Responsibilities Centers

Kinds of Responsibility Centers

Cost Center
Goal: minimize the cost of producing a specified level
of output or the cost of delivering a specified level of
service
Efficiency of operations is the focus

Examples
Machining, assembly, the entire plant
Human resources, advertising, general administration

Cost Center: Duties And Measures

What can a cost center manager control?
Mix of inputs for a given level of output
Not responsible for profit on final products and service

How should we evaluate them?

Budget-based comparison for financials
Center specific non-financial measures

Kinds Of Cost Centers

Engineered cost center
Clear relation between resources consumed and output
Machining or Assembly department

Flexible budget makes sense here

Quality, service, response time are all important Critical
Success Factors (CSF)

Discretionary cost center

No clear relation between resources consumed and output
Legal, Accounting, R & D

Does not make sense to flex the budget

Non-financial measures gain more importance

Evaluating Cost Centers

Short term measures
Focus is on efficiency
Non-financial measures for operational control
Real time, actionable, disaggregate

Variances
Financial impact
Trends and patterns

Long term measures

Focus is on effectiveness
Trend in efficiency
Kaizen

Investments in future
Training

Profit Centers
Profit centers aim to both minimize costs and to
maximize revenues.
Regional centers
Product line managers

What can these managers control?

Input mix, product mix, selling prices
Profit center typical contains revenue and cost centers

Profit Centers: Evaluation

How should we evaluate a profit center?
Budgeted vs. actual profits
Baseline is master budget as manager responsible for output as
well

Non-financials are more strategic in nature

Issues to consider include:

If system encourages local profit maximization as opposed
to firm-wide profit maximization?
How to price transfers across profit centers?

Measuring Profit Centers

Short-term
Less reliance on non-financial measures
Budget- actual comparison
More macro than cost center comparison

Variances for spotting trends and patterns

Long-term
Growth measures
Sales, profit and efficiency

Drivers of future profitability

Non-financial measures

Investment Centers
Aim to maximize the returns from invested capital, or to put
the capital invested by owners and shareholders of their
organizations to the most profitable use.
Large independent divisions in organizations such as Sony, Siemens,
Microsoft, and Proctor and Gamble. Decision rights

What decisions can managers make?

Input mix, product mix, selling prices, capital expenditures

How should we evaluate them?

Financials focus on Investment performance
Return on Investment, Residual Income, Economic Value Added

Non-financial measures less important

Focus on strategy implementation and long-term potential

Measuring Investment Centers

Three widely used metrics
Return on Investment
Residual Income
Economic Value Added