procedures to ensure the
validity of information, establishing adequate safeguards against theft and fraud,
and performing operational audits.
5. Developing personnel in the controller organization and participating in the
education of management personnel in matters relating to the controller function.
Earlier, the Controller was responsible for processing the information required by the
management control system. Currently, this is carried out by Chief Information Officer
(CIO), who reports to CFO or senior management.
The Controller function is a staff function. The Controller is responsible for the design
and operation of the management control system. The nature of the work of Controller
is more in the form of design, developing and analyzing systems and recommendations
to management. However, the use and action with respect to this information is the
responsibility of the line function. The responsibility for actually exercising control runs
from the CEO down through the line organization.
Business Unit Controller:
Business Unit Controllers inevitably have divided loyalty. On one hand, they owe some
allegiance to the Corporate Controller, who is responsible for the overall operation of the
management control system. On the other hand, they also owe allegiance to the
managers of their own business units, for whom they provide staff assistance.
In some companies, the Business Unit Controller reports to the Business Unit Manager, and
has a dotted line reporting to the Corporate Controller. An example is General Electric
Company, USA.
Dotted Line Reporting
Corporate
Controller
13
Business
Unit
Manager
Business
Unit
Controller
In other companies, the Business Unit Controller reports to the Corporate Controller, and has a
dotted line reporting to the Business Unit Manager. An example is ITT, USA, a diversified
company in engineering products and technology solutions.
Solid Line Reporting
Corporate
Controller
Business
Unit
Manager
Business
Unit
Controller
Regardless of the reporting relationships, it is expected that the BU Controller will not
condone or participate in the transmission of misleading information or in the
concealment of unfavourable information.
Q2, May 2011

Briefly describe responsibility center, engineered expense center, discretionary expense
center, revenue center, profit center. How is the performance of the Head of these
centers evaluated?
Responsibility Center:
14

(a) Revenue center
-----------------------------Revenue Center: In a revenue center, output (i.e., revenue) is measured in monetary
costs of operating the office.
--------------------------Expense or Cost Center: Expense centers are responsibility centers whose inputs are
standard costs.
Engineered Expense Centres are those expense centres for which the right or proper
amount of input can be estimated, e.g., direct material cost, direct labour cost, cost of
components, cost of utilities, etc.
Budget preparation and performance evaluation in engineered expense centres:
1. Obtain the output in physical terms
2. Multiply the output in physical terms by standard cost per unit of output, to give
the budgeted cost. This gives what the finished product should have cost.
(Standard costing involves the creation of estimated (i.e., standard) costs for
some or all activities within a company.
3. Find the difference between the budgeted cost and actual costs which are the
known actual input costs . This difference is called the variance This difference
gives the extent to which the company has performed favourably or adversely.
15
Discretionary Expense Centres (also called Managed Expense Centres) are those
expense centres for which it is not feasible to estimate the right or proper amount of
input.
Management formulates the discretionary budget usually in one of the following ways:
1. Incremental method for continuing expenses: in such a case, current level is
taken as starting point and incremental build-up is provided for inflation and
additions (e.g., preparing financial statements of the company)
2. One-shot method for special work (e.g., developing and installing a profitbudgeting system in a newly acquired division.
3. A technique often used is management by objectives to accomplish specific
jobs and performance evaluation.
4. Zero-Base Review: Thorough analysis of existing budget and make a fresh
budget to be reviewed every year. Time consuming but many advantages
(particularly for newly acquired companies). These efforts have led to down
sizing, right sizing, restructuring, process re-engineering.
The difference between budget and actual is not a measure of efficiency (unlike, as in
Engineered Expense Centres).
There is no budget to compute efficiency.
------------------------------------Profit Center: A Business Unit, which is responsible for both revenues and expenses,
investment.
Profit Center:
competition)
Profit Center
16
charges
allocations
-----------------------------------Investment Center: An investment center is an autonomous sub-unit of an organization
as strategic-business-units or SBUs. The head of the SBU is accountable for the in the
parallel category.
competition)
Q3. May 2011

Every SBU is a profit center, but every profit center is not a SBU. Explain under what
conditions Production, Marketing and Service departments can be converted into Profit
Centers.
Suggested Answer:
Every SBU is a profit center, but every profit center is not a SBU
17
investment.
as strategic-business-units or SBUs. The head of the SBU is accountable for the in the
parallel category.
Hence, every SBU is a profit center, but every profit center is not a SBU.
Conditions for converting Production department into a Profit Centre :
A Production department is usually an expense center, with management being judged
on performance standard costs and overhead budgets.This measure does not indicate
how well the manager is performing all aspects of his job. For example,
1. Manager may compromise on quality and still remain within standard costs
2. Manager may avoid interruption of ongoing production to satisfy a customer,
although it would have been better to interrupt and manufacture another batch.
This means losing opportunities to increase revenues, and still remain within
standard budgets.
3. Manager may lack incentive to make more difficult products or to improve
standards.
Hence where standard costs are the basis of performance measurement, it is
advisable to make a separate evaluation of activities like quality control, production
scheduling and make-or-buy decisions.
One way to measure the activity of production in its entirety is to convert it into a
Profit Center, and give it credit for the selling price minus estimated marketing
expenses.
Conditions for converting Marketing department into a Profit Centre :

A marketing activity can be turned into a profit center by charging it with the cost of the
products sold. This transfer price provides the marketing manager with the relevant
information to make the optimum revenue/cost trade-offs, and the standard practice of
measuring a profit centers manager by the centers profitability provides a check on
how well these trade-offs have been made. The transfer price should be based on
standard costs (not actual costs).
The marketing activity should be given a profit responsibility when the marketing
manager is in the best position to make the principal cost/revenue trade- offs, i.e., he is
well equipped with the information of the appropriate costs and revenues to be able to
18
make these decisions. This often happens in case of foreign market activity, i.e., when
different conditions exist in different geographical areas, where decisions cannot be
made centrally but have to be made locally. In these conditions, when the marketing
manager knows the appropriate cost of the product, he can suitably structure the price
so that there is a favourable trade-off.
Conditions for converting Service departments into a Profit Centre :
Units for maintenance, information technology, transportation, engineering, consulting,
customer service and similar support activities can be made into profit centres. These
units operate out of headquarters or service corporate divisions or within business units.
They charge customers for services rendered, with the financial objective of generating
enough revenues to cover their expenses, thus making them self-dependent. Units
receiving these services have the option of procuring them from an outside vendor.
A well known example is that of Singapore Airlines. It created a services business unit
which provided aviation-engineering services to about 80 international carriers. In 200102, when the airlines industry faced significant problems, Singapore Airlines earned a
profit arising out of the profits of this service division.
___________________________
Q4, Nov 2012
(a) Describe the differences in process of budgeting of Engineered Expense and
Discretionary Expense Centers.
(b) Discuss the special challenges faced in controlling R&D activities and possible
management initiatives.
Suggested answer:
(a) Refer Q2 (b), May 2010 above
(b) Discuss the special challenges faced in controlling R&D activities and possible
I.
Challenges in Controlling R&D activities:
The following are the main challenges in controlling R&D activities:

1. Difficulty in relating results to inputs:
The results of R&D activities are difficult to measure quantitatively. Although there may
be an ouput like new Patent or product or new process, it may be difficult to appraise
in the annual budget and give a reliable input output measure.
Thus, it is difficult to measure goals, specially on annual basis
2. Lack of Goal Congruence:
19
The R&D manager typically wants to invest in the best R&D Facilities, but the top
management has to work on a trade-off between investment and expenses versus
revenues, either current or deferred.
3. R&D Continuum:
Activities in R&D lie along a continuum spanning a long period of several years ; from
basic research, pilot tests, and so on finally to product testing.
For example: (1) it took 26 years from the time DNA structure was defined to make the
first product
(2) it took Xerox Corp 24 years (1936 to1960) from basic research to introducing the
copying machine
In such cases annual budgets and assessing performance against them becomes
challenging.
4. Element of chance:
In R&D, there is also an element of chance in success, which makes it challenging to
control its activities.
II.
Possible management initiatives:
Budgets and Measurement of Performance:

Despite all the above challenges, the management needs to take some initiatives to
control R&D performance.
R&D Budgets are generally in the form of a program to be spread over long term plan.
The annual budget is generally a break-up of this plan on year-to year basis. At the end
of the year, the actual expenditure is compared with the budget. However, there is no
linkage of the expenditure incurred with the achievement of a result.
The measurement is indirectly made through the written progress report on the status of
the R&D program.
___________________________
Univ theory Qs on Responsibilty Centers from May 2010 to Nov 2012 (6 papers)
May 2010
Q2, May 2010
(a) Briefly describe Engineered Expense Centres and Discretionary Expense
Centres.
(b) How is budget prepared in each and how performance evaluated in each.?
Q4, May 2010
20
What is a Strategic Business Unit? What are the conditions required for creating an
SBU? How is performance of SBU measured? What are the advantages and
disadvantages of creating SBUs?
Q6, May 2010
How is an investment centre different from a profit centre? What are the different
methods of judging their performance? Which is a better method?
Nov 2010
Q3, Nov 2010
What is a responsibility center? List and explain the different types of responsibility
centers with sketches.
Q4, Nov 2010
Every SBU is a profit center, but every profit center is not a SBU. What are the
conditions that should be fulfilled for an organization unit to be converted into a Profit
Center? What are the different ways to measure the performance of Profit Centers?
Discuss their relative merits and demerits.
Q8, Nov 2010
Organizations with Business Divisions (Profit Centers) format have experienced that
Divisional Controllers experience divided loyalty in carrying out their functions, causing
a possible dysfunction. How could such a situation be resolved? Define the role of a
Controller which suits your suggestion.
May 2011
Q2, May 2011
Briefly describe responsibility center, engineered expense center, discretionary expense
center, revenue center, profit center. How is the performance of the Head of these
centers evaluated?
Q3. May 2011
Every SBU is a profit center, but every profit center is not a SBU. Explain under what
conditions Production, Marketing and Service departments can be converted into Profit
Centers.
Q5. May 2011
What do you understand by Investment Center? Explain two different methods by which
the performance of these centers are measured. Also discuss their merits and demerits.
Nov 2011
No questions
21
April 2012
Q4, April 2012
(a) Explain the different types of Responsibilty Centers.
(b) What is a profit Center? What are the general conditions for creating Profit
Centers?
Q5, April 2012
(a) What are the different alternatives available for measuring the performance of a
business unit?
(b) What is EVA? How it is different from ROI?
Q6 (d), April 2012
Write short note on Strategic Business Unit.
Nov 2012
Q4, Nov 2012
1. Describe the differences in process of budgeting of Engineered Expense and
Discretionary Expense Centers.
2. Discuss the special challenges faced in controlling R&D activities and possible
Q9, Nov 2012
Every SBU is a profit center, but every profit center is not a SBU. Explain. Under what
conditions production, marketing and service departments are converted into Profit
Centers?
22

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ANSWERS TO UNIV Qs ON RESPONSIBILITY CENTRES

Optimal relationship established

Schematic diagram of Engineered Expense Centre

Schematic diagram of Discretionary Expense Centre

Administrative and support services (such as accounting, legal, human

The term discretionary refers to the managements discretion in judgement regarding

(a) Revenue center

1. loss of control at HO level decentralized decision-making forces top

A business unit is a part of an organization that operates as a distinct function,

Inputs not related to outputs

(Rs. for costs directly incurred)

Schematic diagram of Revenue Centre (e.g., Marketing Function)

Schematic diagram of Engineered Expense Centre (e.g., Manufacturing Function)

Schematic diagram of Discretionary Expense Centre (e.g., R&D Function)

Schematic diagram of Profit Centre (e.g., Business Unit)

Investment Center: An investment center is an autonomous sub-unit of an organization

Profits related to Capital Employed

Schematic diagram of Investment Centre (e.g., Strategic Business Unit)

Q4, Nov 2010

Q2, May 2011

A business unit is a part of an organization that operates as a distinct function,

Q3. May 2011

Conditions for converting Marketing department into a Profit Centre :

Challenges in Controlling R&D activities:

The following are the main challenges in controlling R&D activities:

Possible management initiatives:

Budgets and Measurement of Performance:

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